<PAGE>
As filed with the Securities and Exchange Commission on May 20, 1999
Registration No. 333-74467
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Amendment No. 1 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.)
2974 LBJ Freeway
Dallas, Texas 75234
(972) 484-5600
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
______________________
James B. Witherow
2974 LBJ Freeway
Dallas, Texas 75234
(972) 484-5600
(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 815 Connecticut Avenue N.W.
Suite 3700 165 Madison Avenue Suite 701
Dallas, Texas 75201 Memphis, Tennessee 38103 Washington, DC 20006
(214) 659-4400 (901) 523-5679 (202) 973-0600
</TABLE>
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. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum Amount of
Title of each class of securities to be Amount to be offering price aggregate registration
registered registered(1) per unit(2) offering price(2) fee(2)
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Mortgage Pass-Through Certificates $1,000,000 100% $1,000,000 $278.00
======================================================================================================================
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(1) This Registration Statement relates to the offering from time to time of
$1,000,000 aggregate principal amount of Mortgage Pass-Through Certificates
and to any resales of them in market making transactions by
________________, 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 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.
================================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (1) a basic prospectus and (2) an
illustrative form of prospectus supplement for use in an offering of Mortgage
Pass-Through Certificates consisting of senior and subordinate certificate
classes.
<PAGE>
Subject to Completion, dated May 20, 1999
PROSPECTUS
First Horizon Asset Securities Inc.
Depositor
Mortgage Pass-Through Certificates
(Issuable in Series)
____________________________ The Trusts
You should carefully
consider the risk factors The depositor will periodically
beginning on page 6 of this establish trusts to issue certificates
prospectus. 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.
May 20, 1999
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. The prospectus is not an offer
to sell there securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
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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.................................................................. 17
Agency Securities.............................................................................. 21
Private Mortgage-Backed Securities............................................................. 23
Substitution of Mortgage Assets................................................................ 26
Pre-Funding Arrangements....................................................................... 26
Available Information.......................................................................... 27
Incorporation of Certain Documents by Reference................................................ 28
USE OF PROCEEDS................................................................................... 28
THE DEPOSITOR..................................................................................... 28
THE MASTER SERVICER............................................................................... 29
MORTGAGE LOAN PROGRAM............................................................................. 29
Underwriting Standards......................................................................... 29
Qualifications of Sellers...................................................................... 33
Representations by Sellers; Repurchases........................................................ 34
DESCRIPTION OF THE CERTIFICATES................................................................... 36
General........................................................................................ 37
Distributions on Certificates.................................................................. 40
Advances....................................................................................... 42
Reports to Certificateholders.................................................................. 43
Categories of Classes of Certificates.......................................................... 44
Indices Applicable to Floating Rate and Inverse Floating Rate Classes.......................... 48
Book-Entry Certificates........................................................................ 52
CREDIT ENHANCEMENT................................................................................ 55
General........................................................................................ 55
Subordination.................................................................................. 55
Mortgage Pool Insurance Policies............................................................... 56
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Special Hazard Insurance Policies............................................................. 58
Bankruptcy Bonds.............................................................................. 59
Reserve Fund.................................................................................. 60
Cross Support................................................................................. 60
Insurance Policies, Surety Bonds and Guaranties............................................... 61
Over-Collateralization........................................................................ 61
YIELD AND PREPAYMENT CONSIDERATIONS.............................................................. 61
THE POOLING AND SERVICING AGREEMENT.............................................................. 63
Assignment of Mortgage Assets................................................................. 63
Payments on Mortgage Assets; Deposits to Certificate Account.................................. 67
Collection Procedures......................................................................... 70
Hazard Insurance.............................................................................. 71
Realization Upon Defaulted Mortgage Loans..................................................... 73
Servicing and Other Compensation and Payment of Expenses...................................... 78
Evidence as to Compliance..................................................................... 79
List of Certificateholders.................................................................... 80
Certain Matters Regarding the Master Servicer and the Depositor............................... 80
Events of Default............................................................................. 81
Rights Upon Event of Default.................................................................. 82
Amendment..................................................................................... 82
Termination; Optional Termination............................................................. 84
The Trustee................................................................................... 85
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS...................................................... 85
General....................................................................................... 85
Foreclosure/Repossession...................................................................... 86
Rights of Redemption.......................................................................... 89
Anti-Deficiency Legislation and Other Limitations on Lenders.................................. 90
Environmental Risks........................................................................... 91
Due-on-Sale Clauses........................................................................... 92
Prepayment Charges............................................................................ 93
Applicability of Usury Laws................................................................... 93
Soldiers' and Sailors' Civil Relief Act....................................................... 93
MATERIAL FEDERAL INCOME TAX CONSEQUENCES......................................................... 94
General....................................................................................... 94
Non-REMIC Certificates........................................................................ 94
REMIC Certificates............................................................................ 105
Prohibited Transactions and Other Taxes....................................................... 124
Liquidation and Termination................................................................... 125
Administrative Matters........................................................................ 125
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Tax-Exempt Investors............................................................................. 125
Non-U.S. Persons................................................................................. 126
Tax-Related Restrictions on Transfers of Residual Certificates................................... 126
STATE TAX CONSIDERATIONS............................................................................ 129
ERISA CONSIDERATIONS................................................................................ 129
Prohibited Transaction Exemption 83-1............................................................ 130
Underwriter Exemptions........................................................................... 132
Insurance Company General Accounts............................................................... 134
Other Exemptions................................................................................. 135
Consultation with Counsel........................................................................ 135
LEGAL INVESTMENT.................................................................................... 135
METHOD OF DISTRIBUTION.............................................................................. 137
LEGAL MATTERS....................................................................................... 138
FINANCIAL INFORMATION............................................................................... 138
RATING.............................................................................................. 138
INDEX OF DEFINED TERMS.............................................................................. 140
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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., 2974 LBJ Freeway,
Dallas, Texas 75234 and the telephone number is (972) 484-5600. 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 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, the 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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<PAGE>
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 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 obligations 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 comes from representations and
warranties made by it in connection with its sale
of the loans to the depositor and its obligation
to deliver the related
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<PAGE>
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.............. 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, or that have been structured to support
other classes of certificates or to meet the
investment requirements of limited categories of
investors who may require, for example, an
investment with a specified maturity date, a call
protection feature, or a specific type of
amortization feature.
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;
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<PAGE>
. 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
. 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
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<PAGE>
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
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
large concentrations of mortgaged
properties will be identified in the
prospectus supplement under "The
Mortgage Pool."
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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 may adversely affect
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
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
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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 "Certain 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
substantial principal payments (that
is, 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.
Violations of consumer protection laws
may adversely affect your
certificates......................... Violations of state and/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.
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See "Certain Legal Aspects of the
Mortgage Loans".
Violations of environmental laws
may adversely affect you............. 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 "Certain Legal Aspects of the
Mortgage Loans -- Environmental
Risks".
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 thereunder.
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
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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 or
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
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
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mortgage assets would not be
included in the depositor's
bankruptcy estate.
THE TRUST FUND/1/
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 include one or more of the following types of
mortgage-related assets (the "Mortgage Assets"):
. a pool of first lien mortgage loans (or participation interests in them)
secured by one- to four-family residential properties,
. mortgage pass-through securities (the "Agency Securities") issued or
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac, or
. Mortgage pass-through certificates or collateralized mortgage
obligations ("Private Mortgage-Backed Securities") evidencing an
interest in, or secured by, mortgage loans of the type that would
otherwise be eligible to be mortgage loans.
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.
________________________________
/1/ 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 consisting
primarily of the Mortgage Assets in the mortgage pool. Similarly, the term pass-
through rate will refer to the pass- through rate borne by the 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 on the pages indicated under the
caption "Index to Defined Terms" beginning on page 137.
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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 (i.e., loans that are not
insured or guaranteed by any governmental agency), 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.
The certificates will be entitled to payment from the assets of the related
trust fund or other assets pledged for the benefit of the holders of the
certificates as specified in the related prospectus supplement and will not be
entitled to payments in respect of the assets of any other trust fund
established by the depositor. The applicable prospectus supplement may specify
the Mortgage Assets that a trust fund will consist of, but if it does not, the
Mortgage Assets of any trust fund will consist of mortgage loans, Agency
Securities or Private Mortgage-Backed Securities but not a combination of them.
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.
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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 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
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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 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 (e.g., 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,
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. 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.
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 principally of its contractual servicing obligations under
the related pooling and servicing agreement (including its 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
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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 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 of 1933 or have been held for at least the holding period
required to be eligible for sale under Rule 144(k) under the Securities Act of
1933.
Agency Securities
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 (which may be the trustee) that is a member of
the Federal Reserve System or of a clearing corporation on the books of which
the security is held. Each Agency Security will evidence an interest in a pool
of mortgage loans and/or cooperative loans and/or in principal distributions and
interest distributions thereon.
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
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interest or to receive distributions of principal and/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.
Ginnie Mae. Ginnie Mae is a wholly-owned corporate instrumentality of the
United States within HUD. Section 306(g) of Title III of the National Housing
Act of 1934, as amended (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 Title III of the Emergency Home Finance Act of 1970,
as amended (the "Freddie Mac Act"). Freddie Mac was established primarily for
the purpose of increasing the availability of mortgage credit for the financing
of needed housing. 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
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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 (but may include FHA Loans and 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
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
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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.
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.
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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
. 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 of Private Mortgage-Backed Securities, the servicer (if
other than the issuer of Private Mortgage-Backed Securities) and the
trustee for 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.
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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 of 1933 or have been held for at least the holding
period required to be eligible for sale under Rule 144(k) under the Securities
Act of 1933.
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.
Pre-Funding Arrangements
If specified in the prospectus supplement for a series, the related pooling
and servicing agreement will provide for a commitment by the depositor to
purchase additional mortgage loans (the "Subsequent mortgage loans") after the
date on which the related certificates are issued (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 into a
segregated account (a "Pre-Funding Account") 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; 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 three
months, 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
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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.
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 under the
Securities Act of 1933, as amended, covering the certificates. 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.
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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 Securities Exchange Act of 1934, as amended, 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 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
2974 LBJ Freeway, Dallas, Texas 75234. Its telephone number is (972) 484-
5600.
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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
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 2974 LBJ Freeway, Dallas,
Texas 75234. Its telephone number is (972) 484-5600. 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 FT
Mortgage's Seller Guide (together with FT Mortgage's Servicer Guide, the
"Guide," as modified from time to time). 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.
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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.
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.
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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 (other than a trust if a trust
is the 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 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
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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 (such as property
taxes and hazard insurance), and its other financial obligations and monthly
living expenses. FT Mortgage will generally underwrite ARM 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 ARM 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
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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 loan documentation" mortgage
loan 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.
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.
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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 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.
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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 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 Internal Revenue Code of
1986, as amended (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
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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."
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;
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. 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;
. 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 to be issued
thereunder and the nature of 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., 2974 LBJ Freeway, Dallas, Texas 75234, 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
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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 (exclusive of 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
. 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.
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Distributions of either or both of principal and interest on the related
certificates will be made by the trustee on each distribution date (i.e.,
monthly, quarterly, semi-annually or at other intervals and on the dates
specified in the prospectus supplement) in proportion to the percentages
specified in the related prospectus supplement. Distributions will be made 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 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 the
Employee Retirement Income Security Act of 1974, as amended, 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 "real estate mortgage investment conduit" or
"REMIC" as defined in the Code. 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
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"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 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. As between certificates of different classes and as between distributions
of principal (and, if applicable, between distributions of principal prepayments
and scheduled payments of principal) and interest, distributions made on any
distribution date will be applied as 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 aggregate original
balance of the certificates (or, in the case of certificates entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of certificates (the initial "class certificate balance") entitled to
interest at the pass-through rate from the date and for the periods specified in
the
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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 or, in the case of
certificates entitled only to distributions allocable to interest, 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 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.
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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 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 (from
its own funds, funds advanced by sub-servicers or funds held in the Certificate
Account for future distributions to certificateholders), 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. In the case of cooperative loans, the master servicer
also will be required to advance any unpaid
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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 (e.g., 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 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;
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. 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.
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.
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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 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 different
categories (e.g., primary planned
principal classes, secondary planned
principal classes and so forth) having
different effective structuring ranges
and different principal payment
priorities. The structuring range for
the secondary planned principal class of
a series of 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
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CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
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.
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.
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CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
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 (e.g., 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 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.
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CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
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 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
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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.
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.
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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 Federal Home
Loan Bank District (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 Federal Home Loan Bank of San Francisco ("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
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
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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 Monthly
Median Cost of Funds Ratio to SAIF-Insured Institutions (the "National Cost of
Funds Index") published by the Office of Thrift Supervision (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 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, 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 means 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
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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 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
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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 in true 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 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
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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
. 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
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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
. 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
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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.
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
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. 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 (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 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 (and many primary
mortgage insurance policies do not 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. A failure of
coverage for one of these reasons might
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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. 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.
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, then, subject to these limitations, each special
hazard insurance policy will provide that
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where there has been damage to property securing a foreclosed mortgage loan
(title to which has been acquired by the insured) and to the extent the damage
is not covered by the hazard insurance policy or flood insurance policy, if any,
maintained by the mortgagor or the master servicer, the special hazard insurer
will pay the lesser of the cost of repair or replacement of the 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 certain expenses is paid by the special
hazard insurer, the amount of further coverage under the related special hazard
insurance policy will be reduced by that amount less any net proceeds from the
sale of the property. Any amount paid to repair the property will further reduce
coverage by that amount. So long as a mortgage pool insurance policy remains in
effect, the payment by the special hazard insurer of the cost of repair or of
the unpaid principal balance of the related mortgage loan plus accrued interest
and certain expenses will not affect the total insurance proceeds paid to
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 "Certain Legal
Aspects of the Mortgage Loans -- Anti-Deficiency Legislation and Other
Limitations on Lenders."
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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 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. 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
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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 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
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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.
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 "Certain 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
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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 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
(including 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
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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
. 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,
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. 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.
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.
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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 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 (the "Subsequent Transfer Agreement") 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
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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 for the related trust fund a separate account or accounts for the
collection of payments on the related Mortgage Assets in the trust fund (the
"Certificate Account"). 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
. 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. 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
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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):
. 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 ("Insured Expenses") 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 unreimbursed advances, if any) received and retained in
connection with the liquidation of defaulted mortgage loans, by
foreclosure or otherwise, together with any net proceeds 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";
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. 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:
. to pay to the master servicer the servicing fees described in the
related prospectus supplement, the master servicing fees (subject to
reduction) 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;
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. 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.
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
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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 "Certain 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 "Certain 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.
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
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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 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 a specified percentage (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 (generally defined as replacement cost at the
time and place of loss, less physical depreciation) 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. 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
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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 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,
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. 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 ;
. 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
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. 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 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
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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:
. 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 (to the extent no advance has been
made for the amount) on the mortgage loan; 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 of 1937, 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
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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 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
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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
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 (which may vary under certain circumstances) 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
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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 (a "Liquidated Mortgage"), 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.
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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.
Certain 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
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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 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.
"Voting rights" are the portion of voting rights of all of the certificates
that is allocated to any certificate pursuant to the terms of the pooling and
servicing agreement.
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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 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 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 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;
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(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
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
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(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.
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 (see "Material Federal
Income Tax Consequences" in this prospectus and in the related prospectus
supplement), from the related trust fund of all of the remaining Mortgage
Assets and all property acquired in respect of the Mortgage Assets.
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.
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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.
CERTAIN 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 law (which laws may differ
substantially), 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
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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 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
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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.
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
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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 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
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before transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the 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.
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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 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
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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 (which, in the case of a
cooperative loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Environmental 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 the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("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.
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This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996 (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 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 the federal Resource Conservation and
Recovery Act ("RCRA" ), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under 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
Depository
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Institutions Act of 1982 (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.
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 the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision that expressly rejects an application of the federal law. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V. Certain states have taken action to reimpose interest rate
limits or to limit discount points or other charges, or both.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of the borrower's mortgage loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the mortgage loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of the borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible
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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.
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 Internal Revenue Code of 1986, as amended. 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 Internal Revenue Code of
1986 (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.
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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 mortgage loans in the trust fund represented by
certificates, including interest, original issue discount ("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;
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. 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 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
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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 (e.g., cause the loss to be treated as
capital if the assets are held as capital assets by the taxpayer).
On December 30, 1997 the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. 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.
Original Issue Discount. 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 "original issue discount" (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 ARM 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
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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 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
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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 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 represent the right to principal and
interest, or principal only, on all or a portion of the mortgage loans (the
"Stripped Bond Certificates"), while the second class of certificates may
represent the right to some or all of the interest on the same mortgage loans
(the "Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the mortgage loan principal
balance) 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.
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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
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 ARM 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)
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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 mortgage loans
with interest rates that adjust periodically ("ARM 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 "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
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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 as a discount factor
the original yield to maturity of the respective component under the Prepayment
Assumption) 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 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 ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the certificates, which represent interests in ARM Loans. Additionally, the IRS
has not issued guidance under the
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Code's coupon stripping rules with respect to instruments that represent
interests in ARM Loans. In the absence of any authority, the master servicer
will report OID on certificates attributable to ARM 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 ARM 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 ARM 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.
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
(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
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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.
As used in this prospectus, a "U.S. Person" means
. 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)
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),
. 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, or
. a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have authority to control all substantial decisions of
the trust.
In addition, U.S. Persons would include certain trusts that can elect to be
treated as U.S. Persons. A "Non-U.S. Person" is a person other than a U.S.
Person.
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 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
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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.
Final regulations dealing with backup withholding and information reporting
on income paid to foreign persons and related matters (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 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 related certificates
(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
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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 related certificates will be considered to be regular interests
("Regular Certificates") or residual interests ("Residual Certificates") 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).
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
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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 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. Holders
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of Regular Certificates (the "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 final regulations (the "Contingent Regulations") in June
1996 governing the calculation of OID on instruments having contingent interest
payments. 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 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.
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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
certain Regular Certificates to be issued at prices significantly exceeding
their principal amounts or based on notional principal balances (the "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 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
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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 ARM 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 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
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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 (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 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
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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 ARM 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
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
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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.
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
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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 interest that has accrued before the issue date ("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."
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
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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 Internal Revenue Service, 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 holders
of Residual Certificates (the "Residual Certificateholder") 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.
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
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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 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
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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 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
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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.
Mark to Market Rules. A Residual Certificate acquired after January 3, 1995
cannot be marked-to-market.
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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) 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 "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
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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 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
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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 tax on REMICs equal to 100 percent of the net income
derived from "prohibited transactions" (the "Prohibited Transactions Tax" ) 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 tax on
the trust fund equal to 100% of the value of the contributed property (the
"Contributions Tax"). 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.
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
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. 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 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
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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 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 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
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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
(generally with 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.
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 section of this discussion,
unless no significant purpose of the transfer is
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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 "Certain
Federal Income Tax Consequences --Non-REMIC Certificates -- Non-U.S. Persons,"
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 "Certain
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 employee benefit plans subject to ERISA (and
the Code imposes requirements on certain other 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) (collectively "Plans") and on persons who
bear specified relationships to Plans ("Parties in Interest") or are fiduciaries
with respect to Plans. 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.
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On November 13, 1986, the United States Department of Labor 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
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 Securities Exchange Act of 1934, as amended.
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.
Prohibited Transaction Exemption 83-1
In Prohibited Transaction Exemption 83-1 ("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 certificates that represent interests in a
mortgage pool consisting of mortgage loans representing loans for single family
homes ("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
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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 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
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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.
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 prohibited transaction exemptions. 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 to certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") 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;
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. 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 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 of 1933 as amended.
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
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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;
. 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 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 (the "Restricted Group").
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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 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 Prohibited Transaction Exemption 95-60 ("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 and/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 prohibited transaction exemptions 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.
-132-
<PAGE>
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.
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 the Secondary Mortgage Market
Enhancement Act of 1984 ("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 its 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").
-133-
<PAGE>
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.
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 (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
-134-
<PAGE>
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 __________________, an affiliate of the depositor, in connection with
offers and sales related to market making transactions in the certificates in
which __________________ acts as principal. ___________________________ 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 of 1933, as amended,
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.
-135-
<PAGE>
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, 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.
-136-
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
"1986 Act"................................................. 101
"Agency Securities"........................................ 16
"Amortizable Bond Premium Regulations"..................... 97
"Applicable Amount"........................................ 122
"ARM Loans"................................................ 101
"Asset Conservation Act"................................... 92
"Available Funds".......................................... 40
"CERCLA"................................................... 91
"Certificate Account"...................................... 67
"Certificateholder"........................................ 54
"Class Certificate Balance"................................ 40
"Code"..................................................... 35
"Companion Classes"........................................ 46
"Contingent Regulations"................................... 108
"Contributions Tax"........................................ 124
"Deferred Interest"........................................ 103
"Eleventh District"........................................ 50
"FHLBSF"................................................... 50
"Garn-St Germain Act"...................................... 93
"Housing Act".............................................. 22
"Insured Expenses"......................................... 68
"Legislative History"...................................... 101
"Liquidated Mortgage"...................................... 79
"Master REMIC"............................................. 107
"Mortgage Assets".......................................... 16
"National Cost of Funds Index"............................. 51
"New Withholding Regulations".............................. 105
"Non-U.S. Person".......................................... 104
"OID Regulations".......................................... 101
"OID"...................................................... 95
"OTS"...................................................... 51
"Parties in Interest"...................................... 129
"Payment Lag Certificates"................................. 116
"Plans".................................................... 129
"Prepayment Assumption".................................... 101
"Pre-Funding Account"...................................... 26
"Pre-Funding Arrangement".................................. 26
"Pre-Issuance Accrued Interest"............................ 117
"Prime Rate"............................................... 52
"Private Mortgage-Backed Securities"....................... 16
</TABLE>
-137-
<PAGE>
<TABLE>
<S> <C>
"Prohibited Transactions Tax".............................. 124
"RCRA"..................................................... 92
"Regular Certificateholders"............................... 108
"Regular Certificates"..................................... 106
"Relief Act"............................................... 93
"REMIC Certificates"....................................... 106
"REMIC".................................................... 39
"Residual Certificateholder"............................... 118
"Residual Certificates".................................... 106
"Single Family Certificates"............................... 130
"SMMEA".................................................... 135
"Stripped ARM Obligations"................................. 103
"Stripped Bond Certificates"............................... 99
"Stripped Coupon Certificates"............................. 99
"Subsequent Mortgage Loans"................................ 26
"Subsequent Transfer Agreement"............................ 66
"Super-Premium Certificates"............................... 110
"Title V".................................................. 93
"U.S. Person".............................................. 104
"Underwriter Exemptions"................................... 132
"Voting Rights"............................................ 81
</TABLE>
-138-
<PAGE>
Subject to Completion, dated May 20, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 20, 1999)
$______________________
(Approximate)
First Horizon Asset Securities, Inc.
Depositor
FT Mortgage Companies
Seller and 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 The trust will issue:
consider the risk factors
beginning on page S-8 of . ______ classes of senior certificates;
This prospectus supplement
and on page 6 of the . ______ classes of junior certificates;
accompanying prospectus.
---------------------------- . ______ 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 __________, an affiliate of the depositor and the master servicer, in
connection with offers and sales related to market making transactions in the
offered certificates in which ________ acts as principal. _______ 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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
PAGE
----
<S> <C>
SUMMARY..................................................................... S-4
The Issuer............................................................. S-4
Offered Certificates................................................... S-4
The Mortgage Loans..................................................... S-4
Cut-off Date........................................................... S-5
Closing Date........................................................... S-5
Depositor.............................................................. S-5
Seller and Master Servicer............................................. S-5
Trustee................................................................ S-5
Distribution Dates..................................................... S-5
Interest Payments...................................................... S-5
Principal Payments..................................................... S-5
Optional Termination................................................... S-5
Collection Account; Priority of Distributions.......................... S-6
Advances............................................................... S-6
Credit Enhancement..................................................... S-6
Subordination.......................................................... S-6
Tax Status............................................................. S-7
ERISA Considerations................................................... S-7
Legal Investment....................................................... S-7
Ratings................................................................ S-7
RISK FACTORS................................................................ S-8
Certificates may not be
appropriate investments
for some investors................................................... S-8
Prepayments are unpredictable
and will affect the yield on
your certificates.................................................... S-9
The effect of prepayment on principal
only and interest only
certificates may be severe.......................................... S-10
Subordination may not be
sufficent to protect senior
certificates from losses............................................. S-10
Concentration of [California]
mortgage loans may increase
risk of losses....................................................... S-11
Residual Certificates have
adverse tax consequences............................................. S-12
Year 2000 computer problems
could disrupt distributions on
your certificates.................................................... S-12
FORWARD LOOKING STATEMENTS.................................................. S-15
THE MORTGAGE POOL........................................................... S-16
General................................................................ S-16
Assignment of the Mortgage Loans....................................... S-24
SERVICING OF MORTGAGE LOANS................................................. S-26
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C>
General................................................................. S-26
The Master Servicer..................................................... S-26
Foreclosure, Delinquency and Loss Experience............................ S-26
Servicing Compensation and Payment of Expenses.......................... S-31
Adjustment to Master Servicing Fee in Connection with Prepaid Mortgage
Loans................................................................. S-31
Advances................................................................ S-31
DESCRIPTION OF THE CERTIFICATES.............................................. S-32
General................................................................. S-32
Book-Entry Certificates................................................. S-33
Payments on Mortgage Loans; Accounts.................................... S-34
Distributions........................................................... S-34
Priority of Distributions Among Certificates............................ S-34
Interest................................................................ S-35
Principal............................................................... S-36
Allocation of Losses.................................................... S-42
Structuring Assumptions................................................. S-43
Optional Purchase of Defaulted Loans.................................... S-45
Optional Termination.................................................... S-45
The Trustee............................................................. S-46
Restrictions on Transfer of the Class A-R Certificates.................. S-46
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS................................ S-46
General................................................................. S-46
Prepayment Considerations and Risks..................................... S-47
Sensitivity of the Class X Certificates................................. S-48
Sensitivity of the Principal Only Certificates.......................... S-49
Additional Information.................................................. S-50
Weighted Average Lives of the Offered Certificates...................... S-50
Decrement Tables........................................................ S-51
Last Scheduled Distribution Date........................................ S-53
The Subordinated Certificates........................................... S-53
CREDIT ENHANCEMENT........................................................... S-54
Subordination of Certain Classes........................................ S-54
USE OF PROCEEDS.............................................................. S-56
MATERIAL FEDERAL INCOME TAX CONSEQUENCES..................................... S-56
ERISA CONSIDERATIONS......................................................... S-57
METHOD OF DISTRIBUTION....................................................... S-59
LEGAL MATTERS................................................................ S-60
RATINGS...................................................................... S-60
INDEX OF TERMS............................................................... S-62
</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.
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Class Certificate Pass-Through
Class Principal Balance Rate Type
----- ----------------- ---- ----
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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 $_____.
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:
<TABLE>
<CAPTION>
--------------------------------------------------
Class Minimum Denomination
----- --------------------
--------------------------------------------------
<S> <C>
Class A-1
--------------------------------------------------
Class A-2
--------------------------------------------------
Class A-3
--------------------------------------------------
Class PO
--------------------------------------------------
Class X
--------------------------------------------------
Class A-R
--------------------------------------------------
Class M
--------------------------------------------------
Class B-1
--------------------------------------------------
Class B-2
---------------------------------------------------
</TABLE>
Certificates with principal balances in excess of these amounts will be
issued in multiples of $1,000 above the minimum denomination.
See "Discription 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:
. Total original principal balance/(1)/: $________________
. Original terms to maturity:______to______ years
. Weighted average maturity: between ___ and ___ months
. Weighted average annual interest rate: between ____% and ____%
. 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-4
<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 and 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 rate specified or described on the cover page
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-___.
See "Description of the Certificates -- Principal".
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".
S-5
<PAGE>
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 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.
S-6
<PAGE>
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 ___.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Class Rating Rating
----- ------ ------
- --------------------------------------------------------------------------------
<S> <C> <C>
Class A-1
- --------------------------------------------------------------------------------
Class A-2
- --------------------------------------------------------------------------------
Class A-3
- --------------------------------------------------------------------------------
Class PO
- --------------------------------------------------------------------------------
Class X
- --------------------------------------------------------------------------------
Class A-R
- --------------------------------------------------------------------------------
Class M
- --------------------------------------------------------------------------------
Class B-1
- --------------------------------------------------------------------------------
Class B-2
- --------------------------------------------------------------------------------
</TABLE>
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".
S-7
<PAGE>
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:
. 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;
. 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;
. 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;
. unless a secondary market for the
certificates develops, the certificates may
be illiquid investments; and
. you must report interest as well as original
issue discount, if any, on the accrual method
of 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.
S-8
<PAGE>
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:
. the amortization schedules of the mortgage
loans;
. the rate of principal prepayments, including
partial prepayments and those resulting from
refinancing, by mortgagors;
. liquidations of defaulted mortgage loans;
. repurchases of mortgage loans by the seller
as a result of defective documentation or
breaches of representations and warranties;
. optional purchase by the seller of defaulted
mortgage loans; and
. 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:
. 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
principal at an interest rate as high as the
pass-through rate on your certificates.
. 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
S-9
<PAGE>
you may be able to reinvest the principal
at a higher rate of interest than the
pass-through rate on your certificates.
. 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:
. 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.
. 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.
. 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".
Subordination may not be
sufficent 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
S-10
<PAGE>
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]:
. 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.
S-11
<PAGE>
. 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.
. 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.
. 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.
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.
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.
S-12
<PAGE>
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-15 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 March 31, 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 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
S-13
<PAGE>
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 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.
S-14
<PAGE>
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 (including 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 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.
S-15
<PAGE>
THE MORTGAGE POOL
General
The depositor will purchase mortgage loans in the mortgage pool from FT
Mortgage Companies ("FT Mortgage") or an affiliate of FT Mortgage pursuant to a
pooling and servicing agreement among FT Mortgage, as seller and 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. FT Mortgage
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 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
S-16
<PAGE>
mortgage loan is the first day of each 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 Loans. "Jumbo Loans" are 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 ("PMI")
policy issued by a mortgage insurance company acceptable to Fannie Mae or
Freddie Mac. The PMI 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%.
With respect to some of the mortgage loans (the "Lender PMI Mortgage
Loans"), the lender (rather than the borrower) acquired the primary mortgage
guaranty insurance and charged the related borrower an interest premium. Except
with respect to the Lender PMI Mortgage Loans, no PMI policy will be required
with respect to any mortgage loan
. 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
. if maintaining the PMI policy is prohibited by applicable law.
With respect to the Lender PMI Mortgage Loans, the PMI 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
S-17
<PAGE>
. 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
. 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,
. 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
. 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%.
MORTGAGE RATES
--------------
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance Percentage of
Mortgage Rates (%) Mortgage Loans Outstanding Mortgage Pool
------------------ -------------- ----------- -------------
<S> <C> <C> <C>
6.375..........................
6.500..........................
6.625..........................
6.750..........................
6.875..........................
7.000..........................
7.125..........................
7.250..........................
7.375..........................
7.500..........................
</TABLE>
S-18
<PAGE>
<TABLE>
<S> <C>
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-19
<PAGE>
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Aggregate
Principal
Number of Balance Percentage of
Current Mortgage Loan Amounts Mortgage Loans Outstanding Mortgage Pool
----------------------------- -------------- ----------- -------------
<S> <C> <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-20
<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> <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> <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-21
<PAGE>
STATE DISTRIBUTION
OF MORTGAGE PROPERTIES (1)
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance Percent of
State Mortgage Loans Outstanding Mortgage Pool
----- -------------- ----------- -------------
<S> <C> <C> <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-22
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance Percent of
State Mortgage Loans Outstanding Mortgage Pool
----- -------------- ----------- -------------
<S> <C> <C> <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> <C> <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> <C> <C>
Single Family.....................
Condominium.......................
High Rise Condo...................
2-4 Family........................
Planned Unit......................
TOTALS:........................
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
Aggregate
Number of Principal
Mortgage Balance Percent of
--------
Occupancy Type Loans Outstanding Mortgage Pool
-------------- ----- ----------- -------------
<S> <C> <C> <C>
Primary Residence.................
Investor Property.................
Second Residence..................
</TABLE>
S-23
<PAGE>
TOTALS:........................
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> <C> <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,
. 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,
. the original mortgage creating a first lien on the related mortgaged
property with evidence of recording,
. an assignment in recordable form of the mortgage,
S-24
<PAGE>
. the title policy with respect to the related mortgaged property, and
. if applicable, all recorded intervening assignments of the mortgage
and any riders or modifications to 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
Internal Revenue Code of 1986, as amended (the "Code").
On the date of substitution, any replacement mortgage loan will
. 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 the amount of any shortfall (a
"Substitution Adjustment Amount") into the Certificate Account for
distribution to the certificateholders on the related Distribution
Date,
. have a mortgage rate not lower than, and not more than one percentage
point per annum higher than, that of the deleted mortgage loan,
. have a loan-to-value ratio not higher than that of the deleted
mortgage loan,
. 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
. 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.
S-25
<PAGE>
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 ___________, 1999, FT Mortgage provided servicing for approximately
$____ 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 2974 LBJ
Freeway, Dallas, Texas 75234.
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.
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.
S-26
<PAGE>
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 originated or acquired by FT Mortgage, and serviced or master
serviced by the master servicer.
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-27
<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, Three Months Ended
----------------- ------------------
1996 1997 1998 March 31, 1999
---- ---- ---- --------------
No. of Principal No. of Principal No. of Principal No. of Principal
Loans Balance Loans Balance Loans Balance Loans Balance
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio
Period of Delinquency
30-59 Days
60-89 Days
90 Days or more
Total Delinquencies
Foreclosures Pending
Total Delinquencies and
Foreclosures Pending
Net Gains/Losses on
liquidated loans
Percentage of Net
Gains/Losses on
liquidated loans
</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 millions. 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).
S-28
<PAGE>
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.
[Remainder of Page Intentionally Left Blank]
S-29
<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, Three Months Ended
----------------- ------------------
1996 1997 1998 March 31, 1999
---- ---- ---- --------------
No. of Principal No. of Principal No. of Principal No. of Principal
Loans Balance Loans Balance Loans Balance Loans Balance
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio
Period of Delinquency
30-59 Days
60-89 Days
90 Days or more
Total Delinquencies
Foreclosures Pending
Total Delinquencies and
Foreclosures Pending
Net Gains/Losses on
liquidated loans
Percentage of Net
Gains/Losses on
liquidated loans
</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 millions. 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).
S-30
<PAGE>
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 (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 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 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
S-31
<PAGE>
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
. all amounts previously distributed to certificateholders of the class
as payments of principal,
. the amount of Realized Losses, including Excess Losses, allocated to
the class, and
. 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
S-32
<PAGE>
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. ("CEDE").
Accordingly, CEDE 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.
Unless and until definitive certificates are issued, it is anticipated that
the only certificateholder of the book-entry certificates will be CEDE, as
nominee of the depository. Beneficial owners of the book-entry certificates will
not be certificateholders, as that term is used in the 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, 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.
S-33
<PAGE>
Payments on Mortgage Loans; Accounts
On or before the closing date, the master servicer will establish an
account (the "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 account established
and maintained with the trustee on behalf of the certificateholders (the
"Distribution Account").
Distributions
Distributions on the certificates will be made by the trustee on the ___
day of each month or, if that day is not a business day, on the first business
day thereafter, commencing in _____ 1999 (each, a "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:
. to interest on each interest bearing class of senior certificates;
. 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 up to the maximum
amount of principal to be distributed on the senior classes on such
Distribution Date;
. 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
. 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".
"Available Funds" with respect to any Distribution Date will be equal to
the sum of
S-34
<PAGE>
. 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;
. 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 (collectively,
"Insurance Proceeds") and all other cash amounts received and retained
in connection with the liquidation of defaulted mortgage loans, by
foreclosure or otherwise ("Liquidation Proceeds") during the calendar
month before the Distribution Date (in each case, net of unreimbursed
expenses incurred in connection with a liquidation or foreclosure and
unreimbursed advances, if any);
. all partial or full prepayments received during the related Prepayment
Period; and
. 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.
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.
S-35
<PAGE>
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. With respect to any Distribution Date, the "Net
Interest Shortfall" is equal to any net prepayment interest shortfalls for the
Distribution Date and the amount of interest that would otherwise have been
received with respect to any mortgage loan that was the subject of a Relief Act
Reduction or a Special Hazard Loss, Fraud Loss, Debt Service Reduction or
Deficient Valuation, after the exhaustion of the respective amounts of coverage
provided by the subordinate certificates for those types of losses.
A "Relief Act Reduction" is a reduction in the amount of monthly interest
payment on a mortgage loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940. See "Certain Legal Aspects of the Mortgage Loans -- Soldiers' and
Sailors' Civil Relief Act" in the prospectus. With respect to any Distribution
Date, a net prepayment interest shortfall is the amount by which the aggregate
of prepayment interest shortfalls during the portion of the Prepayment Period
occurring in the calendar month before the Distribution Date exceeds the
aggregate amount payable on the Distribution Date by the master servicer as
described under "Servicing of Mortgage Loans -- Adjustment to Master Servicing
Fee in Connection with Prepaid Mortgage Loans." A prepayment interest shortfall
is the amount by which interest paid by a borrower in connection with a
prepayment of principal on a mortgage loan is less than one month's interest at
the related mortgage rate on the Stated Principal Balance of the mortgage loan.
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 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.
The Non-PO Percentage with respect to any mortgage loan with a net mortgage
rate less than ___% (each, a "Discount mortgage loan") will be equal to the net
mortgage rate divided by ____%. The Non-PO Percentage with respect to any
mortgage loan with a net mortgage rate equal to or greater than ____% (each, a
"Non-Discount mortgage loan") will be 100%. The PO Percentage with respect to
any Discount mortgage loan will be equal to (___% minus the net mortgage rate)
divided by ___%. The PO Percentage with respect to any Non-Discount mortgage
loan will be 0%.
S-36
<PAGE>
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.
The "Non-PO Formula Principal Amount" for any Distribution Date will equal
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.
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:
. to the Class A-R Certificates, until their class certificate balance
is reduced to zero;
. 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;
. 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;
. 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
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<PAGE>
principal only certificates), pro rata, in accordance with their respective
class certificate balances immediately before the Distribution Date.
The Senior Credit Support Depletion Date is the date on which the class
certificate balance of each class of subordinate certificates has been reduced
to zero.
"Prepayment Period" means 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.
The Senior Principal Distribution Amount for any Distribution Date will
equal the sum of
. 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,
. 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
. the Senior Prepayment Percentage or
. 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
. 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.
"Stated Principal Balance" means 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.
The "Pool Principal Balance" with respect to any Distribution Date equals
the aggregate of the Stated Principal Balances of the mortgage loans outstanding
on the Due Date in the month before the Distribution Date.
The "Senior Percentage" for any Distribution Date is 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
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<PAGE>
of certificates, other than the principal only certificates, immediately before
the Distribution Date.
The "Subordinated Percentage" for any Distribution Date will be calculated
as the difference between 100% and the Senior Percentage for the Distribution
Date.
The "Senior Prepayment Percentage" for any Distribution Date occurring
during the five years beginning on the first Distribution Date will equal 100%.
Thereafter, the Senior Prepayment Percentage will be subject to gradual
reduction as described in the second following paragraph. This disproportionate
allocation of unscheduled payments of principal will have the effect of
accelerating the amortization of the senior certificates (other than the
principal only certificates) which receive these unscheduled payments of
principal while, in the absence of Realized Losses, increasing the interest in
the Pool 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 "Subordinated Prepayment Percentage" as of any Distribution Date will
be calculated as the difference between 100% and the Senior Prepayment
Percentage.
The Senior Prepayment Percentage for any Distribution Date occurring on or
after the fifth anniversary of the first Distribution Date will be as follows:
. for any Distribution Date in the first year thereafter, the Senior
Percentage plus 70% of the Subordinated Percentage for the
Distribution Date;
. for any Distribution Date in the second year thereafter, the Senior
Percentage plus 60% of the Subordinated Percentage for the
Distribution Date;
. for any Distribution Date in the third year thereafter, the Senior
Percentage plus 40% of the Subordinated Percentage for the
Distribution Date;
. for any Distribution Date in the fourth year thereafter, the Senior
Percentage plus 20% of the Subordinated Percentage for the
Distribution Date; and
. 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:
. 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
. cumulative Realized Losses on the mortgage loans do not exceed
. 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,
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<PAGE>
. 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,
. for the Distribution Date on the seventh anniversary of the first
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,
. 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
. 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.
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.
With respect to each class of subordinate certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of the
class and all classes of subordinate certificates which have higher numerical
class designations than the class (the "Applicable Credit Support Percentage")
is less than the Applicable Credit Support Percentage for the class on the date
of issuance of the certificates (the "Original Applicable Credit Support
Percentage"), no distribution of partial principal prepayments and principal
prepayments in full will be made to any of those classes (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 Class Subordination Percentage with respect to any Distribution Date
and each class of subordinate certificates, will equal 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.
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<PAGE>
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.
The Subordinated Principal Distribution Amount for any Distribution Date
will equal the sum of
. 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
. 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.
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
. the PO Formula Principal Amount for the Distribution Date, and
. 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.
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<PAGE>
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.
The PO Formula Principal Amount for any Distribution Date will equal the
sum of the applicable PO Percentage of
. all monthly payments of principal due on each mortgage loan on the
related Due Date,
. 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,
. the Substitution Adjustment Amount in connection with any deleted
mortgage loan received for the Distribution Date,
. 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,
. 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
. 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.
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
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<PAGE>
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.
In general, a "Realized Loss" means, 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. "Excess Losses" are Special Hazard Losses in excess of
the Special Hazard Loss Coverage Amount, Bankruptcy Losses in excess of the
Bankruptcy Loss Coverage Amount and Fraud Losses in excess of the Fraud Loss
Coverage Amount. "Bankruptcy Losses" are losses that are incurred as a result
Debt Service Reductions and Deficient Valuations. "Special Hazard Losses" are
Realized Losses in respect of Special Hazard mortgage loans. "Fraud Losses" are
losses sustained on a Liquidated mortgage loan by reason of a default arising
from fraud, dishonesty or misrepresentation. See "Credit Enhancement --
Subordination of Certain Classes".
A "Liquidated mortgage loan" is a defaulted mortgage loan as to which the
master servicer has determined that all recoverable liquidation and insurance
proceeds have been received. A "Special Hazard mortgage loan" is a Liquidated
mortgage loan as to which the ability to recover the full amount due thereunder
was substantially impaired by a hazard not insured against under a standard
hazard insurance policy of the type described in the prospectus under "Credit
Enhancement -- Special Hazard Insurance Policies". See "Credit Enhancement --
Subordination of Certain Classes".
Structuring Assumptions
Unless otherwise specified, the information in the tables in this
prospectus supplement has been prepared on the basis of the following assumed
characteristics of the mortgage loans and the following additional assumptions
(collectively, the "Structuring Assumptions"):
. the mortgage pool consists of two mortgage loans with the following
characteristics:
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<PAGE>
<TABLE>
<CAPTION>
Original Term Remaining Term
Principal Net to Maturity to Maturity
---------
Balance Mortgage Rate Mortgage Rate (in Months) (in Months)
------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
$
$
$
</TABLE>
. the mortgage loans prepay at the specified constant percentages of
SPA,
. no defaults in the payment by mortgagors of principal of and interest
on the mortgage loans are experienced,
. 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,
. prepayments are allocated without giving effect to loss and
delinquency tests,
. 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,
. 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,
. the initial class certificate balance or notional amount, as
applicable, of each class of certificates is as set forth on
page S-4,
. 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,
. 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,
. the closing date of the sale of the certificates is ___________, 1999,
. the seller is not required to repurchase or substitute for any
mortgage loan,
. the master servicer does not exercise the option to repurchase the
mortgage loans described under "-- Optional Purchase of Defaulted
Loans" and "-- Optional Termination," and
. 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
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<PAGE>
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.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this prospectus supplement is
the Standard Prepayment Assumption ("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 (for example, 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.
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<PAGE>
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.
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 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.
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<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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:
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> <C> <C> <C> <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
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<PAGE>
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:
CLASS PRICE
- ----- -----
Class PO...............................
SENSITIVITY OF THE CLASS PO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
----------------------------------------------
<S> <C> <C> <C> <C> <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)
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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 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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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
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-53
<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
. Special Hazard Losses in an initial amount expected to be up to
approximately $___________ (the "Special Hazard Loss Coverage
Amount"),
. Bankruptcy Losses in an initial amount expected to be up to
approximately $_____________ (the "Bankruptcy Loss Coverage Amount"),
and
. Fraud Losses in an initial amount expected to be up to approximately
$_______________ (the "Fraud Loss Coverage Amount").
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<PAGE>
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
. the Special Hazard Loss coverage amount as of the closing date less
the amount, if any, of losses attributable to Special Hazard mortgage
loans incurred since the closing date, or
the greatest of
. 1% of the aggregate of the principal balances of the mortgage loans,
. twice the principal balance of the largest mortgage loan, and
. 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
. 1% of the then current Pool Principal Balance, and
. 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.
A "Deficient Valuation" occurs when a bankruptcy court establishes the
value of a mortgaged property at an amount that is less than the then
outstanding principal balance of the mortgage loan secured by the mortgaged
property or reduces the outstanding principal balance of a mortgage loan. If a
bankruptcy court reduces the value of a mortgaged property, the amount of the
related secured debt could be reduced to this value, and the holder of the
related mortgage loan would become an unsecured creditor to the extent the
outstanding principal balance of the mortgage loan exceeds the value so assigned
to the mortgaged property by the bankruptcy court.
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<PAGE>
In addition, other modifications of the terms of a mortgage loan can result
from a bankruptcy proceeding, including the reduction (a "Debt Service
Reduction") of the amount of the monthly payment on the related mortgage loan.
A Debt Service Reduction or Deficient Valuation will be disregarded so long as
the master servicer is pursuing any other remedies that may be available with
respect to the related mortgage loan and either the mortgage loan has not
incurred a payment default or scheduled monthly payments of principal and
interest are being advanced by the master servicer without regard to any Debt
Service Reduction or Deficient Valuation.
USE OF PROCEEDS
The depositor will apply the net proceeds of the sale of the certificates
against the purchase price of the mortgage loans.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
trust fund as a REMIC. The Residual Certificates will constitute the sole class
of residual interests in the REMIC.
All classes of certificates except the Class A-R Certificates (the "Regular
Certificates") and the Class A-R Certificates (the "Residual 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 Original Issue Discount ("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
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<PAGE>
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 Internal Revenue Code of 1986, as amended (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 Residual 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 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 Residual 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 Residual Certificates should consult their tax advisors
regarding whether, at the time of acquisition, a Residual 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 an employee benefit or other plan or arrangement (such as
an individual retirement plan or Keogh plan) that is subject to ERISA or to
Section 4975 of the Code (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
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<PAGE>
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.
The U.S. Department of Labor has granted an individual administrative
exemption to _____________ (Prohibited Transaction Exemption _____, Exemption
Application No. D-_____ Fed. Reg. (________)) (the "Exemption") 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. The Exemption applies to mortgage
loans such as the mortgage loans in the trust fund.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations" in the
prospectus.
It is expected that the Exemption 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 the Exemption other than those within the control of the
investors will be met. In addition, as of the date hereof, there is no single
mortgagor that is the obligor on 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 the Exemption 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 Prohibited Transaction Class
Exemption 83-1 ("PTE 83-1"), the Exemption 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:
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. 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,
. 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 Prohibited Transaction Class Exemption 95-
60 ("PTE 95-60")) and that the purchase and holding of the
certificates are covered under Sections I and III of PTE 95-60, or
. 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.
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
________________________ ("_____________" and, together with
_______________________, the "Underwriters"), 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
S-59
<PAGE>
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 ___________________________, 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 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
S-60
<PAGE>
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.
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.
S-61
<PAGE>
INDEX OF TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Applicable Credit Support Percentage".................................... S-40
"Available Funds"......................................................... S-34
"Bankruptcy Loss Coverage Amount"......................................... S-54
"Bankruptcy Losses"....................................................... S-43
"CEDE".................................................................... S-33
"Certificate Account"..................................................... S-34
"Code".................................................................... S-25
"Debt Service Reduction".................................................. S-56
"Deficient Valuation"..................................................... S-55
"Discount Mortgage Loan".................................................. S-36
"Distribution Account".................................................... S-34
"Distribution Date"....................................................... S-34
"Due Date"................................................................ S-16
"Excess Losses"........................................................... S-43
"Exemption"............................................................... S-58
"Fraud Loss Coverage Amount".............................................. S-54
"Fraud Losses"............................................................ S-43
"FT Mortgage"............................................................. S-16
"Insurance Proceeds"...................................................... S-35
"Lender PMI Mortgage Loans"............................................... S-17
"Liquidated Mortgage Loan"................................................ S-43
"Liquidation Proceeds".................................................... S-35
"Loan-to-Value Ratio"..................................................... S-17
"Net Interest Shortfall".................................................. S-36
"Non-Discount Mortgage Loan".............................................. S-36
"OID"..................................................................... S-56
"Original Applicable Credit Support Percentage"........................... S-40
"Prepayment Period"....................................................... S-38
"Realized Loss"........................................................... S-43
"Regular Certificates".................................................... S-56
"Relief Act Reduction".................................................... S-36
"Residual Certificates"................................................... S-56
"Restricted Classes"...................................................... S-40
"SPA"..................................................................... S-45
"Special Hazard Loss Coverage Amount"..................................... S-54
"Special Hazard Losses"................................................... S-43
"Special Hazard Mortgage Loan"............................................ S-43
"Stated Principal Balance"................................................ S-38
"Structuring Assumptions"................................................. S-43
"Substitution Adjustment Amount".......................................... S-25
"Underwritten Certificates"............................................... S-59
</TABLE>
S-63
<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.
<TABLE>
<S> <C>
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. =========
</TABLE>
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*
______________
* 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).
** Filed herewith.
*** To be filed by amendment.
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.
(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
II-2
<PAGE>
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. 1 to the Registration Statement relates and has duly caused this Amendment
No. 1 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 May, 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. 1 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 May 20, 1999
- ---------------------------------------- (Principal Executive Officer)
James B. Witherow
Gary B. Klinger* Chief Financial Officer and Treasurer May 20, 1999
- ----------------------------------------- (Principal Financial Officer and
Gary B. Klinger Principal Accounting Officer
J. Kenneth Glass* Director May 20, 1999
- ------------------------------------------
J. Kenneth Glass
/s/ Thomas J. Wageman
- ------------------------------------------ Director May 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)
______________
*To be filed by amendment.
<PAGE>
EXHIBIT 4.1
-----------
FIRST HORIZON ASSET SECURITIES INC.
Depositor
FT MORTGAGE COMPANIES,
Seller and Master Servicer
and
[The Bank of New York],
Trustee
_____________________________________________________
POOLING AND SERVICING AGREEMENT
Dated as of _______ 1, 1999
_____________________________________________________
FIRST HORIZON MORTGAGE PASS-THROUGH TRUST 1999-__
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-__
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - DEFINITIONS......................................................................... 5
ARTICLE II - CONVEYANCE OF MORTGAGE LOANS;REPRESENTATIONS AND WARRANTIES........................ 31
SECTION 2.1 Conveyance of Mortgage Loans.......................................... 31
SECTION 2.2 Acceptance by Trustee of the Mortgage Loans........................... 34
SECTION 2.3 Representations, Warranties and Covenants of the Seller and
Master Servicer.................................................... 35
SECTION 2.4 Representations and Warranties of the Depositor as to the
Mortgage Loans..................................................... 37
SECTION 2.5 Delivery of Opinion of Counsel in Connection with
Substitutions...................................................... 38
SECTION 2.6 Execution and Delivery of Certificates................................ 38
SECTION 2.7 REMIC Matters......................................................... 38
SECTION 2.8 Covenants of the Master Servicer...................................... 38
ARTICLE III - ADMINISTRATION AND SERVICING OF MORTGAGE LOANS.................................... 40
SECTION 3.1 Master Servicer to Service Mortgage Loans............................. 40
SECTION 3.2 Subservicing; Enforcement of the Obligations of Servicers............. 41
SECTION 3.3 Rights of the Depositor and the Trustee in Respect of the Master
Servicer........................................................... 41
SECTION 3.4 Trustee to Act as Master Servicer..................................... 41
SECTION 3.5 Collection of Mortgage Loan Payments; Certificate Account;
Distribution Account............................................... 42
SECTION 3.6 Collection of Taxes, Assessments and Similar Items; Escrow
Accounts........................................................... 44
SECTION 3.7 Access to Certain Documentation and Information Regarding
the Mortgage Loans................................................. 45
SECTION 3.8 Permitted Withdrawals from the Certificate Account and
Distribution Account............................................... 45
SECTION 3.9 Maintenance of Hazard Insurance; Maintenance of Primary
Insurance Policies................................................. 47
SECTION 3.10 Enforcement of Due-on-Sale Clauses; Assumption
Agreements........................................................ 48
SECTION 3.11 Realization Upon Defaulted Mortgage Loans; Repurchase of
Certain Mortgage Loans............................................ 49
SECTION 3.12 Trustee to Cooperate; Release of Mortgage Files...................... 52
SECTION 3.13 Documents Records and Funds in Possession of Master
Servicer to be Held for the Trustee................................ 52
SECTION 3.14 Servicing Compensation............................................... 53
SECTION 3.15 Access to Certain Documentation...................................... 53
SECTION 3.16 Annual Statement as to Compliance.................................... 54
SECTION 3.17 Annual Independent Public Accountants' Servicing Statement;
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Financial Statements............................................ 54
SECTION 3.18 Errors and Omissions Insurance; Fidelity Bonds........................ 54
ARTICLE IV - DISTRIBUTIONS AND ADVANCES BY THE MASTER SERVICER.................................. 56
SECTION 4.1 Advances.............................................................. 56
SECTION 4.2 Priorities of Distribution............................................ 56
SECTION 4.3 Distributions in Reduction of the Class ____ and Class ____
Certificates.................................................... 59
SECTION 4.4 Allocation of Realized Losses......................................... 62
SECTION 4.5 Reserved.............................................................. 63
SECTION 4.6 Monthly Statements to Certificateholders.............................. 63
SECTION 4.7 Determination of Pass-Through Rates for COFI Certificates............. 65
SECTION 4.8 Determination of Pass-Through Rates for LIBOR Certificates
(Reference Bank Method)......................................... 66
SECTION 4.9 Determination of Pass-Through Rates for LIBOR Certificates
(BBA Method).................................................... 67
ARTICLE V - THE CERTIFICATES.................................................................... 70
SECTION 5.1 The Certificates...................................................... 70
SECTION 5.2 Certificate Register; Registration of Transfer and Exchange of
Certificates.................................................... 70
SECTION 5.3 Mutilated, Destroyed, Lost or Stolen Certificates..................... 75
SECTION 5.4 Persons Deemed Owners................................................. 75
SECTION 5.5 Access to List of Certificateholders' Names and Addresses............. 75
SECTION 5.6 Maintenance of Office or Agency....................................... 75
ARTICLE VI - THE DEPOSITOR AND THE MASTER SERVICER.............................................. 76
SECTION 6.1 Respective Liabilities of the Depositor and the
Master Servicer................................................. 76
SECTION 6.2 Merger or Consolidation of the Depositor or the
Master Servicer................................................. 76
SECTION 6.3 Limitation on Liability of the Depositor, the Seller, the Master
Servicer and Others............................................. 76
SECTION 6.4 Limitation on Resignation of Master Servicer.......................... 77
ARTICLE VII - DEFAULT........................................................................... 78
SECTION 7.1 Events of Default..................................................... 78
SECTION 7.2 Trustee to Act; Appointment of Successor.............................. 79
SECTION 7.3 Notification to Certificateholders.................................... 80
ARTICLE VIII - CONCERNING THE TRUSTEE........................................................... 81
SECTION 8.1 Duties of Trustee..................................................... 81
SECTION 8.2 Certain Matters Affecting the Trustee................................. 81
SECTION 8.3 Trustee Not Liable for Certificates or Mortgage Loans................. 83
SECTION 8.4 Trustee May Own Certificates.......................................... 83
SECTION 8.5 Trustee's Fees and Expenses........................................... 83
SECTION 8.6 Eligibility Requirements for Trustee.................................. 84
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 8.7 Resignation and Removal of Trustee.................................. 84
SECTION 8.8 Successor Trustee................................................... 85
SECTION 8.9 Merger or Consolidation of Trustee.................................. 85
SECTION 8.10 Appointment of Co-Trustee or Separate Trustee....................... 85
SECTION 8.11 Tax Matters......................................................... 87
SECTION 8.12 Periodic Filings.................................................... 88
ARTICLE IX - TERMINATION........................................................................ 90
SECTION 9.1 Termination upon Liquidation or Purchase of all
Mortgage Loans................................................ 90
SECTION 9.2 Final Distribution on the Certificates.............................. 90
SECTION 9.3 Additional Termination Requirements................................. 91
ARTICLE X - MISCELLANEOUS PROVISIONS............................................................ 93
SECTION 10.1 Amendment........................................................... 93
SECTION 10.2 Recordation of Agreement; Counterparts.............................. 94
SECTION 10.3 Governing Law....................................................... 94
SECTION 10.4 Intention of Parties................................................ 95
SECTION 10.5 Notices............................................................. 95
SECTION 10.6 Severability of Provisions.......................................... 96
SECTION 10.7 Assignment.......................................................... 96
SECTION 10.8 Limitation on Rights of Certificateholders.......................... 96
SECTION 10.9 Inspection and Audit Rights......................................... 97
SECTION 10.10 Certificates Nonassessable and Fully Paid........................... 97
</TABLE>
<PAGE>
SCHEDULES
Schedule I: Mortgage Loan Schedule.............................. S-I-1
Schedule II: Representations and Warranties
of the Seller/Master Servicer....................... S-II-1
Schedule III: Representations and
Warranties as to the Mortgage Loans................. S-III-1
Schedule IV: Principal Balances Schedule [if applicable]......... S-IV-1
Schedule V: Form of Monthly Master Servicer Report.............. S-V-1
EXHIBITS
Exhibit A: Form of Senior Certificate (excluding Notional
Amount Certificates).............................. A-1
Exhibit B: Form of Subordinated Certificate.................... B-1
Exhibit C: Form of Class A-R Certificate....................... C-1
Exhibit D: Form of Notional Amount Certificate................. D-1
Exhibit E: Form of Reverse of Certificates..................... E-1
Exhibit F: Form of Initial Certification....................... F-1
Exhibit G: Form of Delay Delivery Certification................ G-1
Exhibit H: Form of Final Certification of Trustee.............. H-1
Exhibit I: Transfer Affidavit.................................. I-1
Exhibit J: Form of Transferor Certificate...................... J-1
Exhibit K: Form of Investment Letter [Non-Rule 144A]........... K-1
Exhibit L: Form of Rule 144A Letter............................ L-1
Exhibit M: Request for Release (for Trustee)................... M-1
Exhibit N: Request for Release (Mortgage Loan)
Paid in Full, Repurchased and Replaced)........... N-1
<PAGE>
THIS POOLING AND SERVICING AGREEMENT, dated as of _________ 1, 1999, among
FIRST HORIZON ASSET SECURITIES INC., a Delaware corporation, as depositor (the
"Depositor"), FT MORTGAGE COMPANIES, a Kansas corporation, as seller (in such
capacity, the "Seller") and as master servicer (in such capacity, the "Master
Servicer"), and _____________________, a banking corporation organized under the
laws of the State of _________, as trustee (the "Trustee").
WITNESSETH THAT
In consideration of the mutual agreements herein contained, the parties
hereto agree as follows:
PRELIMINARY STATEMENT
The Depositor is the owner of the Trust Fund that is hereby conveyed to the
Trustee in return for the Certificates. The Trust Fund for federal income tax
purposes will consist of a single REMIC. The Certificates will represent the
entire beneficial ownership interest in the Trust Fund. The Regular Certificates
will represent the "regular interests" in the Trust Fund and the Residual
Certificates will represent the single "residual interest" in the Trust Fund.
The "latest possible maturity date" for federal income tax purposes of all
interests created hereby will be the Latest Possible Maturity Date.
The following table sets forth characteristics of the Certificates,
together with the minimum denominations and integral multiples in excess thereof
in which such Classes shall be issuable (except that one Certificate of each
Class of Certificates may be issued in a different amount and, in addition, one
Residual Certificate representing the Tax Matters Person Certificate may be
issued in a different amount):
<PAGE>
Integral
Initial Class Multiples
Class Certificate Pass-Through Minimum in Excess of
Designation Balance Rate Denomination Minimum
- ----------- ------- ---- ------------ -------
Class A-1
Class A-2
Class A-3
Class PO
Class X
Class A-R
Class M
Class B-1
Class B-2
________________
(1) The Class PO Certificates will be Principal Only Certificates and will not
bear interest.
(2) The Class X Certificates will be Notional Amount Certificates, will have no
principal balance and will bear interest on their Notional Amount
(initially $___________).
(3) The Pass-Through Rate for the Class X Certificates for any Distribution
Date will be equal to the excess of (a) the average of the Adjusted Net
Mortgage Rates of the Non-Discount Mortgage Loans, weighted on the basis of
their respective Stated Principal Balances over (b) ____% per annum. The
Pass-Through Rate of the Class X Certificates for the first Distribution
Date is ____%
(4) Minimum Denomination is based on the Notional Amount of such Class. Set
forth below are designations of Classes of Certificates to the categories
used herein:
Accretion Directed
Certificates............. None.
Accrual Certificates..... None.
Accrual Components....... None.
Book-Entry Certificates.. All Classes of Certificates other than the Physical
Certificates.
Component Certificates... None.
Components............... For purposes of calculating distributions, the
Component Certificates will be comprised of multiple
payment components having the designations, Initial
Component Balances and Pass-Through Rates set forth
below:
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Initial
Component
Designation Balance Pass-Through Rate
----------- ------------- -----------------
N/A N/A N/A
Delay Certificates...... All interest-bearing Classes of Certificates other than
the Non-Delay Certificates, if any.
ERISA-Restricted
Certificates............ Residual Certificates and Subordinated Certificates
and, until an ERISA Qualifying Underwriting has
occurred with respect to such Classes, Class PO and
Class X Certificates.
Floating Rate
Certificates............ None.
Inverse Floating Rate
Certificates............ None.
COFI Certificates....... None.
LIBOR Certificates...... None.
Non-Delay Certificates.. None.
Notional Amount
Certificates............ Class X Certificates.
Offered Certificates.... All Classes of Certificates other than the Private
Certificates.
Physical Certificates... Class PO and Class X Certificates, the Private
Certificates and the Residual Certificates.
Planned Principal
Classes................. None.
Primary Planned
Principal Classes....... None.
Principal Only
Certificates............ Class PO Certificates.
Private Certificates.... Class B-3, Class B-4 and Class B-5 Certificates.
Rating Agencies......... ______________ and ___________.
Regular Certificates.... All Classes of Certificates, other than the Residual
Certificates.
Residual Certificates... Class A-R Certificates.
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Scheduled Principal
Classes................. None.
Secondary Planned
Principal Class......... None.
Senior Certificates..... Class A-1, Class A-2, Class A-3, Class PO, Class X and
Class A-R Certificates.
Subordinated
Certificates............ Class M, Class B-1 and Class B-2 Certificates.
Support Classes......... None.
Targeted Principal
Classes................. None.
With respect to any of the foregoing designations as to which the
corresponding reference is "None," all defined terms and provisions herein
relating solely to such designations shall be of no force or effect, and any
calculations herein incorporating references to such designations shall be
interpreted without reference to such designations and amounts. Defined terms
and provisions herein relating to statistical rating agencies not designated
above as Rating Agencies shall be of no force or effect.
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ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
Accretion Directed Certificates: As specified in the Preliminary Statement.
Accrual Amount: With respect to the Accrual Certificates and any
Distribution Date prior to the Accrual Termination Date, the amount allocable to
interest on such Class of Accrual Certificates with respect to such Distribution
Date pursuant to Section 4.2(a)(iii).
Accrual Certificates: As specified in the Preliminary Statement.
Accrual Termination Date: The earlier of (a) the Senior Credit Support
Depletion Date and (b) the Distribution Date on which the Class Certificate
Balance of the Class ____ Certificates is reduced to zero.
Adjusted Mortgage Rate: As to each Mortgage Loan, and at any time, the per
annum rate equal to the Mortgage Rate less the Master Servicing Fee Rate.
Adjusted Net Mortgage Rate: As to each Mortgage Loan, and at any time, the
per annum rate equal to the Mortgage Rate less the related Expense Rate. For
purposes of determining whether any Substitute Mortgage Loan is a Discount
Mortgage Loan or a Non-Discount Mortgage Loan and for purposes of calculating
the applicable PO Percentage and applicable Non-PO Percentage, each Substitute
Mortgage Loan shall be deemed to have an Adjusted Net Mortgage Rate equal to the
Adjusted Net Mortgage Rate of the Deleted Mortgage Loan for which it is
substituted.
Advance: The payment required to be made by the Master Servicer with
respect to any Distribution Date pursuant to Section 4.1, the amount of any such
payment being equal to the aggregate of payments of principal and interest (net
of the Master Servicing Fee and net of any net income in the case of any REO
Property) on the Mortgage Loans that were due on the related Due Date and not
received as of the close of business on the related Determination Date, less the
aggregate amount of any such delinquent payments that the Master Servicer has
determined would constitute a Nonrecoverable Advance if advanced.
Agreement: This Pooling and Servicing Agreement and all amendments or
supplements hereto.
Allocable Share: As to any Distribution Date and any Mortgage Loan (i) with
respect to the Class X Certificates, (a) the ratio that (x) the excess, if any,
of the Adjusted Net Mortgage Rate with respect to such Mortgage Loan over the
Required Coupon bears to (y) such Adjusted Net Mortgage Rate or (b) if the
Adjusted Net Mortgage Rate with respect to such Mortgage Loan does not exceed
the Required Coupon, zero, (ii) with respect to the Class PO Certificates, zero
and (iii) with respect to each other Class of Certificates the product of (a)
the lesser of (I) the ratio that the Required Coupon bears to such Adjusted Net
Mortgage Rate and (II) one, multiplied by (b) the ratio that the amount
calculated with respect to such Distribution Date for such Class pursuant to
clause (i) of the
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definition of Class Optimal Interest Distribution Amount (without giving effect
to any reduction of such amount pursuant to Section 4.2(d)) bears to the amount
calculated with respect to such Distribution Date for each Class of Certificates
pursuant to clause (i) of the definition of Class Optimal Interest Distribution
Amount (without giving effect to any reduction of such amount pursuant to
Section 4.2(d)).
Amount Available for Senior Principal: As to any Distribution Date,
Available Funds for such Distribution Date reduced by the aggregate amount
distributable (or allocable to the Accrual Amount, if applicable) on such
Distribution Date in respect of interest on the Senior Certificates pursuant to
Section 4.2(a)(ii).
Amount Held for Future Distribution: As to any Distribution Date, the
aggregate amount held in the Certificate Account at the close of business on the
related Determination Date on account of (i) Principal Prepayments received
after the related Prepayment Period and Liquidation Proceeds received in the
month of such Distribution Date and (ii) all Scheduled Payments due after the
related Due Date.
Applicable Credit Support Percentage: As defined in Section 4.2(e).
Appraised Value: With respect to any Mortgage Loan, the Appraised Value of
the related Mortgaged Property shall be: (i) with respect to a Mortgage Loan
other than a Refinancing Mortgage Loan, the lesser of (a) the value of the
Mortgaged Property based upon the appraisal made at the time of the origination
of such Mortgage Loan and (b) the sales price of the Mortgaged Property at the
time of the origination of such Mortgage Loan; (ii) with respect to a
Refinancing Mortgage Loan other than a Streamlined Documentation Mortgage Loan,
the value of the Mortgaged Property based upon the appraisal made-at the time of
the origination of such Refinancing Mortgage Loan; and (iii) with respect to a
Streamlined Documentation Mortgage Loan, (a) if the loan-to-value ratio with
respect to the Original Mortgage Loan at the time of the origination thereof was
90% or less, the value of the Mortgaged Property based upon the appraisal made
at the time of the origination of the Original Mortgage Loan and (b) if the
loan-to-value ratio with respect to the Original Mortgage Loan at the time of
the origination thereof was greater than 90%, the value of the Mortgaged
Property based upon the appraisal (which may be a drive-by appraisal) made at
the time of the origination of such Streamlined Documentation Mortgage Loan.
Available Funds: As to any Distribution Date, the sum of (a) the aggregate
amount held in the Certificate Account at the close of business on the related
Determination Date net of the Amount Held for Future Distribution and net of
amounts permitted to be withdrawn from the Certificate Account pursuant to
clauses (i)-(viii), inclusive, of Section 3.8(a) and amounts permitted to be
withdrawn from the Distribution Account pursuant to clauses (i)-(iii) inclusive
of Section 3.8(b), (b) the amount of the related Advance and (c) in connection
with Defective Mortgage Loans, as applicable, the aggregate of the Purchase
Prices and Substitution Adjustment Amounts deposited on the related Distribution
Account Deposit Date.
Bankruptcy Code: The United States Bankruptcy Reform Act of 1978, as
amended.
Bankruptcy Coverage Termination Date: The point in time at which the
Bankruptcy Loss Coverage Amount is reduced to zero.
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Bankruptcy Loss: With respect to any Mortgage Loan, a Deficient Valuation
or Debt Service Reduction; provided, however, that a Bankruptcy Loss shall not
be deemed a Bankruptcy Loss hereunder so long as the Master Servicer has
notified the Trustee in writing that the Master Servicer is diligently pursuing
any remedies that may exist in connection with the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any related escrow payments in respect of such
Mortgage Loan are being advanced on a current basis by the Master Servicer, in
either case without giving effect to any Debt Service Reduction or Deficient
Valuation.
Bankruptcy Loss Coverage Amount: As of any Determination Date, the
Bankruptcy Loss Coverage Amount shall equal the Initial Bankruptcy Coverage
Amount as reduced by (i) the aggregate amount of Bankruptcy Losses allocated to
the Certificates since the Cut-off Date and (ii) any permissible reductions in
the Bankruptcy Loss Coverage Amount as evidenced by a letter of each Rating
Agency to the Trustee to the effect that any such reduction will not result in a
downgrading of the then current ratings assigned to the Classes of Certificates
rated by it.
Blanket Mortgage: The mortgage or mortgages encumbering the Cooperative
Property.
Book-Entry Certificates: As specified in the Preliminary Statement.
Business Day: Any day other than (i) a Saturday or a Sunday, or (ii) a day
on which banking institutions in the City of ________, or the State of _______
or the city in which the Corporate Trust Office of the Trustee is located are
authorized or obligated by law or executive order to be closed.
Certificate: Any one of the Certificates executed by the Trustee in
substantially the forms attached hereto as exhibits.
Certificate Account: The separate Eligible Account or Accounts created and
maintained by the Master Servicer pursuant to Section 3.5 with a depository
institution in the name of the Master Servicer for the benefit of the Trustee on
behalf of Certificateholders and designated "FT Mortgage Companies in trust for
the registered holders of First Horizon Asset Securities Inc. Mortgage Pass-
Through Certificates Series 1999-__."
Certificate Balance: With respect to any Certificate at any date, the
maximum dollar amount of principal to which the Holder thereof is then entitled
hereunder, such amount being equal to the Denomination thereof (A) minus the sum
of (i) all distributions of principal previously made with respect thereto and
(ii) all Realized Losses (including Excess Losses) allocated thereto and, in the
case of any Subordinated Certificates, all other reductions in Certificate
Balance previously allocated thereto pursuant to Section 4.3 and (B) in the case
of any Class of Accrual Certificates, increased by the Accrual Amount added to
the Class Certificate Balance of such Class prior to such date.
Certificate Owner: With respect to a Book-Entry Certificate, the Person who
is the beneficial owner of such Book-Entry Certificate.
Certificate Register: The register maintained pursuant to Section 5.2
hereof.
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Certificateholder or Holder: The person in whose name a Certificate is
registered in the Certificate Register, except that, solely for the purpose of
giving any consent pursuant to this Agreement, any Certificate registered in the
name of the Depositor or any affiliate of the Depositor shall be deemed not to
be Outstanding and the Percentage Interest evidenced thereby shall not be taken
into account in determining whether the requisite amount of Percentage Interests
necessary to effect such consent has been obtained; provided, however, that if
any such Person (including the Depositor) owns 100% of the Percentage Interests
evidenced by a Class of Certificates, such Certificates shall be deemed to be
Outstanding for purposes of any provision hereof that requires the consent of
the Holders of Certificates of a particular Class as a condition to the taking
of any action hereunder. The Trustee is entitled to rely conclusively on a
certification of the Depositor or any affiliate of the Depositor in determining
which Certificates are registered in the name of an affiliate of the Depositor.
Class: All Certificates bearing the same class designation as set forth in
the Preliminary Statement.
Class Certificate Balance: With respect to any Class and as to any date of
determination, the aggregate of the Certificate Balances of all Certificates of
such Class as of such date.
Class Interest Shortfall: As to any Distribution Date and Class, the amount
by which the amount described in clause (i) of the definition of Class Optimal
Interest Distribution Amount for such Class exceeds the amount of interest
actually distributed on such Class on such Distribution Date pursuant to such
clause (i).
Class Optimal Interest Distribution Amount: With respect to any
Distribution Date and interest bearing Class or, with respect to any interest
bearing Component, any Component thereof, the sum of (i) one month's interest
accrued during the related Interest Accrual Period at the Pass-Through Rate for
such Class on the related Class Certificate Balance, Component Balance or
Notional Amount, as applicable, subject to reduction as provided in Section
4.2(d) and (ii) any Class Unpaid Interest Amounts for such Class or Component.
Class PO Deferred Amount: As to any Distribution Date, the aggregate of the
applicable PO Percentage of each Realized Loss, other than any Excess Loss, to
be allocated to the Class PO Certificates on such Distribution Date on or prior
to the Senior Credit Support Depletion Date or previously allocated to the Class
PO Certificates and not yet paid to the Holders of the Class PO Certificates.
Class Subordination Percentage: With respect to any Distribution Date and
each Class of Subordinated Certificates, the quotient (expressed as a
percentage) of (a) the Class Certificate Balance of such Class of Certificates
immediately prior to such Distribution Date divided by (b) the aggregate of the
Class Certificate Balances immediately prior to such Distribution Date of all
Classes of Certificates.
Class Unpaid Interest Amounts: As to any Distribution Date and Class of
interest bearing Certificates, the amount by which the aggregate Class Interest
Shortfalls for such Class on prior Distribution Dates exceeds the amount
distributed on such Class on prior Distribution Dates pursuant to clause (ii) of
the definition of Class Optimal Interest Distribution Amount.
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Closing Date: _____________, 1999.
Code: The Internal Revenue Code of 1986, including any successor or
amendatory provisions.
COFI: The Monthly Weighted Average Cost of Funds Index for the Eleventh
District Savings Institutions published by the Federal Home Loan Bank of San
Francisco.
COFI Certificates: As specified in the Preliminary Statement.
Component: As specified in the Preliminary Statement.
Component Balance: With respect to any Component and any Distribution Date,
the Initial Component Balance thereof on the Closing Date, less all amounts
applied in reduction of the principal balance of such Component and Realized
Losses allocated thereto on previous Distribution Dates.
Component Certificates: As specified in the Preliminary Statement.
Cooperative Corporation: The entity that holds title (fee or an acceptable
leasehold estate) to the real property and improvements constituting the
Cooperative Property and which governs the Cooperative Property, which
Cooperative Corporation must qualify as a Cooperative Housing Corporation under
Section 216 of the Code.
Coop Shares: Shares issued by a Cooperative Corporation.
Cooperative Loan: Any Mortgage Loan secured by Coop Shares and a
Proprietary Lease.
Cooperative Property: The real property and improvements owned by the
Cooperative Corporation, including the allocation of individual dwelling units
to the holders of the Coop Shares of the Cooperative Corporation.
Cooperative Unit: A single family dwelling located in a Cooperative
Property.
Corporate Trust Office: The designated office of the Trustee in the State
of _________ at which at any particular time its corporate trust business with
respect to this Agreement shall be administered, which office at the date of the
execution of this Agreement is located at _________ ______________________
(Attn: Mortgage-Backed Securities Group, First Horizon Asset Securities Inc.
Series 1999-__), facsimile no. ________, and which is the address to which
notices to and correspondence with the Trustee should be directed.
Corresponding Classes of Certificates: With respect to each Subsidiary
REMIC Regular Interest, any Class of Certificates or Components appearing
opposite such Subsidiary REMIC Regular Interest in the Preliminary Statement.
Cut-off Date: __________, 1999.
Cut-off Date Pool Principal Balance: $_________.
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Cut-off Date Principal Balance: As to any Mortgage Loan, the Stated
Principal Balance thereof as of the close of business on the Cut-off Date.
Debt Service Reduction: With respect to any Mortgage Loan, a reduction by a
court of competent jurisdiction in a proceeding under the Bankruptcy Code in the
Scheduled Payment for such Mortgage Loan which became final and non-appealable,
except such a reduction resulting from a Deficient Valuation or any reduction
that results in a permanent forgiveness of principal.
Deceased Holder: With respect to a Class ____ or Class ____
Certificateholder, as the context requires, as defined in Section 4.3(b).
Defective Mortgage Loan: Any Mortgage Loan which is required to be
repurchased pursuant to Section 2.2 or 2.3.
Deficient Valuation: With respect to any Mortgage Loan, a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then-outstanding indebtedness under the Mortgage Loan, or any reduction in
the amount of principal to be paid in connection with any Scheduled Payment that
results in a permanent forgiveness of principal, which valuation or reduction
results from an order of such court which is final and non-appealable in a
proceeding under the Bankruptcy Code.
Definitive Certificates: Any Certificate evidenced by a Physical
Certificate and any Certificate issued in lieu of a Book-Entry Certificate
pursuant to Section 5.2(e).
Delay Certificates: As specified in the Preliminary Statement.
Delay Delivery Mortgage Loans: The Mortgage Loans for which all or a
portion of a related Mortgage File is not delivered to Trustee on the Closing
Date. The number of Delay Delivery Mortgage Loans shall not exceed 50% of the
aggregate number of Mortgage Loans as of the Closing Date.
Deleted Mortgage Loan: As defined in Section 2.3(c) hereof.
Denomination: With respect to each Certificate, the amount set forth on the
face thereof as the "Initial Certificate Balance of this Certificate" or the
"Initial Notional Amount of this Certificate" or, if neither of the foregoing,
the Percentage Interest appearing on the face thereof.
Depositor: First Horizon Asset Securities Inc., a Delaware corporation, or
its successor in interest.
Depository: The initial Depository shall be The Depository Trust Company,
the nominee of which is CEDE & Co., as the registered Holder of the Book-Entry
Certificates. The Depository shall at all times be a "clearing corporation" as
defined in Section 8-102(a)(5) of the Uniform Commercial Code of the State of
New York.
Depository Participant: A broker, dealer, bank or other financial
institution or other Person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
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Determination Date: As to any Distribution Date, the 22nd day of each month
or if such 22nd day is not a Business Day the next preceding Business Day;
provided, however, that if such 22nd day or such Business Day, whichever is
applicable, is less than two Business Days prior to the related Distribution
Date, the Determination Date shall be the first Business Day which is two
Business Days preceding such Distribution Date.
Discount Mortgage Loan: Any Mortgage Loan with an Adjusted Net Mortgage
Rate that is less than the Required Coupon.
Distribution Account: The separate Eligible Account created and maintained
by the Trustee pursuant to Section 3.5 in the name of the Trustee for the
benefit of the Certificateholders and designated "___________ in trust for
registered holders of First Horizon Asset Securities Inc. Mortgage Pass-Through
Certificates, Series 1999-__." Funds in the Distribution Account shall be held
in trust for the Certificateholders for the uses and purposes set forth in this
Agreement.
Distribution Account Deposit Date: As to any Distribution Date, 12:30 p.m.
____ time on the Business Day immediately preceding such Distribution Date.
Distribution Date: The 25th day of each calendar month after the initial
issuance of the Certificates, or if such 25th day is not a Business Day, the
next succeeding Business Day, commencing in ________ 1999.
Due Date: With respect to any Distribution Date, the first day of the month
in which the related Distribution Date occurs.
Duff & Phelps: Duff & Phelps Credit Rating Co., or any successor thereto.
If Duff & Phelps is designated as a Rating Agency in the Preliminary Statement,
for purposes of Section 10.05(b) the address for notices to Duff & Phelps shall
be Duff & Phelps Credit Rating Co., 55 East Monroe Street, 38th floor, Chicago,
Illinois 60603, Attention: MBS Monitoring, or such other address as Duff &
Phelps may hereafter furnish to the Depositor and the Master Servicer.
Eligible Account: Any of (i) an account or accounts maintained with a
federal or state chartered depository institution or trust company the short-
term unsecured debt obligations of which (or, in the case of a depository
institution or trust company that is the principal subsidiary of a holding
company, the debt obligations of such holding company) have the highest short-
term ratings of each Rating Agency at the time any amounts are held on deposit
therein, or (ii) an account or accounts in a depository institution or trust
company in which such accounts are insured by the FDIC or the SAIF (to the
limits established by the FDIC or the SAIF, as applicable) and the uninsured
deposits in which accounts are otherwise secured such that, as evidenced by an
Opinion of Counsel delivered to the Trustee and to each Rating Agency, the
Certificateholders have a claim with respect to the funds in such account or a
perfected first priority security interest against any collateral (which shall
be limited to Permitted Investments) securing such funds that is superior to
claims of any other depositors or creditors of the depository institution or
trust company in which such account is maintained, or (iii) a trust account or
accounts maintained with (a) the trust department of a federal or state
chartered depository institution or (b) a trust company, acting in its fiduciary
capacity or (iv) any other account acceptable to each Rating Agency. Eligible
Accounts may bear interest, and may include, if otherwise qualified under this
definition, accounts maintained with the Trustee.
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ERISA: The Employee Retirement Income Security Act of 1974, as amended.
ERISA Qualifying Underwriting: With respect to any ERISA-Restricted
Certificate that is not a Subordinated Certificate or a Residual Certificate, a
best efforts or firm commitment underwriting or private placement that meets the
requirements of Prohibited Transaction Exemption 97-34, 62 Fed. Reg. 39021
(1997), as amended (or any successor thereto), or any substantially similar
administrative exemption granted by the U.S. Department of Labor (an
"Underwriter's Exemption").
ERISA-Restricted Certificate: As specified in the Preliminary Statement.
Escrow Account: The Eligible Account or Accounts established and maintained
pursuant to Section 3.6(a) hereof.
Event of Default: As defined in Section 7.1 hereof.
Excess Loss: The amount of any (i) Fraud Loss realized after the Fraud Loss
Coverage Termination Date, (ii) Special Hazard Loss realized after the Special
Hazard Coverage Termination Date or (iii) Bankruptcy Loss realized after the
Bankruptcy Coverage Termination Date.
Excess Proceeds: With respect to any Liquidated Mortgage Loan, the amount,
if any, by which the sum of any Liquidation Proceeds of such Mortgage Loan
received in the calendar month in which such Mortgage Loan became a Liquidated
Mortgage Loan, net of any amounts previously reimbursed to the Master Servicer
as Nonrecoverable Advance(s) with respect to such Mortgage Loan pursuant to
Section 3.8(a)(iii), exceeds (i) the unpaid principal balance of such Liquidated
Mortgage Loan as of the Due Date in the month in which such Mortgage Loan became
a Liquidated Mortgage Loan plus (ii) accrued interest at the Mortgage Rate from
the Due Date as to which interest was last paid or advanced (and not reimbursed)
to Certificateholders up to the Due Date applicable to the Distribution Date
immediately following the calendar month during which such liquidation occurred.
Expense Rate: As to each Mortgage Loan, the sum of the related Master
Servicing Fee Rate and the Trustee Fee Rate.
FDIC: The Federal Deposit Insurance Corporation, or any successor thereto.
FHLMC: The Federal Home Loan Mortgage Corporation, a corporate
instrumentality of the United States created and existing under Title III of the
Emergency Home Finance Act of 1970, as amended, or any successor thereto.
FIRREA: The Financial Institutions Reform, Recovery, and Enforcement Act of
1989.
Fitch: Fitch IBCA, Inc., or any successor thereto. If Fitch is designated
as a Rating Agency in the Preliminary Statement, for purposes of Section
10.05(b) the address for notices to Fitch shall be Fitch IBCA, Inc., One State
Street Plaza, New York, New York 10004, Attention: Residential Mortgage
Surveillance Group, or such other address as Fitch may hereafter furnish to the
Depositor and the Master Servicer.
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FNMA: The Federal National Mortgage Association, a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, or any successor thereto.
Fraud Loan: A Liquidated Mortgage Loan as to which a Fraud Loss has
occurred.
Fraud Losses: Realized Losses on Mortgage Loans as to which a loss is
sustained by reason of a default arising from fraud, dishonesty or
misrepresentation in connection with the related Mortgage Loan, including a loss
by reason of the denial of coverage under any related Primary Insurance Policy
because of such fraud, dishonesty or misrepresentation.
Fraud Loss Coverage Amount: As of the Closing Date, $___________ subject to
reduction from time to time, by the amount of Fraud Losses allocated to the
Certificates. In addition, on each anniversary of the Cut-off Date, the Fraud
Loss Coverage Amount will be reduced as follows: (a) on the first, second, third
and fourth anniversaries of the Cut-off Date, to an amount equal to the lesser
of (i) 1% of the then current Pool Stated Principal Balance and (ii) 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 such preceding anniversary; and (b) on the fifth anniversary of the Cut-
off Date, to zero.
Fraud Loss Coverage Termination Date: The point in time at which the Fraud
Loss Coverage Amount is reduced to zero.
Guaranteed Distributions: With respect to any Distribution Date, (i) the
Class Optimal Interest Distribution Amount for the Class ____ Certificates for
such Distribution Date (as reduced by Section 4.2(d) as described in the
definition of Class Optimal Distribution Amount) plus the amount of any Class
____ Net Interest Shortfall that is not covered by the Class ____ Reserve Fund,
(ii) the amount of any Realized Loss, including any Excess Loss, allocated to
the Class ____ Certificates on such Distribution Date and (iii) the Class
Certificate Balances of the Class ____ Certificates to the extent unpaid on the
Distribution Date in ___________.
Index: With respect to any Interest Accrual Period for the COFI
Certificates, the then-applicable index used by the Trustee pursuant to Section
4.7 to determine the applicable Pass-Through Rate for such Interest Accrual
Period for the COFI Certificates. With respect to any Interest Accrual Period
for the LIBOR Certificates, the then-applicable index used by the Trustee
pursuant to [Section 4.8][Section 4.9] to determine the applicable Pass-Through
Rate for such Interest Accrual Period for the LIBOR Certificates.
Indirect Participant: A broker, dealer, bank or other financial institution
or other Person that clears through or maintains a custodial relationship with a
Depository Participant.
Initial Bankruptcy Coverage Amount: $____________.
Initial Component Balance: As specified in the Preliminary Statement.
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Insurance Policy: With respect to any Mortgage Loan included in the Trust
Fund, any insurance policy, including all riders and endorsements thereto in
effect, including any replacement policy or policies for any Insurance Policies.
Insurance Proceeds: Proceeds paid by an insurer pursuant to any Insurance
Policy, in each case other than any amount included in such Insurance Proceeds
in respect of Insured Expenses.
Insured Expenses: Expenses covered by an Insurance Policy or any other
insurance policy with respect to the Mortgage Loans.
Interest Accrual Period: With respect to each Class of Delay Certificates
and any Distribution Date, the calendar month prior to the month of such
Distribution Date. With respect to any Non-Delay Certificates and any
Distribution Date, the one month period commencing on the 25th day of the month
preceding the month in which such Distribution Date occurs and ending on the
24th day of the month in which such Distribution Date occurs.
Interest Determination Date: With respect to (a) any Interest Accrual
Period for any LIBOR Certificates and (b) any Interest Accrual Period for the
COFI Certificates for which the applicable Index is LIBOR, the second Business
Day prior to the first day of such Interest Accrual Period.
Latest Possible Maturity Date: The Distribution Date following the third
anniversary of the scheduled maturity date of the Mortgage Loan having the
latest scheduled maturity date as of the Cut-off Date.
Lender PMI Mortgage Loan: Certain Mortgage Loans as to which the lender
(rather than the borrower) acquires the Primary Insurance Policy and charges the
related borrower an interest premium.
LIBOR: The London interbank offered rate for one-month United States dollar
deposits calculated in the manner described in [Section 4.8][Section 4.9].
LIBOR Certificates: As specified in the Preliminary Statement.
Liquidated Mortgage Loan: With respect to any Distribution Date, a
defaulted Mortgage Loan (including any REO Property) which was liquidated in the
calendar month preceding the month of such Distribution Date and as to which the
Master Servicer has determined (in accordance with this Agreement) that it has
received all amounts it expects to receive in connection with the liquidation of
such Mortgage Loan, including the final disposition of an REO Property.
Liquidation Proceeds: Amounts, including Insurance Proceeds, received in
connection with the partial or complete liquidation of defaulted Mortgage Loans,
whether through trustee's sale, foreclosure sale or otherwise or amounts
received in connection with any condemnation or partial release of a Mortgaged
Property and any other proceeds received in connection with an REO Property,
less the sum of related unreimbursed Master Servicing Fees, Servicing Advances
and Advances.
Living Holders: Holders of the Class ___ or Class ___ Certificates, as the
context requires, other than the related Deceased Holders.
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Loan-to-Value Ratio: With respect to any Mortgage Loan and as to any date
of determination, the fraction (expressed as a percentage) the numerator of
which is the principal balance of the related Mortgage Loan at such date of
determination and the denominator of which is the Appraised Value of the related
Mortgaged Property.
Lost Mortgage Note: Any Mortgage Note the original of which was permanently
lost or destroyed and has not been replaced.
Maintenance: With respect to any Cooperative Unit, the rent paid by the
Mortgagor to the Cooperative Corporation pursuant to the Proprietary Lease.
Majority in Interest: As to any Class of Regular Certificates, the Holders
of Certificates of such Class evidencing, in the aggregate, at least 51% of the
Percentage Interests evidenced by all Certificates of such Class.
Master Servicer: FT Mortgage Companies, a Kansas corporation, and its
successors and assigns, in its capacity as master servicer hereunder.
Master Servicer Advance Date: As to any Distribution Date, 12:30 p.m.
______ time on the Business Day immediately preceding such Distribution Date.
Master Servicing Fee: As to each Mortgage Loan and any Distribution Date,
an amount payable out of each full payment of interest received on such Mortgage
Loan and equal to one-twelfth of the Master Servicing Fee Rate multiplied by the
Stated Principal Balance of such Mortgage Loan as of the Due Date in the month
of such Distribution Date (prior to giving effect to any Scheduled Payments due
on such Mortgage Loan on such Due Date), subject to reduction as provided in
Section 3.14.
Master Servicing Fee Rate: With respect to each Mortgage Loan, ____% per
annum.
Monthly Statement: The statement delivered to the Certificateholders
pursuant to Section 4.4.
Moody's: Moody's Investors Service, Inc., or any successor thereto. If
Moody's is designated as a Rating Agency in the Preliminary Statement, for
purposes of Section 10.05(b) the address for notices to Moody's shall be Moody's
Investors Service, Inc., 99 Church Street, New York, New York 10007, Attention:
Residential Pass-Through Monitoring, or such other address as Moody's may
hereafter furnish to the Depositor or the Master Servicer.
Mortgage: The mortgage, deed of trust or other instrument creating a first
lien on an estate in fee simple or leasehold interest in real property securing
a Mortgage Note.
Mortgage File: The mortgage documents listed in Section 2.1 hereof
pertaining to a particular Mortgage Loan and any additional documents delivered
to the Trustee to be added to the Mortgage File pursuant to this Agreement.
Mortgage Loans: Such of the mortgage loans transferred and assigned to the
Trustee pursuant to the provisions hereof as from time to time are held as a
part of the Trust Fund (including any REO
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Property), the mortgage loans so held being identified in the Mortgage Loan
Schedule, notwithstanding foreclosure or other acquisition of title of the
related Mortgaged Property.
Mortgage Loan Schedule: The list of Mortgage Loans (as from time to time
amended by the Master Servicer to reflect the addition of Substitute Mortgage
Loans and the deletion of Deleted Mortgage Loans pursuant to the provisions of
this Agreement) transferred to the Trustee as part of the Trust Fund and from
time to time subject to this Agreement, attached hereto as Schedule I, setting
forth the following information with respect to each Mortgage Loan:
(i) the loan number;
(ii) the Mortgagor's name and the street address of the Mortgaged
Property, including the zip code;
(iii) the maturity date;
(iv) the original principal balance;
(v) the Cut-off Date Principal Balance;
(vi) the first payment date of the Mortgage Loan;
(vii) the Scheduled Payment in effect as of the Cut-off Date;
(viii) the Loan-to-Value Ratio at origination;
(ix) a code indicating whether the residential dwelling at the time of
origination was represented to be owner-occupied;
(x) a code indicating whether the residential dwelling is either (a) a
detached single family dwelling (b) a dwelling in a de minimis PUD, (c) a
condominium unit or PUD (other than a de minimis PUD), (d) a two- to four-unit
residential property or (e) a Cooperative Unit;
(xi) the Mortgage Rate;
(xii) a code indicating whether the Mortgage Loan is a Lender PMI Mortgage
Loan and, in the case of any Lender PMI Mortgage Loan, a percentage representing
the amount of the related interest premium charged to the borrower;
(xiii) the purpose for the Mortgage Loan;
(xiv) the type of documentation program pursuant to which the Mortgage
Loan was originated; and
(xv) the Master Servicing Fee for the Mortgage Loan.
Such schedule shall also set forth the total of the amounts described under
(iv) and (v) above for all of the Mortgage Loans.
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Mortgage Note: The original executed note or other evidence of indebtedness
evidencing the indebtedness of a Mortgagor under a Mortgage Loan.
Mortgage Rate: The annual rate of interest borne by a Mortgage Note from
time to time, net of any interest premium charged by the mortgagee to obtain or
maintain any Primary Insurance Policy.
Mortgaged Property: The underlying property securing a Mortgage Loan,
which, with respect to a Cooperative Loan, is the related Coop Shares and
Proprietary Lease.
Mortgagor: The obligor(s) on a Mortgage Note.
National Cost of Funds Index: The National Monthly Median Cost of Funds
Ratio to SAIF-Insured Institutions published by the Office of Thrift
Supervision.
Net Prepayment Interest Shortfalls: As to any Distribution Date, the amount
by which the aggregate of Prepayment Interest Shortfalls during the related
Prepayment Period exceeds an amount equal to one-half of the aggregate Master
Servicing Fee for such Distribution Date before reduction of the Master
Servicing Fee in respect of such Prepayment Interest Shortfalls.
Non-Delay Certificates: As specified in the Preliminary Statement.
Non-Discount Mortgage Loan: Any Mortgage Loan with an Adjusted Net Mortgage
Rate that is greater than or equal to the Required Coupon.
Non-PO Formula Principal Amount: As to any Distribution Date, the sum of
the applicable Non-PO Percentage of (a) the principal portion of each Scheduled
Payment (without giving effect, prior to the Bankruptcy Coverage Termination
Date, to any reductions thereof caused by any Debt Service Reductions or
Deficient Valuations) due on each Mortgage Loan on the related Due Date, (b) the
Stated Principal Balance of each Mortgage Loan that was repurchased by the
Seller or the Master Servicer pursuant to this Agreement as of such Distribution
Date, (c) the Substitution Adjustment Amount in connection with any Deleted
Mortgage Loan received with respect to such Distribution Date, (d) any Insurance
Proceeds or Liquidation Proceeds allocable to recoveries of principal of
Mortgage Loans that are not yet Liquidated Mortgage Loans received during the
calendar month preceding the month of such Distribution Date, (e) with respect
to each Mortgage Loan that became a Liquidated Mortgage Loan during the calendar
month preceding the month of such Distribution Date, the amount of the
Liquidation Proceeds allocable to principal received during the calendar month
preceding the month of such Distribution Date with respect to such Mortgage Loan
and (f) all Principal Prepayments received during the related Prepayment Period.
Non-PO Percentage: As to any Discount Mortgage Loan, a fraction (expressed
as a percentage) the numerator of which is the Adjusted Net Mortgage Rate of
such Discount Mortgage Loan and the denominator of which is the Required Coupon.
As to any Non-Discount Mortgage Loan, 100%.
Nonrecoverable Advance: Any portion of an Advance previously made or
proposed to be made by the Master Servicer that, in the good faith judgment of
the Master Servicer, will not be
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ultimately recoverable by the Master Servicer from the related Mortgagor,
related Liquidation Proceeds or otherwise.
Notice of Final Distribution: The notice to be provided pursuant to Section
9.2 to the effect that final distribution on any of the Certificates shall be
made only upon presentation and surrender thereof.
Notional Amount: With respect to any Distribution Date and the Class X
Certificates, the aggregate of the Stated Principal Balances of the Non-Discount
Mortgage Loans as of the Due Date in the month of such Distribution Date (prior
to giving effect to any Scheduled Payments due on such Mortgage Loans on such
Due Date).
Notional Amount Certificates: As specified in the Preliminary Statement.
Offered Certificates: As specified in the Preliminary Statement.
Officer's Certificate: A certificate (i) signed by the Chairman of the
Board, the Vice Chairman of the Board, the President, a Managing Director, a
Vice President (however denominated), an Assistant Vice President, the
Treasurer, the Secretary, or one of the Assistant Treasurers or Assistant
Secretaries of the Depositor or the Master Servicer, or (ii), if provided for in
this Agreement, signed by a Servicing Officer, as the case may be, and delivered
to the Depositor and the Trustee, as the case may be, as required by this
Agreement.
Opinion of Counsel: A written opinion of counsel, who may be counsel for
the Depositor or the Master Servicer, including, in-house counsel, reasonably
acceptable to the Trustee; provided, however, that with respect to the
interpretation or application of the REMIC Provisions, such counsel must (i) in
fact be independent of the Depositor and the Master Servicer, (ii) not have any
direct financial interest in the Depositor or the Master Servicer or in any
affiliate of either, and (iii) not be connected with the Depositor or the Master
Servicer as an officer, employee, promoter, underwriter, trustee, partner,
director or person performing similar functions.
Optional Termination: The termination of the trust created hereunder in
connection with the purchase of the Mortgage Loans pursuant to Section 9.1(a)
hereof.
Original Applicable Credit Support Percentage: With respect to each of the
following Classes of Subordinated Certificates, the corresponding percentage
described below, as of the Closing Date:
Class M ____%
Class B-1 ____%
Class B-2 ____%
Class B-3 ____%
Class B-4 ____%
Class B-5 ____%
Original Mortgage Loan: The mortgage loan refinanced in connection with the
origination of a Refinancing Mortgage Loan.
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Original Subordinated Principal Balance: The aggregate of the Class
Certificate Balances of the Subordinated Certificates as of the Closing Date.
OTS: The Office of Thrift Supervision.
Outside Reference Date: As to any Interest Accrual Period for the COFI
Certificates, the close of business on the tenth day thereof.
Outstanding: With respect to the Certificates as of any date of
determination, all Certificates theretofore executed and authenticated under
this Agreement except:
(i) Certificates theretofore canceled by the Trustee or delivered to the
Trustee for cancellation; and
(ii) Certificates in exchange for which or in lieu of which other
Certificates have been executed and delivered by the Trustee pursuant to this
Agreement.
Outstanding Mortgage Loan: As of any Due Date, a Mortgage Loan with a
Stated Principal Balance greater than zero-which was not the subject of a
Principal Prepayment in Full prior to such Due Date and which did not become a
Liquidated Mortgage Loan prior to such Due Date.
Ownership Interest: As to any Residual Certificate, any ownership interest
in such Certificate including any interest in such Certificate as the Holder
thereof and any other interest therein, whether direct or indirect, legal or
beneficial.
Pass-Through Rate: For any interest bearing Class of Certificates or
Component, the per annum rate set forth or calculated in the manner described in
the Preliminary Statement.
Percentage Interest: As to any Certificate, the percentage interest
evidenced thereby in distributions required to be made on the related Class,
such percentage interest being set forth on the face thereof or equal to the
percentage obtained by dividing the Denomination of such Certificate by the
aggregate of the Denominations of all Certificates of the same Class.
Permitted Investments: At any time, any one or more of the following
obligations and securities:
(i) obligations of the United States or any agency thereof, provided
such obligations are backed by the full faith and credit of the United States;
(ii) general obligations of or obligations guaranteed by any state of the
United States or the District of Columbia receiving the highest long-term debt
rating of each Rating Agency, or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to the Certificates by
each Rating Agency;
(iii) commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each Rating Agency, or
such lower rating as will not result in the downgrading or withdrawal of the
ratings then assigned to the Certificates by each Rating Agency;
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(iv) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company incorporated
under the laws of the United States or of any state thereof and subject to
supervision and examination by federal and/or state banking authorities,
provided that the commercial paper and/or long term unsecured debt obligations
of such depository institution or trust company (or in the case of the principal
depository institution in a holding company system, the commercial paper or
long-term unsecured debt obligations of such holding company, but only if
Moody's is not a Rating Agency) are then rated one of the two highest long-term
and the highest short-term ratings of each Rating Agency for such securities, or
such lower ratings as will not result in the downgrading or withdrawal of the
rating then assigned to the Certificates by either Rating Agency;
(v) demand or time deposits or certificates of deposit issued by any
bank or trust company or savings institution to the extent that such deposits
are fully insured by the FDIC;
(vi) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the issuance of such
agreements, such terms and conditions as will not result in the downgrading or
withdrawal of the rating then assigned to the Certificates by either Rating
Agency;
(vii) repurchase obligations with respect to any security described in
clauses (i) and (ii) above, in either case entered into with a depository
institution or trust company (acting as principal)
described in clause (iv) above;
(viii) securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the face amount
thereof) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof which, at
the time of such investment, have one of the two highest ratings of each Rating
Agency (except if the Rating Agency is Moody's, such rating shall be the highest
commercial paper rating of Moody's for any such securities), or such lower
rating as will not result in the downgrading or withdrawal of the rating then
assigned to the Certificates by either Rating Agency as evidenced by a signed
writing delivered by each Rating Agency;
(ix) units of a taxable money-market portfolio having the highest rating
assigned by each Rating Agency (except if Fitch or Duff & Phelps is a Rating
Agency and has not rated the portfolio, the highest rating assigned by Moody's)
and restricted to obligations issued or guaranteed by the United States of
America or entities whose obligations are backed by the full faith and credit of
the United States of America and repurchase agreements collateralized by such
obligations; and
(x) such other investments bearing interest or sold at a discount
acceptable to each Rating Agency as will not result in the downgrading or
withdrawal of the rating then assigned to the Certificates by either Rating
Agency, as evidenced by a signed writing delivered by each Rating Agency.
provided that no such instrument shall be a Permitted Investment if such
instrument evidences the right to receive interest only payments with respect to
the obligations underlying such instrument.
Permitted Transferee: Any person other than (i) the United States, any
State or political subdivision thereof, or any agency or instrumentality of any
of the foregoing, (ii) a foreign
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government, International Organization or any agency or instrumentality of
either of the foregoing, (iii) an organization (except certain farmers'
cooperatives described in section 521 of the Code) which is exempt from tax
imposed by Chapter 1 of the Code (including the tax imposed by section 511 of
the Code on unrelated business taxable income) on any excess inclusions (as
defined in section 860E(c)(l) of the Code) with respect to any Residual
Certificate, (iv) rural electric and telephone cooperatives described in section
1381(a)(2)(C) of the Code, (v) an "electing large partnership" as defined in
section 775 of the Code, (vi) a Person that is not a citizen or resident of the
United States, a corporation, partnership, or other entity created or organized
in or under the laws of the United States, any state thereof or the District of
Columbia, an estate whose income from sources without the United States is
includible in gross income for United States federal income tax purposes
regardless of its connection with the conduct of a trade or business within the
United States or a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust unless such Person has furnished the transferor and the Trustee with a
duly completed Internal Revenue Service Form 4224 or any applicable successor
form, and (vi) any other Person so designated by the Depositor based upon an
Opinion of Counsel that the Transfer of an Ownership Interest in a Residual
Certificate to such Person may cause the REMIC hereunder to fail to qualify as a
REMIC at any time that the Certificates are outstanding. The terms "United
States," "State" and "International Organization" shall have the meanings set
forth in section 7701 of the Code or successor provisions. A corporation will
not be treated as an instrumentality of the United States or of any State or
political subdivision thereof for these purposes if all of its activities are
subject to tax and, with the exception of the Federal Home Loan Mortgage
Corporation, a majority of its board of directors is not selected by such
government unit.
Person: Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government, or any agency or political subdivision thereof.
Physical Certificate: As specified in the Preliminary Statement.
Planned Balance: Not applicable.
Planned Principal Classes: As specified in the Preliminary Statement.
PO Formula Principal Amount: As to any Distribution Date, the sum of the
applicable PO Percentage of (a) the principal portion of each Scheduled Payment
(without giving effect, prior to the Bankruptcy Coverage Termination Date, to
any reductions thereof caused by any Debt Service Reductions or Deficient
Valuations) due on each Mortgage Loan on the related Due Date, (b) the Stated
Principal Balance of each Mortgage Loan that was repurchased by the Seller or
the Master Servicer pursuant to this Agreement as of such Distribution Date, (c)
the Substitution Adjustment Amount in connection with any Deleted Mortgage Loan
received with respect to such Distribution Date, (d) any Insurance Proceeds or
Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that
are not yet Liquidated Mortgage Loans received during the calendar month
preceding the month of such Distribution Date, (e) with respect to each Mortgage
Loan that became a Liquidated Mortgage Loan during the month preceding the
calendar month of such Distribution Date, the amount of Liquidation Proceeds
allocable to principal received during the month preceding the month of such
Distribution Date with respect to such Mortgage Loan and (f) all Principal
Prepayments received during the related Prepayment Period.
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PO Percentage: As to any Discount Mortgage Loan, a fraction (expressed as a
percentage) the numerator of which is the excess of the Required Coupon over the
Adjusted Net Mortgage Rate of such Discount Mortgage Loan and the denominator of
which is the Required Coupon. As to any Non-Discount Mortgage Loan, 0%.
Pool Stated Principal Balance: As to any Distribution Date, the aggregate
of the Stated Principal Balances of the Mortgage Loans which were Outstanding
Mortgage Loans on the Due Date in the month preceding the month of such
Distribution Date.
Prepayment Interest Excess: As to any Principal Prepayment received by the
Master Servicer from the first day through the fifteenth day of any calendar
month (other than the calendar month in which the Cut-off Date occurs), all
amounts paid by the related Mortgagor in respect of interest on such Principal
Prepayment. All Prepayment Interest Excess shall be paid to the Master Servicer
as additional master servicing compensation.
Prepayment Interest Shortfall: As to any Distribution Date, Mortgage Loan
and Principal Prepayment received on or after the sixteenth day of the month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, on or after the Cut-off Date) and on or before the last day
of the month preceding the month of such Distribution Date, the amount, if any,
by which one month's interest at the related Mortgage Rate, net of the Master
Servicing Fee Rate, on such Principal Prepayment exceeds the amount of interest
paid in connection with such Principal Prepayment.
Prepayment Period: As to any Distribution Date, the period from the 16th
day of the calendar month preceding the month of such Distribution Date (or, in
the case of the first Distribution Date, from the Cut-off Date) through the 15th
of the month of such Distribution Date.
Prepayment Shift Percentage: As to any Distribution Date occurring during
the five years beginning on the first Distribution Date, 0%. Thereafter, the
Prepayment Shift Percentage for any Distribution Date occurring on or after the
fifth anniversary of the first Distribution Date will be as follows: for any
Distribution Date in the first year thereafter, 30%; for any Distribution Date
in the second year thereafter, 40%; for any Distribution Date in the third year
thereafter, 60%; for any Distribution Date in the fourth year thereafter, 80%;
and for any Distribution Date thereafter, 100%.
Primary Insurance Policy: Each policy of primary mortgage guaranty
insurance or any replacement policy therefor with respect to any Mortgage Loan.
Primary Planned Principal Classes: As specified in the Preliminary
Statement.
Principal Prepayment: Any payment of principal by a Mortgagor on a Mortgage
Loan that is received in advance of its scheduled Due Date and is not
accompanied by an amount representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment. Partial
Principal Prepayments shall be applied by the Master Servicer in accordance with
the terms of the related Mortgage Note.
Principal Prepayment in Full: Any Principal Prepayment made by a Mortgagor
of the entire principal balance of a Mortgage Loan.
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Priority Amount: As to any Distribution Date, the amount equal to the sum
of (i) the product of (A) Scheduled Principal Distribution Amounts (B) the Shift
Percentage and (C) the Priority Percentage, each as of such Distribution Date
and (ii) the product of (A) Unscheduled Principal Distribution Amounts, (B) the
Prepayment Shift Percentage and (C) the Priority Percentage, each as of such
Distribution Date.
Priority Percentage: As to any Distribution Date, a fraction, the numerator
of which is equal to the aggregate Class Certificate Balance of the Class ____
Certificates on such Distribution Date, and the denominator of which is equal to
the aggregate Class Certificate Balances of the Certificates (other than the
Class PO Certificates) on such Distribution Date.
Private Certificate: As specified in the Preliminary Statement.
Pro Rata Share: As to any Distribution Date, the Subordinated Principal
Distribution Amount and any Class of Subordinated Certificates, the portion of
the Subordinated Principal Distribution Amount allocable to such Class, equal to
the product of the Subordinated Principal Distribution Amount on such
Distribution Date and a fraction, the numerator of which is the related Class
Certificate Balance thereof and the denominator of which is the aggregate of the
Class Certificate Balances of the Subordinated Certificates.
Proprietary Lease: With respect to any Cooperative Unit, a lease or
occupancy agreement between a Cooperative Corporation and a holder of related
Coop Shares.
Prospectus Supplement: The Prospectus Supplement dated _______, 1999
relating to the Offered Certificates.
PUD: Planned Unit Development.
Purchase Price: With respect to any Mortgage Loan required to be purchased
by the Seller pursuant to Section 2.2 or 2.3 hereof or purchased at the option
of the Master Servicer pursuant to Section 3.11, an amount equal to the sum of
(i) 100% of the unpaid principal balance of the Mortgage Loan on the date of
such purchase, and (ii) accrued interest thereon at the applicable Mortgage Rate
(or at the applicable Adjusted Mortgage Rate if (x) the purchaser is the Master
Servicer or (y) if the purchaser is the Seller and the Seller is the Master
Servicer) from the date through which interest was last paid by the Mortgagor to
the Due Date in the month in which the Purchase Price is to be distributed to
Certificateholders.
Qualified Insurer: A mortgage guaranty insurance company duly qualified as
such under the laws of the state of its principal place of business and each
state having jurisdiction over such insurer in connection with the insurance
policy issued by such insurer, duly authorized and licensed in such states to
transact a mortgage guaranty insurance business in such states and to write the
insurance provided by the insurance policy issued by it, approved as a FNMA-
approved mortgage insurer and having a claims paying ability rating of at least
"AA" or equivalent rating by a nationally recognized statistical rating
organization. Any replacement insurer with respect to a Mortgage Loan must have
at least as high a claims paying ability rating as the insurer it replaces had
on the Closing Date.
Rating Agency: Each of the Rating Agencies specified in the Preliminary
Statement. If any such organization or a successor is no longer in existence,
"Rating Agency" shall be such nationally
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recognized statistical rating organization, or other comparable Person, as is
designated by the Depositor, notice of which designation shall be given to the
Trustee. References herein to a given rating category of a Rating Agency shall
mean such rating category without giving effect to any modifiers.
Realized Loss: With respect to each Liquidated Mortgage Loan, an amount
(not less than zero or more than the Stated Principal Balance of the Mortgage
Loan) as of the date of such liquidation, equal to (i) the Stated Principal
Balance of the Liquidated Mortgage Loan as of the date of such liquidation, plus
(ii) interest at the Adjusted Net Mortgage Rate from the Due Date as to which
interest was last paid or advanced (and not reimbursed) to Certificateholders up
to the Due Date in the month in which Liquidation Proceeds are required to be
distributed on the Stated Principal Balance of such Liquidated Mortgage Loan
from time to time, minus (iii) the Liquidation Proceeds, if any, received during
the month in which such liquidation occurred, to the extent applied as
recoveries of interest at the Adjusted Net Mortgage Rate and to principal of the
Liquidated Mortgage Loan. With respect to each Mortgage Loan which has become
the subject of a Deficient Valuation, if the principal amount due under the
related Mortgage Note has been reduced, the difference between the principal
balance of the Mortgage Loan outstanding immediately prior to such Deficient
Valuation and the principal balance of the Mortgage Loan as reduced by the
Deficient Valuation. With respect to each Mortgage Loan which has become the
subject of a Debt Service Reduction and any Distribution Date, the amount, if
any, by which the principal portion of the related Scheduled Payment has been
reduced.
Recognition Agreement: With respect to any Cooperative Loan, an agreement
between the Cooperative Corporation and the originator of such Mortgage Loan
which establishes the rights of such originator in the Cooperative Property.
Record Date: With respect to any Distribution Date, the close of business
on the last Business Day of the month preceding the month in which such
Distribution Date occurs.
Reference Bank: As defined in Section 4.7.
Refinancing Mortgage Loan: Any Mortgage Loan originated in connection with
the refinancing of an existing mortgage loan.
Regular Certificates: As specified in the Preliminary Statement.
Relief Act: The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
Relief Act Reductions: With respect to any Distribution Date and any
Mortgage Loan as to which there has been a reduction in the amount of interest
collectible thereon for the most recently ended calendar month as a result of
the application of the Relief Act, the amount, if any, by which interest
collectible on such Mortgage Loan for the most recently ended calendar month is
less than interest accrued thereon for such month pursuant to the Mortgage Note.
REMIC: A "real estate mortgage investment conduit" within the meaning of
section 860D of the Code.
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REMIC Change of Law: Any proposed, temporary or final regulation, revenue
ruling, revenue procedure or other official announcement or interpretation
relating to REMICs and the REMIC Provisions issued after the Closing Date.
REMIC Provisions: Provisions of the federal income tax law relating to real
estate mortgage investment conduits, which appear at sections 860A through 860G
of Subchapter M of Chapter 1 of the Code, and related provisions, and
regulations promulgated thereunder, as the foregoing may be in effect from time
to time as well as provisions of applicable state laws.
REO Property: A Mortgaged Property acquired by the Trust Fund through
foreclosure or deed-in-lieu of foreclosure in connection with a defaulted
Mortgage Loan.
Request for Release: The Request for Release submitted by the Master
Servicer to the Trustee, substantially in the form of Exhibits __ and __, as
appropriate.
Required Coupon: ____% per annum.
Required Insurance Policy: With respect to any Mortgage Loan, any insurance
policy that is required to be maintained from time to time under this Agreement.
Residual Certificates: As specified in the Preliminary Statement.
Responsible Officer: When used with respect to the Trustee, any Vice
President, any Assistant Vice President, the Secretary, any Assistant Secretary,
any Trust Officer or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also to whom, with respect to a particular matter, such matter is referred
because of such officer's knowledge of and familiarity with the particular
subject.
Restricted Classes: As defined in Section 4.2(e).
Scheduled Balances: Not applicable.
Scheduled Classes: As specified in the Preliminary Statement.
Scheduled Payment: The scheduled monthly payment on a Mortgage Loan due on
any Due Date allocable to principal and/or interest on such Mortgage Loan which,
unless otherwise specified herein, shall give effect to any related Debt Service
Reduction and any Deficient Valuation that affects the amount of the monthly
payment due on such Mortgage Loan.
Scheduled Principal Distribution Amount: As to any Distribution Date, an
amount equal to the sum of all amounts described in clauses (a) through (d) of
the definition of Non-PO Formula Principal Amount for such Distribution Date;
provided, however, that if a Bankruptcy Loss that is an Excess Loss is sustained
with respect to a Mortgage Loan that is not a Liquidated Mortgage Loan, the
Scheduled Principal Distribution Amounts will be reduced on the related
Distribution Date by the applicable Non-PO Percentage of the principal portion
of such Bankruptcy Loss.
Secondary Planned Principal Clauses: As specified in the Preliminary
Statement.
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Securities Act: The Securities Act of 1933, as amended.
Seller: FT Mortgage Companies, a Kansas corporation, and its successors and
assigns, in its capacity as seller of the Mortgage Loans to the Depositor.
Senior Certificates: As specified in the Preliminary Statement.
Senior Credit Support Depletion Date: The date on which the Class
Certificate Balance of each Class of Subordinated Certificates has been reduced
to zero.
Senior Percentage: As to 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 Class PO Certificates)
as of such date and the denominator of which is the aggregate of the Class
Certificate Balances of all Classes of Certificates (other than the Class PO
Certificates) as of such date.
Senior Prepayment Percentage: For any Distribution Date during the five
years beginning on the first Distribution Date, 100%. The Senior Prepayment
Percentage for any Distribution Date occurring on or after the fifth anniversary
of the first Distribution Date will, except as provided herein, be as follows:
for any Distribution Date in the first year thereafter, the Senior Percentage
plus ___% of the Subordinated Percentage for such Distribution Date; for any
Distribution Date in the second year thereafter, the Senior Percentage plus __%
of the Subordinated Percentage for such Distribution Date; for any Distribution
Date in the third year thereafter, the Senior Percentage plus __% of the
Subordinated Percentage for such Distribution Date; for any Distribution Date in
the fourth year thereafter, the Senior Percentage plus __% of the Subordinated
Percentage for such Distribution Date; and for any Distribution Date thereafter,
the Senior Percentage for such Distribution Date (unless on any Distribution
Date the Senior Percentage exceeds the initial Senior Percentage, in which case
the Senior Prepayment Percentage for such Distribution Date will once again
equal 100%). Notwithstanding the foregoing, no decrease in the Senior Prepayment
Percentage will occur unless both of the Senior Step Down Conditions are
satisfied.
Senior Principal Distribution Amount: As to any Distribution Date, the sum
of (i) 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 such Distribution Date, (ii) with respect to each Mortgage
Loan that became a Liquidated Mortgage Loan during the calendar month preceding
the month of such Distribution Date, the lesser of (x) the Senior Percentage of
the applicable Non-PO Percentage of the Stated Principal Balance of such
Mortgage Loan and (y) either (A) the Senior Prepayment Percentage, or (B) if an
Excess Loss was sustained with respect to such Liquidated Mortgage Loan during
such prior calendar month, the Senior Percentage, of the applicable Non-PO
Percentage of the amount of the Liquidation Proceeds allocable to principal
received with respect to such Mortgage Loan, and (iii) the Senior 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 such
Distribution Date.
Senior Step Down Conditions: As of the first Distribution Date as to which
any decrease in the Senior Prepayment Percentage applies, (i) the outstanding
principal balance of all Mortgage Loans delinquent 60 days or more (averaged
over the preceding six month period), as a percentage of the aggregate principal
balance of the Subordinated Certificates on such Distribution Date, does
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not equal or exceed __% and (ii) cumulative Realized Losses with respect to the
Mortgage Loans do not exceed (i) with respect to the Distribution Date on the
fifth anniversary of the first Distribution Date, __% of the Original
Subordinated Principal Balance, (b) with respect to the Distribution Date on the
sixth anniversary of the first Distribution Date, __% of the Original
Subordinated Principal Balance, (c) with respect to the Distribution Date on the
seventh anniversary of the first Distribution Date, __% of the Original
Subordinated Principal Balance, (d) with respect to the Distribution Date on the
eighth anniversary of the first Distribution Date, __% of the Original
Subordinated Principal Balance and (e) with respect to the Distribution Date on
the ninth anniversary of the first Distribution Date, __% of the Original
Subordinated Principal Balance.
Servicing Advances: All customary, reasonable and necessary "out of pocket"
costs and expenses incurred in the performance by the Master Servicer of its
servicing obligations, including, but not limited to, the cost of (i) the
preservation, restoration and protection of a Mortgaged Property, (ii) any
expenses reimbursable to the Master Servicer pursuant to Section 3.11 and any
enforcement or judicial proceedings, including foreclosures, (iii) the
management and liquidation of any REO Property and (iv) compliance with the
obligations under Section 3.9.
Servicing Officer: Any officer of the Master Servicer involved in, or
responsible for, the administration and servicing of the Mortgage Loans whose
name and facsimile signature appear on a list of servicing officers furnished to
the Trustee by the Master Servicer on the Closing Date pursuant to this
Agreement, as such list may from time to time be amended.
Shift Percentage: As of any Distribution Date occurring during the five
years beginning on the first Distribution Date, 0% and for each Distribution
Date occurring on or after the fifth anniversary of the first Distribution Date,
100%.
Special Hazard Coverage Termination Date: The point in time at which the
Special Hazard Loss Coverage Amount is reduced to zero.
Special Hazard Loss: Any Realized Loss suffered by a Mortgaged Property on
account of direct physical loss but not including (i) any loss of a type covered
by a hazard insurance policy or a flood insurance policy required to be
maintained with respect to such Mortgaged Property pursuant to Section 3.9 to
the extent of the amount of such loss covered thereby, or (ii) any loss caused
by or resulting from:
(a) normal wear and tear;
(b) fraud, conversion or other dishonest act on the part of the Trustee,
the Master Servicer or any of their agents or employees (without regard to any
portion of the loss not covered by any errors and omissions policy);
(c) errors in design, faulty workmanship or faulty materials, unless the
collapse of the property or a part thereof ensues and then only for the ensuing
loss;
(d) nuclear or chemical reaction or nuclear radiation or radioactive or
chemical contamination, all whether controlled or uncontrolled, and whether such
loss be direct or indirect, proximate or remote or be in whole or in part caused
by, contributed to or aggravated by a peril covered by the definition of the
term "Special Hazard Loss";
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(e) hostile or warlike action in time of peace and war, including action
in hindering, combating or defending against an actual, impending or expected
attack:
1. by any government or sovereign power, de jure or de facto, or by
any authority maintaining or using military, naval or air forces; or
2. by military, naval or air forces; or
3. by an agent of any such government, power, authority or forces;
(f) any weapon of war employing nuclear fission, fusion or other
radioactive force, whether in time of peace or war; or
(g) insurrection, rebellion, revolution, civil war, usurped power or
action taken by governmental authority in hindering, combating or defending
against such an occurrence, seizure or destruction under quarantine or customs
regulations, confiscation by order of any government or public authority or
risks of contraband or illegal transportation or trade.
Special Hazard Loss Coverage Amount: With respect to the first Distribution
Date, $_________. With respect to any Distribution Date after the first
Distribution Date, the lesser of (a) the greatest of (i) 1% of the aggregate of
the principal balances of the Mortgage Loans, (ii) twice the principal balance
of the largest Mortgage Loan and (iii) the aggregate of the principal balances
of all Mortgage Loans secured by Mortgaged Properties located in the single
California postal zip code area having the highest aggregate principal balance
of any such zip code area and (b) the Special Hazard Loss Coverage Amount as of
the Closing Date less the amount, if any, of Special Hazard Losses allocated to
the Certificates since the Closing Date. All principal balances for the purpose
of this definition will be calculated as of the first day of the calendar month
preceding the month of such Distribution Date after giving effect to Scheduled
Payments on the Mortgage Loans then due, whether or not paid.
Special Hazard Mortgage Loan: A Liquidated Mortgage Loan as to which a
Special Hazard Loss has occurred.
S&P: Standard & Poor's, a division of The McGraw-Hill Companies, Inc. If
S&P is designated as a Rating Agency in the Preliminary Statement, for purposes
of Section 10.05(b) the address for notices to S&P shall be Standard & Poor's,
26 Broadway, 15th Floor, New York, New York 10004, Attention: Mortgage
Surveillance Monitoring, or such other address as S&P may hereafter furnish to
the Depositor and the Master Servicer.
Startup Day: The Closing Date.
Stated Principal Balance: As to any Mortgage Loan and Due Date, the unpaid
principal balance of such Mortgage Loan as of such Due Date as specified in the
amortization schedule at the time relating thereto (before any adjustment to
such amortization schedule by reason of any moratorium or similar waiver or
grace period) after giving effect to any previous partial Principal Prepayments
and Liquidation Proceeds allocable to principal (other than with respect to any
Liquidated Mortgage Loan) and to the payment of principal due on such Due Date
and irrespective of any delinquency in payment by the related Mortgagor.
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Streamlined Documentation Mortgage Loan: Any Mortgage Loan originated
pursuant to the Seller's Streamlined Loan Documentation Program then in effect.
Subordinated Certificates: As specified in the Preliminary Statement.
Subordinated Percentage: As to any Distribution Date, 100% minus the Senior
Percentage for such Distribution Date.
Subordinated Prepayment Percentage: As to any Distribution Date, 100% minus
the Senior Prepayment Percentage for such Distribution Date.
Subordinated Principal Distribution Amount: With respect to any
Distribution Date, an amount equal to (A) the sum of (i) 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 such Distribution Date, (ii) with respect to each Mortgage Loan that became
a Liquidated Mortgage Loan during the calendar month preceding the month of such
Distribution Date, the applicable Non-PO Percentage of the amount of the
Liquidation Proceeds allocated to principal received with respect thereto
remaining after application thereof pursuant to clause (ii) 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 such Mortgage
Loan and (iii) the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of all amounts described in clause (f) of the definition of "Non-PO
Formula Principal Amount" for such Distribution Date reduced by (B) the amount
of any payments in respect of Class PO Deferred Amounts on the related
Distribution Date.
Subservicer: Any person to whom the Master Servicer has contracted for the
servicing of all or a portion of the Mortgage Loans pursuant to Section 3.2
hereof.
Substitute Mortgage Loan: A Mortgage Loan substituted by the Seller for a
Deleted Mortgage Loan which must, on the date of such substitution, as confirmed
in a Request for Release, substantially in the form of Exhibit M, (i) have a
Stated Principal Balance, after deduction of the principal portion of the
Scheduled Payment due in the month of substitution, not in excess of, and not
more than 10% less than the Stated Principal Balance of the Deleted Mortgage
Loan; (ii) be accruing interest at a rate no lower than and not more than 1% per
annum higher than, that of the Deleted Mortgage Loan; (iii) have a Loan-to-Value
Ratio no higher than that of the Deleted Mortgage Loan; (iv) have a remaining
term to maturity no greater than (and not more than one year less than that of)
the Deleted Mortgage Loan; (v) not be a Cooperative Loan unless the Deleted
Mortgage Loan was a Cooperative Loan and (vi) comply with each representation
and warranty set forth in Section 2.3 hereof.
Substitution Adjustment Amount: The meaning ascribed to such term pursuant
to Section 2.3.
Support Classes: As specified in the Preliminary Statement.
Targeted Balances: With respect to the Targeted Principal Classes and any
Distribution Date appearing in Schedule IV hereto, if any, the applicable amount
appearing opposite such Distribution Date for such respective Class.
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Targeted Principal Classes: As specified in the Preliminary Statement.
Tax Matters Person: The person designated as "tax matters person" in the
manner provided under Treasury regulation ss. 1.860F-4(d) and temporary Treasury
regulation ss. 301.6231(a)(7)1T. Initially, the Tax Matters Person shall be the
Trustee.
Tax Matters Person Certificate: The Class A-R Certificate with a
Denomination of $____.
Transfer: Any direct or indirect transfer or sale of any Ownership Interest
in a Residual Certificate.
Trustee: ______________ and its successors and, if a successor trustee is
appointed hereunder, such successor.
Trustee Fee: As to any Distribution Date, an amount equal to one-twelfth of
the Trustee Fee Rate multiplied by the Pool Stated Principal Balance with
respect to such Distribution Date.
Trustee Fee Rate: With respect to each Mortgage Loan, the per annum rate
agreed upon in writing on or prior to the Closing Date by the Trustee and the
Depositor.
Trust Fund: The corpus of the trust created hereunder consisting of (i) the
Mortgage Loans and all interest and principal received on or with respect
thereto after the Cut-off Date to the extent not applied in computing the Cut-
off Date Principal Balance thereof; (ii) the Certificate Account and the
Distribution Account and all amounts deposited therein pursuant to the
applicable provisions of this Agreement; (iii) property that secured a Mortgage
Loan and has been acquired by foreclosure, deed-in-lieu of foreclosure or
otherwise; and (iv) all proceeds of the conversion, voluntary or involuntary, of
any of the foregoing.
Unscheduled Principal Distribution Amount: As to any Distribution Date, an
amount equal to the sum of (i) with respect to each Mortgage Loan that became a
Liquidated Mortgage Loan during the calendar month preceding the month of such
Distribution Date, the Non-PO Percentage of the Liquidation Proceeds allocable
to principal received with respect to such Mortgage Loan and (ii) the applicable
Non-PO Percentage of the amount described in clause (f) of the definition of
"Non-PO Formula Principal Amount" for such Distribution Date.
Voting Rights: The portion of the voting rights of all of the Certificates
which is allocated to any Certificate. As of any date of determination, (a) 1%
of all Voting Rights shall be allocated to each Class of Notional Amount
Certificates, if any (such Voting Rights to be allocated among the holders of
Certificates of each such Class in accordance with their respective Percentage
Interests), and (b) the remaining Voting Rights (or 100% of the Voting Rights if
there is no Class of Notional Amount Certificates) shall be allocated among
Holders of the remaining Classes of Certificates in proportion to the
Certificate Balances of their respective Certificates on such date.
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ARTICLE II
CONVEYANCE OF MORTGAGE LOANS;
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 Conveyance of Mortgage Loans.
(a) The Seller, concurrently with the execution and delivery hereof,
hereby sells, transfers, assigns, sets over and otherwise conveys to the
Depositor, without recourse, all the right, title and interest of the Seller in
and to the Mortgage Loans, including all interest and principal received or
receivable by the Seller on or with respect to the Mortgage Loans after the Cut-
off Date and all interest and principal payments on the Mortgage Loans received
prior to the Cut-off Date in respect of installments of interest and principal
due thereafter, but not including payments of principal and interest due and
payable on the Mortgage Loans on or before the Cut-off Date. On or prior to the
Closing Date, the Seller shall deliver to the Depositor or, at the Depositor's
direction, to the Trustee or other designee of the Depositor, the Mortgage File
for each Mortgage Loan listed in the Mortgage Loan Schedule (except that, in the
case of the Delay Delivery Mortgage Loans, such delivery may take place within
thirty (30) days following the Closing Date). Such delivery of the Mortgage
Files shall be made against payment by the Depositor of the purchase price,
previously agreed to by the Seller and Depositor, for the Mortgage Loans. With
respect to any Mortgage Loan that does not have a first payment date on or
before the Due Date in the month of the first Distribution Date, the Seller
shall deposit into the Distribution Account on or before the Distribution
Account Deposit Date relating to the first Distribution Date, an amount equal to
one month's interest at the related Adjusted Mortgage Rate on the Cut-off Date
Principal Balance of such Mortgage Loan.
(b) The Depositor, concurrently with the execution and delivery hereof,
hereby sells, transfers, assigns, sets over and otherwise conveys to the Trustee
for the benefit of the Certificateholders, without recourse, all the right,
title and interest of the Depositor in and to the Trust Fund together with the
Depositor's right to require the Seller to cure any breach of a representation
or warranty made herein by the Seller or to repurchase or substitute for any
affected Mortgage Loan in accordance herewith.
(c) In connection with the transfer and assignment set forth in clause (b)
above, the Depositor has delivered or caused to be delivered to the Trustee (or,
in the case of the Delay Delivery Mortgage Loans, will deliver or cause to be
delivered to the Trustee within thirty (30) days following the Closing Date) for
the benefit of the Certificateholders the following documents or instruments
with respect to each Mortgage Loan so assigned:
(i) (A) the original Mortgage Note endorsed by manual or facsimile
signature in blank in the following form: "Pay to the order of ____________
without recourse," with all intervening endorsements showing a complete
chain of endorsement from the originator to the Person endorsing the
Mortgage Note (each such endorsement being sufficient to transfer all
right, title and interest of the party so endorsing, as noteholder or
assignee thereof, in and to that Mortgage Note); or
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(B) with respect to any Lost Mortgage Note, a lost note
affidavit from the Seller stating that the original Mortgage Note was lost
or destroyed, together with a copy of such Mortgage Note;
(ii) except as provided below, the original recorded Mortgage or a
copy of such Mortgage certified by the Seller as being a true and complete
copy of the Mortgage;
(iii) a duly executed assignment of the Mortgage (which may be
included in a blanket assignment or assignments), together with, except as
provided below, all interim recorded assignments of such mortgage (each
such assignment, when duly and validly completed, to be in recordable form
and sufficient to effect the assignment of and transfer to the assignee
thereof, under the Mortgage to which the assignment relates); provided
that, if the related Mortgage has not been returned from the applicable
public recording office, such assignment of the Mortgage may exclude the
information to be provided by the recording office;
(iv) the original or copies of each assumption, modification, written
assurance or substitution agreement, if any;
(v) except as provided below, the original or duplicate original
lender's title policy and all riders thereto; and
(vi) in the case of a Cooperative Loan, the originals of the
following documents or instruments:
(a) The Coop Shares, together with a stock power in blank;
(b) The executed Security Agreement;
(c) The executed Proprietary Lease;
(d) The executed Recognition Agreement;
(e) The executed assignment of Recognition Agreement;
(f) The executed UCC-1 financing statement with evidence of
recording thereon which have been filed in all places required
to perfect the Seller's interest in the Coop Shares and the
Proprietary Lease; and
(g) Executed UCC-3 financing statements or other appropriate UCC
financing statements required by state law, evidencing a
complete and unbroken line from the mortgagee to the Trustee
with evidence of recording thereon (or in a form suitable for
recordation).
In the event that in connection with any Mortgage Loan the Depositor cannot
deliver (a) the original recorded Mortgage, (b) all interim recorded assignments
or (c) the lender's title policy (together with all riders thereto) satisfying
the requirements of clause (ii), (iii) or (v) above, respectively, concurrently
with the execution and delivery hereof because such document or documents have
not been returned from the applicable public recording office in the case of
clause (ii) or (iii) above, or because the title policy has not been delivered
to either the Master Servicer or the Depositor by the applicable title insurer
in the case of clause (v) above, the Depositor shall promptly deliver to the
Trustee, in the case of clause (ii) or (iii) above, such original Mortgage or
such interim assignment, as the case may be, with evidence of recording
indicated thereon upon receipt thereof from the public recording office, or a
copy thereof, certified, if appropriate, by the
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relevant recording office, but in no event shall any such delivery of the
original Mortgage and each such interim assignment or a copy thereof, certified,
if appropriate, by the relevant recording office, be made later than one year
following the Closing Date, or, in the case of clause (v) above, no later than
120 days following the Closing Date; provided, however, in the event the
Depositor is unable to deliver by such date each Mortgage and each such interim
assignment by reason of the fact that any such documents have not been returned
by the appropriate recording office, or, in the case of each such interim
assignment, because the related Mortgage has not been returned by the
appropriate recording office, the Depositor shall deliver such documents to the
Trustee as promptly as possible upon receipt thereof and, in any event, within
720 days following the Closing Date. The Depositor shall forward or cause to be
forwarded to the Trustee (a) from time to time additional original documents
evidencing an assumption or modification of a Mortgage Loan and (b) any other
documents required to be delivered by the Depositor or the Master Servicer to
the Trustee. In the event that the original Mortgage is not delivered and in
connection with the payment in full of the related Mortgage Loan and the public
recording office requires the presentation of a "lost instruments affidavit and
indemnity" or any equivalent document, because only a copy of the Mortgage can
be delivered with the instrument of satisfaction or reconveyance, the Master
Servicer shall execute and deliver or cause to be executed and delivered such a
document to the public recording office. In the case where a public recording
office retains the original recorded Mortgage or in the case where a Mortgage is
lost after recordation in a public recording office, the Seller shall deliver to
the Trustee a copy of such Mortgage certified by such public recording office to
be a true and complete copy of the original recorded Mortgage.
As promptly as practicable subsequent to such transfer and assignment, and
in any event, within thirty (30) days thereafter, the Trustee shall (i) affix
the Trustee's name to each assignment of Mortgage, as the assignee thereof, (ii)
cause such assignment to be in proper form for recording in the appropriate
public office for real property records and (iii) cause to be delivered for
recording in the appropriate public office for real property records the
assignments of the Mortgages to the Trustee, except that, with respect to any
assignments of Mortgage as to which the Trustee has not received the information
required to prepare such assignment in recordable form, the Trustee's obligation
to do so and to deliver the same for such recording shall be as soon as
practicable after receipt of such information and in any event within thirty
(30) days after receipt thereof and that the Trustee need not cause to be
recorded any assignment which relates to a Mortgage Loan (a) the Mortgaged
Property and Mortgage File relating to which are located in California or (b) in
any other jurisdiction under the laws of which in the opinion of counsel the
recordation of such assignment is not necessary to protect the Trustee's and the
Certificateholders' interest in the related Mortgage Loan.
In the case of Mortgage Loans that have been prepaid in full as of the
Closing Date, the Depositor, in lieu of delivering the above documents to the
Trustee, will deposit in the Certificate Account the portion of such payment
that is required to be deposited in the Certificate Account pursuant to Section
3.8 hereof.
Notwithstanding anything to the contrary in this Agreement, within thirty
days after the Closing Date, the Seller shall either (i) deliver to the
Depositor, or at the Depositor's direction, to the Trustee or other designee of
the Depositor the Mortgage File as required pursuant to this Section 2.1 for
each Delay Delivery Mortgage Loan or (ii) (A) substitute a Substitute Mortgage
Loan for the Delay Delivery Mortgage Loan or (B) repurchase the Delayed Delivery
Mortgage Loan, which substitution or repurchase shall be accomplished in the
manner and subject to the conditions set forth
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in Section 2.3 (treating each Delay Delivery Mortgage Loan as a Deleted Mortgage
Loan for purposes of such Section 2.3), provided, however, that if the Seller
fails to deliver a Mortgage File for any Delay Delivery Mortgage Loan within the
thirty-day period provided in the prior sentence, the Seller shall use its best
reasonable efforts to effect a substitution, rather than a repurchase of, such
Deleted Mortgage Loan and provided further that the cure period provided for in
Section 2.2 or in Section 2.3 shall not apply to the initial delivery of the
Mortgage File for such Delay Delivery Mortgage Loan, but rather the Seller shall
have five (5) Business Days to cure such failure to deliver. At the end of such
thirty-day period, the Trustee shall send a Delay Delivery Certification for the
Delay Delivery Mortgage Loans delivered during such thirty-day period in
accordance with the provisions of Section 2.2.
SECTION 2.2 Acceptance by Trustee of the Mortgage Loans.
The Trustee acknowledges receipt of the documents identified in the Initial
Certification in the form annexed hereto as Exhibit F and declares that it holds
and will hold such documents and the other documents delivered to it
constituting the Mortgage Files, and that it holds or will hold such other
assets as are included in the Trust Fund, in trust for the exclusive use and
benefit of all present and future Certificateholders. The Trustee acknowledges
that it will maintain possession of the Mortgage Notes in the State of ________,
unless otherwise permitted by the Rating Agencies.
The Trustee agrees to execute and deliver on the Closing Date to the
Depositor, the Master Servicer and the Seller an Initial Certification in the
form annexed hereto as Exhibit F. Based on its review and examination, and only
as to the documents identified in such Initial Certification, the Trustee
acknowledges that such documents appear regular on their face and relate to such
Mortgage Loan. The Trustee shall be under no duty or obligation to inspect,
review or examine said documents, instruments, certificates or other papers to
determine that the same are genuine, enforceable or appropriate for the
represented purpose or that they have actually been recorded in the real estate
records or that they are other than what they purport to be on their face.
On or about the thirtieth (30th) day after the Closing Date, the Trustee
shall deliver to the Depositor, the Master Servicer and the Seller a Delay
Delivery Certification in the form annexed hereto as Exhibit G, with any
applicable exceptions noted thereon.
Not later than 90 days after the Closing Date, the Trustee shall deliver to
the Depositor, the Master Servicer and the Seller a Final Certification in the
form annexed hereto as Exhibit H, with any applicable exceptions noted thereon.
If, in the course of such review, the Trustee finds any document
constituting a part of a Mortgage File which does not meet the requirements of
Section 2.1, the Trustee shall list such as an exception in the Final
Certification; provided, however that the Trustee shall not make any
determination as to whether (i) any endorsement is sufficient to transfer all
right, title and interest of the party so endorsing, as noteholder or assignee
thereof, in and to that Mortgage Note or (ii) any assignment is in recordable
form or is sufficient to effect the assignment of and transfer to the assignee
thereof under the mortgage to which the assignment relates. The Seller shall
promptly correct or cure such defect within 90 days from the date it was so
notified of such defect and, if the Seller does not correct or cure such defect
within such period, the Seller shall either (a) substitute for the related
Mortgage Loan a Substitute Mortgage Loan, which substitution shall be
accomplished in the manner and subject to the conditions set forth in Section
2.3, or (b) purchase such Mortgage
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Loan from the Trustee within 90 days from the date the Seller was notified of
such defect in writing at the Purchase Price of such Mortgage Loan; provided,
however, that in no event shall such substitution or purchase occur more than
540 days from the Closing Date, except that if the substitution or purchase of a
Mortgage Loan pursuant to this provision is required by reason of a delay in
delivery of any documents by the appropriate recording office, and there is a
dispute between either the Master Servicer or the Seller and the Trustee over
the location or status of the recorded document, then such substitution or
purchase shall occur within 720 days from the Closing Date. The Trustee shall
deliver written notice to each Rating Agency within 270 days from the Closing
Date indicating each Mortgage Loan (a) which has not been returned by the
appropriate recording office or (b) as to which there is a dispute as to
location or status of such Mortgage Loan. Such notice shall be delivered every
90 days thereafter until the related Mortgage Loan is returned to the Trustee.
Any such substitution pursuant to (a) above or purchase pursuant to (b) above
shall not be effected prior to the delivery to the Trustee of the Opinion of
Counsel required by Section 2.5 hereof, if any, and any substitution pursuant to
(a) above shall not be effected prior to the additional delivery to the Trustee
of a Request for Release substantially in the form of Exhibit N. No substitution
is permitted to be made in any calendar month after the Determination Date for
such month. The Purchase Price for any such Mortgage Loan shall be deposited by
the Seller in the Certificate Account on or prior to the Distribution Account
Deposit Date for the Distribution Date in the month following the month of
repurchase and, upon receipt of such deposit and certification with respect
thereto in the form of Exhibit N hereto, the Trustee shall release the related
Mortgage File to the Seller and shall execute and deliver at the Seller's
request such instruments of transfer or assignment prepared by the Seller, in
each case without recourse, as shall be necessary to vest in the Seller, or a
designee, the Trustee's interest in any Mortgage Loan released pursuant hereto.
The Trustee shall retain possession and custody of each Mortgage File in
accordance with and subject to the terms and conditions set forth herein. The
Master Servicer shall promptly deliver to the Trustee, upon the execution or
receipt thereof, the originals of such other documents or instruments
constituting the Mortgage File as come into the possession of the Master
Servicer from time to time.
It is understood and agreed that the obligation of the Seller to substitute
for or to purchase any Mortgage Loan which does not meet the requirements of
Section 2.1 above shall constitute the sole remedy respecting such defect
available to the Trustee, the Depositor and any Certificateholder against the
Seller.
SECTION 2.3 Representations, Warranties and Covenants of the Seller and
Master Servicer.
(a) FT Mortgage Companies, in its capacities as Seller and Master Servicer,
hereby makes the representations and warranties set forth in Schedule II hereto,
and by this reference incorporated herein, to the Depositor and the Trustee, as
of the Closing Date, or if so specified therein, as of the Cut-off Date.
(b) The Seller, in its capacity as Seller, hereby makes the representations
and warranties set forth in Schedule III hereto, and by this reference
incorporated herein, to the Depositor and the Trustee, as of the Closing Date,
or if so specified therein, as of the Cut-off Date.
(c) Upon discovery by any of the parties hereto of a breach of a
representation or warranty made pursuant to Section 2.3(b) that materially and
adversely affects the interests of the
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Certificateholders in any Mortgage Loan, the party discovering such breach shall
give prompt notice thereof to the other parties. The Seller hereby covenants
that within 90 days of the earlier of its discovery or its receipt of written
notice from any party of a breach of any representation or warranty made
pursuant to Section 2.3(b) which materially and adversely affects the interests
of the Certificateholders in any Mortgage Loan, it shall cure such breach in all
material respects, and if such breach is not so cured, shall, (i) if such 90-day
period expires prior to the second anniversary of the Closing Date, remove such
Mortgage Loan (a "Deleted Mortgage Loan") from the Trust Fund and substitute in
its place a Substitute Mortgage Loan, in the manner and subject to the
conditions set forth in this Section; or (ii) repurchase the affected Mortgage
Loan or Mortgage Loans from the Trustee at the Purchase Price in the manner set
forth below; provided, however, that any such substitution pursuant to (i) above
shall not be effected prior to the delivery to the Trustee of the Opinion of
Counsel required by Section 2.5 hereof, if any, and any such substitution
pursuant to (i) above shall not be effected prior to the additional delivery to
the Trustee of a Request for Release substantially in the form of Exhibit N and
the Mortgage File for any such Substitute Mortgage Loan. The Seller shall
promptly reimburse the Master Servicer and the Trustee for any expenses
reasonably incurred by the Master Servicer or the Trustee in respect of
enforcing the remedies for such breach. With respect to the representations and
warranties described in this Section which are made to the best of the Seller's
knowledge, if it is discovered by either the Depositor, the Seller or the
Trustee that the substance of such representation and warranty is inaccurate and
such inaccuracy materially and adversely affects the value of the related
Mortgage Loan or the interests of the Certificateholders therein,
notwithstanding the Seller's lack of knowledge with respect to the substance of
such representation or warranty, such inaccuracy shall be deemed a breach of the
applicable representation or warranty.
With respect to any Substitute Mortgage Loan or Loans, the Seller shall
deliver to the Trustee for the benefit of the Certificateholders the Mortgage
Note, the Mortgage, the related assignment of the Mortgage, and such other
documents and agreements as are required by Section 2.1, with the Mortgage Note
endorsed and the Mortgage assigned as required by Section 2.1. No substitution
is permitted to be made in any calendar month after the Determination Date for
such month. Scheduled Payments due with respect to Substitute Mortgage Loans in
the month of substitution shall not be part of the Trust Fund and will be
retained by the Seller on the next succeeding Distribution Date. For the month
of substitution, distributions to Certificateholders will include the monthly
payment due on any Deleted Mortgage Loan for such month and thereafter the
Seller shall be entitled to retain all amounts received in respect of such
Deleted Mortgage Loan. The Master Servicer shall amend the Mortgage Loan
Schedule for the benefit of the Certificateholders to reflect the removal of
such Deleted Mortgage Loan and the substitution of the Substitute Mortgage Loan
or Loans and the Master Servicer shall deliver the amended Mortgage Loan
Schedule to the Trustee. Upon such substitution, the Substitute Mortgage Loan or
Loans shall be subject to-the terms of this Agreement in all respects, and the
Seller shall be deemed to have made with respect to such Substitute Mortgage
Loan or Loans, as of the date of substitution, the representations and
warranties made pursuant to Section 2.3(b) with respect to such Mortgage Loan.
Upon any such substitution and the deposit to the Certificate Account of the
amount required to be deposited therein in connection with such substitution as
described in the following paragraph, the Trustee shall release the Mortgage
File held for the benefit of the Certificateholders relating to such Deleted
Mortgage Loan to the Seller and shall execute and deliver at the Seller's
direction such instruments of transfer or assignment prepared by the Seller, in
each case without recourse, as shall be necessary to vest title in the Seller,
or its designee, the Trustee's interest in any Deleted Mortgage Loan substituted
for pursuant to this Section 2.3.
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For any month in which the Seller substitutes one or more Substitute
Mortgage Loans for one or more Deleted Mortgage Loans, the Master Servicer will
determine the amount (if any) by which the aggregate principal balance of all
such Substitute Mortgage Loans as of the date of substitution is less than the
aggregate Stated Principal Balance of all such Deleted Mortgage Loans (after
application of the scheduled principal portion of the monthly payments due in
the month of substitution). The amount of such shortage (the "Substitution
Adjustment Amount") plus an amount equal to the aggregate of any unreimbursed
Advances with respect to such Deleted Mortgage Loans shall be deposited in the
Certificate Account by the Seller on or before the Distribution Account Deposit
Date for the Distribution Date in the month succeeding the calendar month during
which the related Mortgage Loan became required to be purchased or replaced
hereunder.
In the event that the Seller shall have repurchased a Mortgage Loan, the
Purchase Price therefor shall be deposited in the Certificate Account pursuant
to Section 3.5 on or before the Distribution Account Deposit Date for the
Distribution Date in the month following the month during which the Seller
became obligated hereunder to repurchase or replace such Mortgage Loan and upon
such deposit of the Purchase Price, the delivery of the Opinion of Counsel
required by Section 2.5 and receipt of a Request for Release in the form of
Exhibit N hereto, the Trustee shall release the related Mortgage File held for
the benefit of the Certificateholders to such Person, and the Trustee shall
execute and deliver at such Person's direction such instruments of transfer or
assignment prepared by such Person, in each case without recourse, as shall be
necessary to transfer title from the Trustee. It is understood and agreed that
the obligation under this Agreement of any Person to cure, repurchase or replace
any Mortgage Loan as to which a breach has occurred and is continuing shall
constitute the sole remedy against such Persons respecting such breach available
to Certificateholders, the Depositor or the Trustee on their behalf.
The representations and warranties made pursuant to this Section 2.3 shall
survive delivery of the respective Mortgage Files to the Trustee for the benefit
of the Certificateholders.
SECTION 2.4 Representations and Warranties of the Depositor as to the
Mortgage Loans.
The Depositor hereby represents and warrants to the Trustee with respect to
each Mortgage Loan as of the date hereof or such other date set forth herein
that as of the Closing Date, and following the transfer of the Mortgage Loans to
it by the Seller, the Depositor had good title to the Mortgage Loans and the
Mortgage Notes were subject to no offsets, defenses or counterclaims.
The Depositor hereby assigns, transfers and conveys to the Trustee all of
its rights with respect to the Mortgage Loans including, without limitation, the
representations and warranties of the Seller made pursuant to Section 2.3(b)
hereof, together with all rights of the Depositor to require the Seller to cure
any breach thereof or to repurchase or substitute for any affected Mortgage Loan
in accordance with this Agreement.
It is understood and agreed that the representations and warranties set
forth in this Section 2.4 shall survive delivery of the Mortgage Files to the
Trustee. Upon discovery by the Depositor or the Trustee of a breach of any of
the foregoing representations and warranties set forth in this Section 2.4
(referred to herein as a "breach"), which breach materially and adversely
affects the interest of the Certificateholders, the party discovering such
breach shall give prompt written notice to the others and to each Rating Agency.
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SECTION 2.5 Delivery of Opinion of Counsel in Connection with
Substitutions.
(a) Notwithstanding any contrary provision of this Agreement, no
substitution pursuant to Section 2.2 or Section 2.3 shall be made more than 90
days after the Closing Date unless the Seller delivers to the Trustee an Opinion
of Counsel, which Opinion of Counsel shall not be at the expense of either the
Trustee or the Trust Fund, addressed to the Trustee, to the effect that such
substitution will not (i) result in the imposition of the tax on "prohibited
transactions" on the Trust Fund or contributions after the Startup Date, as
defined in Sections 860F(a)(2) and 860G(d) of the Code, respectively, or (ii)
cause the Trust Fund to fail to qualify as a REMIC at any time that any
Certificates are outstanding.
(b) Upon discovery by the Depositor, the Seller, the Master Servicer, or
the Trustee that any Mortgage Loan does not constitute a "qualified mortgage"
within the meaning of Section 860G(a)(3) of the Code, the party discovering such
fact shall promptly (and in any event within five (5) Business Days of
discovery) give written notice thereof to the other parties. In connection
therewith, the Trustee shall require the Seller, at the Seller's option, to
either (i) substitute, if the conditions in Section 2.3(c) with respect to
substitutions are satisfied, a Substitute Mortgage Loan for the affected
Mortgage Loan, or (ii) repurchase the affected Mortgage Loan within 90 days of
such discovery in the same manner as it would a Mortgage Loan for a breach of
representation or warranty made pursuant to Section 2.3. The Trustee shall
reconvey to the Seller the Mortgage Loan to be released pursuant hereto in the
same manner, and on the same terms and conditions, as it would a Mortgage Loan
repurchased for breach of a representation or warranty contained in Section 2.3.
SECTION 2.6 Execution and Delivery of Certificates.
The Trustee acknowledges the transfer and assignment to it of the Trust
Fund and, concurrently with such transfer and assignment, has executed and
delivered to or upon the order of the Depositor, the Certificates in authorized
denominations evidencing directly or indirectly the entire ownership of the
Trust Fund. The Trustee agrees to hold the Trust Fund and exercise the rights
referred to above for the benefit of all present and future Holders of the
Certificates and to perform the duties set forth in this Agreement to the best
of its ability, to the end that the interests of the Holders of the Certificates
may be adequately and effectively protected.
SECTION 2.7 REMIC Matters.
The Preliminary Statement sets forth the designations and "latest possible
maturity date" for federal income tax purposes of all interests created hereby.
The "Startup Day" for purposes of the REMIC Provisions shall be the Closing
Date. The "tax matters person" with respect to each REMIC hereunder shall be the
Trustee and the Trustee shall hold the Tax Matters Person Certificate. Each
REMIC's fiscal year shall be the calendar year.
SECTION 2.8 Covenants of the Master Servicer.
The Master Servicer hereby covenants to the Depositor and the Trustee as
follows:
(a) the Master Servicer shall comply in the performance of its obligations
under this Agreement with all reasonable rules and requirements of the insurer
under each Required Insurance Policy; and
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(b) no written information, certificate of an officer, statement furnished
in writing or written report delivered to the Depositor, any affiliate of the
Depositor or the Trustee and prepared by the Master Servicer pursuant to this
Agreement will contain any untrue statement of a material fact or omit to state
a material fact necessary to make such information, certificate, statement or
report not misleading.
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ARTICLE III
ADMINISTRATION AND SERVICING
OF MORTGAGE LOANS
SECTION 3.1 Master Servicer to Service Mortgage Loans.
For and on behalf of the Certificateholders, the Master Servicer shall
service and administer the Mortgage Loans in accordance with the terms of this
Agreement and customary and usual standards of practice of prudent mortgage loan
servicers. In connection with such servicing and administration, the Master
Servicer shall have full power and authority, acting alone and/or through
Subservicers as provided in Section 3.2 hereof, to do or cause to be done any
and all things that it may deem necessary or desirable in connection with such
servicing and administration, including but not limited to, the power and
authority, subject to the terms hereof (i) to execute and deliver, on behalf of
the Certificateholders and the Trustee, customary consents or waivers and other
instruments and documents, (ii) to consent to transfers of any Mortgaged
Property and assumptions of the Mortgage Notes and related Mortgages (but only
in the manner provided in this Agreement), (iii) to collect any Insurance
Proceeds and other Liquidation Proceeds, and (iv) to effectuate foreclosure or
other conversion of the ownership of the Mortgaged Property securing any
Mortgage Loan; provided that the Master Servicer shall not take any action that
is inconsistent with or prejudices the interests of the Trust Fund or the
Certificateholders in any Mortgage Loan or the rights and interests of the
Depositor, the Trustee and the Certificateholders under this Agreement. The
Master Servicer shall represent and protect the interests of the Trust Fund in
the same manner as it protects its own interests in mortgage loans in its own
portfolio in any claim, proceeding or litigation regarding a Mortgage Loan, and
shall not make or permit any modification, waiver or amendment of any Mortgage
Loan which would cause the Trust Fund to fail to qualify as a REMIC or result in
the imposition of any tax under Section 860F(a) or Section 860G(d) of the Code.
Without limiting the generality of the foregoing, the Master Servicer, in its
own name or in the name of the Depositor and the Trustee, is hereby authorized
and empowered by the Depositor and the Trustee, when the Master Servicer
believes it appropriate in its reasonable judgment, to execute and deliver, on
behalf of the Trustee, the Depositor, the Certificateholders or any of them, any
and all instruments of satisfaction or cancellation, or of partial or full
release or discharge and all other comparable instruments, with respect to the
Mortgage Loans, and with respect to the Mortgaged Properties held for the
benefit of the Certificateholders. The Master Servicer shall prepare and deliver
to the Depositor and/or the Trustee such documents requiring execution and
delivery by either or both of them as are necessary or appropriate to enable the
Master Servicer to service and administer the Mortgage Loans to the extent that
the Master Servicer is not permitted to execute and deliver such documents
pursuant to the preceding sentence. Upon receipt of such documents, the
Depositor and/or the Trustee shall execute such documents and deliver them to
the Master Servicer.
In accordance with the standards of the preceding paragraph, the Master
Servicer shall advance or cause to be advanced funds as necessary for the
purpose of effecting the payment of taxes and assessments on the Mortgaged
Properties, which advances shall be reimbursable in the first instance from
related collections from the Mortgagors pursuant to Section 3.6, and further as
provided in Section 3.8. The costs incurred by the Master Servicer, if any, in
effecting the timely payments of taxes and assessments on the Mortgaged
Properties and related insurance premiums shall not, for the purpose of
calculating monthly distributions to the Certificateholders, be added to
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the Stated Principal Balances of the related Mortgage Loans, notwithstanding
that the terms of such Mortgage Loans so permit.
SECTION 3.2 Subservicing; Enforcement of the Obligations of Servicers.
(a) The Master Servicer may arrange for the subservicing of any Mortgage
Loan by a Subservicer pursuant to a subservicing agreement; provided, however,
that such subservicing arrangement and the terms of the related subservicing
agreement must provide for the servicing of such Mortgage Loans in a manner
consistent with the servicing arrangements contemplated hereunder. Unless the
context otherwise requires, references in this Agreement to actions taken or to
be taken by the Master Servicer in servicing the Mortgage Loans include actions
taken or to be taken by a Subservicer on behalf of the Master Servicer.
Notwithstanding the provisions of any subservicing agreement, any of the
provisions of this Agreement relating to agreements or arrangements between the
Master Servicer and a Subservicer or reference to actions taken through a
Subservicer or otherwise, the Master Servicer shall remain obligated and liable
to the Depositor, the Trustee and the Certificateholders for the servicing and
administration of the Mortgage Loans in accordance with the provisions of this
Agreement without diminution of such obligation or liability by virtue of such
subservicing agreements or arrangements or by virtue of indemnification from the
Subservicer and to the same extent and under the same terms and conditions as if
the Master Servicer alone were servicing and administering the Mortgage Loans.
All actions of each Subservicer performed pursuant to the related subservicing
agreement shall be performed as an agent of the Master Servicer with the same
force and effect as if performed directly by the Master Servicer.
(b) For purposes of this Agreement, the Master Servicer shall be deemed to
have received any collections, recoveries or payments with respect to the
Mortgage Loans that are received by a Subservicer regardless of whether such
payments are remitted by the Subservicer to the Master Servicer.
SECTION 3.3 Rights of the Depositor and the Trustee in Respect of the
Master Servicer.
The Depositor may, but is not obligated to, enforce the obligations of the
Master Servicer hereunder and may, but is not obligated to, perform, or cause a
designee to perform, any defaulted obligation of the Master Servicer hereunder
and in connection with any such defaulted obligation to exercise the related
rights of the Master Servicer hereunder; provided that the Master Servicer shall
not be relieved of any of its obligations hereunder by virtue of such
performance by the Depositor or its designee. Neither the Trustee nor the
Depositor shall have any responsibility or liability for any action or failure
to act by the Master Servicer nor shall the Trustee or the Depositor be
obligated to supervise the performance of the Master Servicer hereunder or
otherwise.
SECTION 3.4 Trustee to Act as Master Servicer.
In the event that the Master Servicer shall for any reason no longer be the
Master Servicer hereunder (including by reason of an Event of Default), the
Trustee or its successor shall thereupon assume all of the rights and
obligations of the Master Servicer hereunder arising thereafter (except that the
Trustee shall not be (i) liable for losses of the Master Servicer pursuant to
Section 3.9 hereof or any acts or omissions of the predecessor Master Servicer
hereunder), (ii) obligated to make Advances if it is prohibited from doing so by
applicable law, (iii) obligated to effectuate repurchases or substitutions of
Mortgage Loans hereunder including, but not limited to, repurchases or
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substitutions of Mortgage Loans pursuant to Section 2.2 or 2.3 hereof, (iv)
responsible for expenses of the Master Servicer pursuant to Section 2.3 or (v)
deemed to have made any representations and warranties of the Master Servicer
hereunder). Any such assumption shall be subject to Section 7.2 hereof. If the
Master Servicer shall for any reason no longer be the Master Servicer (including
by reason of any Event of Default), the Trustee or its successor shall succeed
to any rights and obligations of the Master Servicer under each subservicing
agreement.
The Master Servicer shall, upon request of the Trustee, but at the expense
of the Master Servicer, deliver to the assuming party all documents and records
relating to each subservicing agreement or substitute subservicing agreement and
the Mortgage Loans then being serviced thereunder and an accounting of amounts
collected or held by it and otherwise use its best efforts to effect the orderly
and efficient transfer of the substitute subservicing agreement to the assuming
party.
SECTION 3.5 Collection of Mortgage Loan Payments; Certificate Account;
Distribution Account.
(a) The Master Servicer shall make reasonable efforts in accordance with
the customary and usual standards of practice of prudent mortgage servicers to
collect all payments called for under the terms and provisions of the Mortgage
Loans to the extent such procedures shall be consistent with this Agreement and
the terms and provisions of any related Required Insurance Policy. Consistent
with the foregoing, the Master Servicer may in its discretion (i) waive any late
payment charge or any prepayment charge or penalty interest in connection with
the prepayment of a Mortgage Loan and (ii) extend the due dates for payments due
on a Mortgage Note for a period not greater than 180 days; provided, however,
that the Master Servicer cannot extend the maturity of any such Mortgage Loan
past the date on which the final payment is due on the latest maturing Mortgage
Loan as of the Cut-off Date. In the event of any such arrangement, the Master
Servicer shall make Advances on the related Mortgage Loan in accordance with the
provisions of Section 4.1 during the scheduled period in accordance with the
amortization schedule of such Mortgage Loan without modification thereof by
reason of such arrangements. The Master Servicer shall not be required to
institute or join in litigation with respect to collection of any payment
(whether under a Mortgage, Mortgage Note or otherwise or against any public or
governmental authority with respect to a taking or condemnation) if it
reasonably believes that enforcing the provision of the Mortgage or other
instrument pursuant to which such payment is required is prohibited by
applicable law.
(b) The Master Servicer shall establish and maintain a Certificate Account
into which the Master Servicer shall deposit or cause to be deposited no later
than two Business Days after receipt (or, if the current long-term credit rating
of the Master Servicer is reduced below "A" by S&P or "A3" by Moody's, the
Master Servicer shall deposit or cause to be deposited on a daily basis within
one Business Day of receipt), except as otherwise specifically provided herein,
the following payments and collections remitted by Subservicers or received by
it in respect of Mortgage Loans subsequent to the Cut-off Date (other than in
respect of principal and interest due on the Mortgage Loans on or before the
Cut-off Date) and the following amounts required to be deposited hereunder:
(i) all payments on account of principal on the Mortgage Loans,
including Principal Prepayments;
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(ii) all payments on account of interest on the Mortgage Loans, net
of the related Master Servicing Fee;
(iii) all Insurance Proceeds and Liquidation Proceeds, other than
proceeds 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;
(iv) any amount required to be deposited by the Master Servicer
pursuant to Section 3.5(c) in connection with any losses on Permitted
Investments;
(v) any amounts required to be deposited by the Master Servicer
pursuant to Section 3.9(b), 3.9(d), and in respect of net monthly rental
income from REO Property pursuant to Section 3.11 hereof;
(vi) all Substitution Adjustment Amounts;
(vii) all Advances made by the Master Servicer pursuant to Section
4.1; and
(viii) any other amounts required to be deposited hereunder.
In addition, with respect to any Mortgage Loan that is subject to a buydown
agreement, on each Due Date for such Mortgage Loan, in addition to the monthly
payment remitted by the Mortgagor, the Master Servicer shall cause funds to be
deposited into the Certificate Account in an amount required to cause an amount
of interest to be paid with respect to such Mortgage Loan equal to the amount of
interest that has accrued on such Mortgage Loan from the preceding Due Date at
the Mortgage Rate net of the related Master Servicing Fee on such date.
The foregoing requirements for remittance by the Master Servicer shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, payments in the nature of prepayment penalties, late payment
charges or assumption fees, if collected, need not be remitted by the Master
Servicer. In the event that the Master Servicer shall remit any amount not
required to be remitted, it may at any time withdraw or direct the institution
maintaining the Certificate Account to withdraw such amount from the Certificate
Account, any provision herein to the contrary notwithstanding. Such withdrawal
or direction may be accomplished by delivering written notice thereof to the
Trustee or such other institution maintaining the Certificate Account which
describes the amounts deposited in error in the Certificate Account. The Master
Servicer shall maintain adequate records with respect to all withdrawals made
pursuant to this Section. All funds deposited in the Certificate Account shall
be held in trust for the Certificateholders until withdrawn in accordance with
Section 3.8.
(c) The Trustee shall establish and maintain, on behalf of the
Certificateholders, the Distribution Account. The Trustee shall, promptly upon
receipt, deposit in the Distribution Account and retain therein the following:
(i) the aggregate amount remitted by the Master Servicer to the
Trustee pursuant to Section 3.8(a)(ix);
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(ii) any amount deposited by the Master Servicer pursuant to Section
3.5(c) in connection with any losses on Permitted Investments; and
(iii) any other amounts deposited hereunder which are required to be
deposited in the Distribution Account.
In the event that the Master Servicer shall remit any amount not required
to be remitted, it may at any time direct the Trustee to withdraw such amount
from the Distribution Account, any provision herein to the contrary
notwithstanding. Such direction may be accomplished by delivering an Officer's
Certificate to the Trustee which describes the amounts deposited in error in the
Distribution Account. All funds deposited in the Distribution Account shall be
held by the Trustee in trust for the Certificateholders until disbursed in
accordance with this Agreement or withdrawn in accordance with Section 3.8. In
no event shall the Trustee incur liability for withdrawals from the Distribution
Account at the direction of the Master Servicer.
(iv) Each institution at which the Certificate Account or the
Distribution Account is maintained shall invest the funds therein as
directed in writing by the Master Servicer in Permitted Investments, which
shall mature not later than (i) in the case of the Certificate Account, the
second Business Day next preceding the related Distribution Account Deposit
Date (except that if such Permitted Investment is an obligation of the
institution that maintains such account, then such Permitted Investment
shall mature not later than the Business Day next preceding such
Distribution Account Deposit Date) and (ii) in the case of the Distribution
Account, the Business Day next preceding the Distribution Date (except that
if such Permitted Investment is an obligation of the institution that
maintains such fund or account, then such Permitted Investment shall mature
not later than such Distribution Date) and, in each case, shall not be sold
or disposed of prior to its maturity. All such Permitted Investments shall
be made in the name of the Trustee, for the benefit of the
Certificateholders. All income and gain net of any losses realized from
any such investment of funds on deposit in the Certificate Account or the
Distribution Account shall be for the benefit of the Master Servicer as
servicing compensation and shall be remitted to it monthly as provided
herein. The amount of any realized losses in the Certificate Account or the
Distribution Account incurred in any such account in respect of any such
investments shall promptly be deposited by the Master Servicer in the
Certificate Account or paid to the Trustee for deposit into the
Distribution Account, as applicable. The Trustee in its fiduciary capacity
shall not be liable for the amount of any loss incurred in respect of any
investment or lack of investment of funds held in the Certificate Account
or the Distribution Account and made in accordance with this Section 3.5.
(v) The Master Servicer shall give notice to the Trustee, the
Seller, each Rating Agency and the Depositor of any proposed change of the
location of the Certificate Account prior to any change thereof. The
Trustee shall give notice to the Master Servicer, the Seller, each Rating
Agency and the Depositor of any proposed change of the location of the
Distribution Account prior to any change thereof.
SECTION 3.6 Collection of Taxes, Assessments and Similar Items; Escrow
Accounts.
(a) To the extent required by the related Mortgage Note and not violative
of current law, the Master Servicer shall establish and maintain one or more
accounts (each, an "Escrow Account")
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and deposit and retain therein all collections from the Mortgagors (or advances
by the Master Servicer) for the payment of taxes, assessments, hazard insurance
premiums or comparable items for the account of the Mortgagors. Nothing herein
shall require the Master Servicer to compel a Mortgagor to establish an Escrow
Account in violation of applicable law.
(b) Withdrawals of amounts so collected from the Escrow Accounts may be
made only to effect timely payment of taxes, assessments, hazard insurance
premiums, condominium or PUD association dues, or comparable items, to reimburse
the Master Servicer out of related collections for any payments made pursuant to
Sections 3.1 hereof (with respect to taxes and assessments and insurance
premiums) and 3.9 hereof (with respect to hazard insurance), to refund to any
Mortgagors any sums determined to be overages, to pay interest, if required by
law or the terms of the related Mortgage or Mortgage Note, to Mortgagors on
balances in the Escrow Account or to clear and terminate the Escrow Account at
the termination of this Agreement in accordance with Section 9.1 hereof. The
Escrow Accounts shall not be a part of the Trust Fund.
(c) The Master Servicer shall advance any payments referred to in Section
3.6(a) that are not timely paid by the Mortgagors on the date when the tax,
premium or other cost for which such payment is intended is due, but the Master
Servicer shall be required so to advance only to the extent that such advances,
in the good faith judgment of the Master Servicer, will be recoverable by the
Master Servicer out of Insurance Proceeds, Liquidation Proceeds or otherwise.
SECTION 3.7 Access to Certain Documentation and Information Regarding the
Mortgage Loans.
The Master Servicer shall afford the Depositor and the Trustee reasonable
access to all records and documentation regarding the Mortgage Loans and all
accounts, insurance information and other matters relating to this Agreement,
such access being afforded without charge, but only upon reasonable request and
during normal business hours at the office designated by the Master Servicer.
Upon reasonable advance notice in writing, the Master Servicer will provide
to each Certificateholder which is a savings and loan association, bank or
insurance company certain reports and reasonable access to information and
documentation regarding the Mortgage Loans sufficient to permit such
Certificateholder to comply with applicable regulations of the OTS or other
regulatory authorities with respect to investment in the Certificates; provided
that the Master Servicer shall be entitled to be reimbursed by each such
Certificateholder for actual expenses incurred by the Master Servicer in
providing such reports and access.
SECTION 3.8 Permitted Withdrawals from the Certificate Account and
Distribution Account.
(a) The Master Servicer may from time to time make withdrawals from the
Certificate Account for the following purposes:
(i) to pay to the Master Servicer (to the extent not previously
retained by the Master Servicer) the servicing compensation to which it is
entitled pursuant to Section 3.14, and to pay to the Master Servicer, as
additional servicing compensation, earnings on or investment income with
respect to funds in or credited to the Certificate Account;
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(ii) to reimburse the Master Servicer for unreimbursed Advances
made by it, such right of reimbursement pursuant to this subclause (ii)
being limited to amounts received on the Mortgage Loan(s) in respect of
which any such Advance was made;
(ii) to reimburse the Master Servicer for any Nonrecoverable
Advance previously made;
(iv) to reimburse the Master Servicer for Insured Expenses from the
related Insurance Proceeds;
(v) to reimburse the Master Servicer for (a) unreimbursed
Servicing Advances, the Master Servicer's right to reimbursement pursuant
to this clause (a) with respect to any Mortgage Loan being limited to
amounts received on such Mortgage Loan(s) which represent late recoveries
of the payments for which such advances were made pursuant to Section 3.1
or Section 3.6 and (b) for unpaid Master Servicing Fees as provided in
Section 3.11 hereof;
(vi) to pay to the purchaser, with respect to each Mortgage Loan or
property acquired in respect thereof that has been purchased pursuant to
Section 2.2, 2.3 or 3.11, all amounts received thereon after the date of
such purchase;
(vii) to reimburse the Seller, the Master Servicer or the Depositor
for expenses incurred by any of them and reimbursable pursuant to Section
6.3 hereof;
(viii) to withdraw any amount deposited in the Certificate Account
and not required to be deposited therein;
(ix) on or prior to the Distribution Account Deposit Date, to
withdraw an amount equal to the related Available Funds and the Trustee Fee
for such Distribution Date and remit such amount to the Trustee for deposit
in the Distribution Account; and
(x) to clear and terminate the Certificate Account upon
termination of this Agreement pursuant to Section 9.1 hereof.
The Master Servicer shall keep and maintain separate accounting, on a
Mortgage Loan by Mortgage Loan basis, for the purpose of justifying any
withdrawal from the Certificate Account pursuant to such subclauses (i), (ii),
(iv), (v) and (vi). Prior to making any withdrawal from the Certificate Account
pursuant to subclause (iii), the Master Servicer shall deliver to the Trustee an
Officer's Certificate of a Servicing Officer indicating the amount of any
previous Advance determined by the Master Servicer to be a Nonrecoverable
Advance and identifying the related Mortgage Loans(s), and their respective
portions of such Nonrecoverable Advance.
(b) The Trustee shall withdraw funds from the Distribution Account for
distributions to Certificateholders in the manner specified in this Agreement
(and to withhold from the amounts so withdrawn, the amount of any taxes that it
is authorized to withhold pursuant to the last paragraph of Section 8.11). In
addition, the Trustee may from time to time make withdrawals from the
Distribution Account for the following purposes:
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(i) to pay to itself the Trustee Fee for the related Distribution
Date;
(ii) to pay to the Master Servicer as additional servicing
compensation earnings on or investment income with respect to funds in the
Distribution Account;
(iii) to withdraw and return to the Master Servicer any amount
deposited in the Distribution Account and not required to be deposited
therein; and
(iv) to clear and terminate the Distribution Account upon termination
of the Agreement pursuant to Section 9.1 hereof.
SECTION 3.9 Maintenance of Hazard Insurance; Maintenance of Primary
Insurance Policies.
(a) The Master Servicer shall cause to be maintained, for each Mortgage
Loan, hazard insurance with extended coverage in an amount that is at least
equal to the lesser of (i) the maximum insurable value of the improvements
securing such Mortgage Loan or (ii) the greater of (y) the outstanding principal
balance of the Mortgage Loan and (z) an amount such that the proceeds of such
policy shall be sufficient to prevent the Mortgagor and/or the mortgagee from
becoming a co-insurer. Each such policy of standard hazard insurance shall
contain, or have an accompanying endorsement that contains, a standard mortgagee
clause. Any amounts collected by the Master Servicer under any such policies
(other than the amounts to be applied to the restoration or repair of the
related Mortgaged Property or amounts released to the Mortgagor in accordance
with the Master Servicer's normal servicing procedures) shall be deposited in
the Certificate Account. Any cost incurred by the Master Servicer in maintaining
any such insurance shall not, for the purpose of calculating monthly
distributions to the Certificateholders or remittances to the Trustee for their
benefit, be added to the principal balance of the Mortgage Loan, notwithstanding
that the terms of the Mortgage Loan so permit. Such costs shall be recoverable
by the Master Servicer out of late payments by the related Mortgagor or out of
Liquidation Proceeds to the extent permitted by Section 3.8 hereof. It is
understood and agreed that no earthquake or other additional insurance is to be
required of any Mortgagor or maintained on property acquired in respect of a
Mortgage other than pursuant to such applicable laws and regulations as shall at
any time be in force and as shall require such additional insurance. If the
Mortgaged Property is located at the time of origination of the Mortgage Loan in
a federally designated special flood hazard area and such area is participating
in the national flood insurance program, the Master Servicer shall cause flood
insurance to be maintained with respect to such Mortgage Loan. Such flood
insurance shall be in an amount equal to the least of (i) the original principal
balance of the related Mortgage Loan, (ii) the replacement value of the
improvements which are part of such Mortgaged Property, and (iii) the maximum
amount of such insurance available for the related Mortgaged Property under the
national flood insurance program.
(b) In the event that the Master Servicer shall obtain and maintain a
blanket policy insuring against hazard losses on all of the Mortgage Loans, it
shall conclusively be deemed to have satisfied its obligations as set forth in
the first sentence of this Section, it being understood and agreed that such
policy may contain a deductible clause on terms substantially equivalent to
those commercially available and maintained by comparable servicers. If such
policy contains a deductible clause, the Master Servicer shall, in the event
that there shall not have been maintained on the related Mortgaged Property a
policy complying with the first sentence of this Section, and there shall have
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been a loss that would have been covered by such policy, deposit in the
Certificate Account the amount not otherwise payable under the blanket policy
because of such deductible clause. In connection with its activities as Master
Servicer of the Mortgage Loans, the Master Servicer agrees to present, on behalf
of itself, the Depositor, and the Trustee for the benefit of the
Certificateholders, claims under any such blanket policy.
(c) The Master Servicer shall not take any action which would result in
non-coverage under any applicable Primary Insurance Policy of any loss which,
but for the actions of the Master Servicer, would have been covered thereunder.
The Master Servicer shall not cancel or refuse to renew any such Primary
Insurance Policy that is in effect at the date of the initial issuance of the
Certificates and is required to be kept in force hereunder unless the
replacement Primary Insurance Policy for such canceled or non-renewed policy is
maintained with a Qualified Insurer.
Except with respect to any Lender PMI Mortgage Loans, the Master Servicer
shall not be required to maintain any Primary Insurance Policy (i) with respect
to any Mortgage Loan with a Loan-to-Value Ratio less than or equal to 80% as of
any date of determination or, based on a new appraisal, the principal balance of
such Mortgage Loan represents 80% or less of the new appraised value or (ii) if
maintaining such Primary Insurance Policy is prohibited by applicable law. With
respect to the Lender PMI Mortgage Loans, the Master Servicer shall maintain the
Primary Insurance Policy for the life of such Mortgage Loans.
The Master Servicer agrees to effect the timely payment of the premiums on
each Primary Insurance Policy, and such costs not otherwise recoverable shall be
recoverable by the Master Servicer from the related liquidation proceeds.
(d) In connection with its activities as Master Servicer of the Mortgage
Loans, the Master Servicer agrees to present on behalf of itself, the Trustee
and Certificateholders, claims to the insurer under any Primary Insurance
Policies and, in this regard, to take such reasonable action as shall be
necessary to permit recovery under any Primary Insurance Policies respecting
defaulted Mortgage Loans. Any amounts collected by the Master Servicer under any
Primary Insurance Policies shall be deposited in the Certificate Account.
SECTION 3.10 Enforcement of Due-on-Sale Clauses; Assumption Agreements.
(a) Except as otherwise provided in this Section, when any property subject
to a Mortgage has been conveyed by the Mortgagor, the Master Servicer shall to
the extent that it has knowledge of such conveyance, enforce any due-on-sale
clause contained in any Mortgage Note or Mortgage, to the extent permitted under
applicable law and governmental regulations, but only to the extent that such
enforcement will not adversely affect or jeopardize coverage under any Required
Insurance Policy. Notwithstanding the foregoing, the Master Servicer is not
required to exercise such rights with respect to a Mortgage Loan if the Person
to whom the related Mortgaged Property has been conveyed or is proposed to be
conveyed satisfies the terms and conditions contained in the Mortgage Note and
Mortgage related thereto and the consent of the mortgagee under such Mortgage
Note or Mortgage is not otherwise so required under such Mortgage Note or
Mortgage as a condition to such transfer. In the event that the Master Servicer
is prohibited by law from enforcing any such due-on-sale clause, or if coverage
under any Required Insurance Policy would be adversely affected, or if
nonenforcement is otherwise permitted hereunder, the Master Servicer is
authorized, subject to Section 3.10(b), to take or enter into an assumption and
modification agreement from or with the
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person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the Mortgage Note and, unless prohibited
by applicable state law, the Mortgagor remains liable thereon, provided that the
Mortgage Loan shall continue to be covered (if-so covered before the Master
Servicer enters such agreement) by the applicable Required Insurance Policies.
The Master Servicer, subject to Section 3.10(b), is also authorized with the
prior approval of the insurers under any Required Insurance Policies to enter
into a substitution of liability agreement with such Person, pursuant to which
the original Mortgagor is released from liability and such Person is substituted
as Mortgagor and becomes liable under the Mortgage Note. Notwithstanding the
foregoing, the Master Servicer shall not be deemed to be in default under this
Section by reason of any transfer or assumption which the Master Servicer
reasonably believes it is restricted by law from preventing, for any reason
whatsoever.
(b) Subject to the Master Servicer's duty to enforce any due-on-sale clause
to the extent set forth in Section 3.10(a) hereof, in any case in which a
Mortgaged Property has been conveyed to a Person by a Mortgagor, and such Person
is to enter into an assumption agreement or modification agreement or supplement
to the Mortgage Note or Mortgage that requires the signature of the Trustee, or
if an instrument of release signed by the Trustee is required releasing the
Mortgagor from liability on the Mortgage Loan, the Master Servicer shall prepare
and deliver or cause to be prepared and delivered to the Trustee for signature
and shall direct, in writing, the Trustee to execute the assumption agreement
with the Person to whom the Mortgaged Property is to be conveyed and such
modification agreement or supplement to the Mortgage Note or Mortgage or other
instruments as are reasonable or necessary to carry out the terms of the
Mortgage Note or Mortgage or otherwise to comply with any applicable laws
regarding assumptions or the transfer of the Mortgaged Property to such Person.
In connection with any such assumption, no material term of the Mortgage Note
may be changed. In addition, the substitute Mortgagor and the Mortgaged Property
must be acceptable to the Master Servicer in accordance with its underwriting
standards as then in effect. Together with each such substitution, assumption or
other agreement or instrument delivered to the Trustee for execution by it, the
Master Servicer shall deliver an Officer's Certificate signed by a Servicing
Officer stating that the requirements of this subsection have been met in
connection therewith. The Master Servicer shall notify the Trustee that any such
substitution or assumption agreement has been completed by forwarding to the
Trustee the original of such substitution or assumption agreement, which in the
case of the original shall be added to the related Mortgage File and shall, for
all purposes, be considered a part of such Mortgage File to the same extent as
all other documents and instruments constituting a part thereof. Any fee
collected by the Master Servicer for entering into an assumption or substitution
of liability agreement will be retained by the Master Servicer as additional
servicing compensation.
SECTION 3.11 Realization Upon Defaulted Mortgage Loans; Repurchase of
Certain Mortgage Loans.
The Master Servicer shall use reasonable efforts to foreclose upon or
otherwise comparably convert the ownership of properties securing such of the
Mortgage Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments. In
connection with such foreclosure or other conversion, the Master Servicer shall
follow such practices and procedures as it shall deem necessary or advisable and
as shall be normal and usual in its general mortgage servicing activities and
meet the requirements of the insurer under any Required Insurance Policy;
provided, however, that the Master Servicer shall not be required to expend its
own funds in connection with any foreclosure or towards the restoration of any
property
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unless it shall determine (i) that such restoration and/or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan after reimbursement to
itself of such expenses and (ii) that such expenses will be recoverable to it
through Liquidation Proceeds (respecting which it shall have priority for
purposes of withdrawals from the Certificate Account). The Master Servicer shall
be responsible for all other costs and expenses incurred by it in any such
proceedings; provided, however, that it shall be entitled to reimbursement
thereof from the liquidation proceeds with respect to the related Mortgaged
Property, as provided in the definition of Liquidation Proceeds. If the Master
Servicer has knowledge that a Mortgaged Property which the Master Servicer is
contemplating acquiring in foreclosure or by deed in lieu of foreclosure is
located within a 1 mile radius of any site listed in the Expenditure Plan for
the Hazardous Substance Clean Up Bond Act of 1984 or other site with
environmental or hazardous waste risks known to the Master Servicer, the Master
Servicer will, prior to acquiring the Mortgaged Property, consider such risks
and only take action in accordance with its established environmental review
procedures.
With respect to any REO Property, the deed or certificate of sale shall be
taken in the name of the Trustee for the benefit of the Certificateholders, or
its nominee, on behalf of the Certificateholders. The Trustee's name shall be
placed on the title to such REO Property solely as the Trustee hereunder and not
in its individual capacity. The Master Servicer shall ensure that the title to
such REO Property references the Pooling and Servicing Agreement and the
Trustee's capacity thereunder. Pursuant to its efforts to sell such REO
Property, the Master Servicer shall either itself or through an agent selected
by the Master Servicer protect and conserve such REO Property in the same manner
and to such extent as is customary in the locality where such REO Property is
located and may, incident to its conservation and protection of the interests of
the Certificateholders, rent the same, or any part thereof, as the Master
Servicer deems to be in the best interest of the Certificateholders for the
period prior to the sale of such REO Property. The Master Servicer shall prepare
for and deliver to the Trustee a statement with respect to each REO Property
that has been rented showing the aggregate rental income received and all
expenses incurred in connection with the management and maintenance of such REO
Property at such times as is necessary to enable the Trustee to comply with the
reporting requirements of the REMIC Provisions. The net monthly rental income,
if any, from such REO Property shall be deposited in the Certificate Account no
later than the close of business on each Determination Date. The Master Servicer
shall perform the tax reporting and withholding required by Sections 1445 and
6050J of the Code with respect to foreclosures and abandonments, the tax
reporting required by Section 6050H of the Code with respect to the receipt of
mortgage interest from individuals and any tax reporting required by Section
6050P of the Code with respect to the cancellation of indebtedness by certain
financial entities, by preparing such tax and information returns as may be
required, in the form required, and delivering the same to the Trustee for
filing.
In the event that the Trust Fund acquires any Mortgaged Property as
aforesaid or otherwise in connection with a default or imminent default on a
Mortgage Loan, the Master Servicer shall dispose of such Mortgaged Property
prior to three years after its acquisition by the Trust Fund unless the Trustee
shall have been supplied with an Opinion of Counsel to the effect that the
holding by the Trust Fund of such Mortgaged Property subsequent to such three-
year period will not result in the imposition of taxes on "prohibited
transactions" of any REMIC hereunder as defined in section 860F of the Code or
cause any REMIC hereunder to fail to qualify as a REMIC at any time that any
Certificates are outstanding, in which case the Trust Fund may continue to hold
such Mortgaged Property (subject to any conditions contained in such Opinion of
Counsel). Notwithstanding any other provision of this Agreement, no Mortgaged
Property acquired by the Trust Fund shall be rented
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(or allowed to continue to be rented) or otherwise used for the production of
income by or on behalf of the Trust Fund in such a manner or pursuant to any
terms that would (i) cause such Mortgaged Property to fail to qualify as
"foreclosure property" within the meaning of section 860G(a)(8) of the Code or
(ii) subject any REMIC hereunder to the imposition of any federal, state or
local income taxes on the income earned from such Mortgaged Property under
Section 860G(c) of the Code or otherwise, unless the Master Servicer has agreed
to indemnify and hold harmless the Trust Fund with respect to the imposition of
any such taxes.
In the event of a default on a Mortgage Loan one or more of whose obligor
is not a United States Person, as that term is defined in Section 7701(a)(30) of
the Code, in connection with any foreclosure or acquisition of a deed in lieu of
foreclosure (together, "foreclosure") in respect of such Mortgage Loan, the
Master Servicer will cause compliance with the provisions of Treasury Regulation
Section 1.1445-2(d)(3) (or any successor thereto) necessary to assure that no
withholding tax obligation arises with respect to the proceeds of such
foreclosure except to the extent, if any, that proceeds of such foreclosure are
required to be remitted to the obligors on such Mortgage Loan.
The decision of the Master Servicer to foreclose on a defaulted Mortgage
Loan shall be subject to a determination by the Master Servicer that the
proceeds of such foreclosure would exceed the costs and expenses of bringing
such a proceeding. The income earned from the management of any REO Properties,
net of reimbursement to the Master Servicer for expenses incurred (including any
property or other taxes) in connection with such management and net of
unreimbursed Master Servicing Fees, Advances and Servicing Advances, shall be
applied to the payment of principal of and interest on the related defaulted
Mortgage Loans (with interest accruing as though such Mortgage Loans were still
current) and all such income shall be deemed, for all purposes in this
Agreement, to be payments on account of principal and interest on the related
Mortgage Notes and shall be deposited into the Certificate Account. To the
extent the net income received during any calendar month is in excess of the
amount attributable to amortizing principal and accrued interest at the related
Mortgage Rate on the related Mortgage Loan for such calendar month, such excess
shall be considered to be a partial prepayment of principal of the related
Mortgage Loan.
The proceeds from any liquidation of a Mortgage Loan, as well as any income
from an REO Property, will be applied in the following order of priority: first,
to reimburse the Master Servicer for any related unreimbursed Servicing Advances
and Master Servicing Fees; second, to reimburse the Master Servicer for any
unreimbursed Advances; third, to reimburse the Certificate Account for any
Nonrecoverable Advances (or portions thereof) that were previously withdrawn by
the Master Servicer pursuant to Section 3.8(a)(iii) that related to such
Mortgage Loan; fourth, to accrued and unpaid interest (to the extent no Advance
has been made for such amount or any such Advance has been reimbursed) on the
Mortgage Loan or related REO Property, at the Adjusted Net Mortgage Rate to the
Due Date occurring in the month in which such amounts are required to be
distributed; and fifth, as a recovery of principal of the Mortgage Loan. Excess
Proceeds, if any, from the liquidation of a Liquidated Mortgage Loan will be
retained by the Master Servicer as additional servicing compensation pursuant to
Section 3.14.
The Master Servicer, in its sole discretion, shall have the right to
purchase for its own account from the Trust Fund any Mortgage Loan which is 91
days or more delinquent at a price equal to the Purchase Price. The Purchase
Price for any Mortgage Loan purchased hereunder shall be deposited in the
Certificate Account and the Trustee, upon receipt of a certificate from the
Master Servicer in the form of Exhibit N hereto, shall release or cause to be
released to the purchaser of such
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Mortgage Loan the related Mortgage File and shall execute and deliver such
instruments of transfer or assignment prepared by the purchaser of such Mortgage
Loan, in each case without recourse, as shall be necessary to vest in the
purchaser of such Mortgage Loan any Mortgage Loan released pursuant hereto and
the purchaser of such Mortgage Loan shall succeed to all the Trustee's right,
title and interest in and to such Mortgage Loan and all security and documents
related thereto. Such assignment shall be an assignment outright and not for
security. The purchaser of such Mortgage Loan shall thereupon own such Mortgage
Loan, and all security and documents, free of any further obligation to the
Trustee or the Certificateholders with respect thereto.
SECTION 3.12 Trustee to Cooperate; Release of Mortgage Files.
Upon the payment in full of any Mortgage Loan, or the receipt by the Master
Servicer of a notification that payment in full will be escrowed in a manner
customary for such purposes, the Master Servicer will immediately notify the
Trustee by delivering, or causing to be delivered a "Request for Release"
substantially in the form of Exhibit N. Upon receipt of such request, the
Trustee shall promptly release the related Mortgage File to the Master Servicer,
and the Trustee shall at the Master Servicer's direction execute and deliver to
the Master Servicer the request for reconveyance, deed of reconveyance or
release or satisfaction of mortgage or such instrument releasing the lien of the
Mortgage in each case provided by the Master Servicer, together with the
Mortgage Note with written evidence of cancellation thereon. Expenses incurred
in connection with any instrument of satisfaction or deed of reconveyance shall
be chargeable to the related Mortgagor. From time to time and as shall be
appropriate for the servicing or foreclosure of any Mortgage Loan, including for
such purpose, collection under any policy of flood insurance, any fidelity bond
or errors or omissions policy, or for the purposes of effecting a partial
release of any Mortgaged Property from the lien of the Mortgage or the making of
any corrections to the Mortgage Note or the Mortgage or any of the other
documents included in the Mortgage File, the Trustee shall, upon delivery to the
Trustee of a Request for Release in the form of Exhibit M signed by a Servicing
Officer, release the Mortgage File to the Master Servicer. Subject to the
further limitations set forth below, the Master Servicer shall cause the
Mortgage File or documents so released to be returned to the Trustee when the
need therefor by the Master Servicer no longer exists, unless the Mortgage Loan
is liquidated and the proceeds thereof are deposited in the Certificate Account,
in which case the Master Servicer shall deliver to the Trustee a Request for
Release in the form of Exhibit N, signed by a Servicing Officer.
If the Master Servicer at any time seeks to initiate a foreclosure
proceeding in respect of any Mortgaged Property as authorized by this Agreement,
the Master Servicer shall deliver or cause to be delivered to the Trustee, for
signature, as appropriate, any court pleadings, requests for trustee's sale or
other documents necessary to effectuate such foreclosure or any legal action
brought to obtain judgment against the Mortgagor on the Mortgage Note or the
Mortgage or to obtain a deficiency judgment or to enforce any other remedies or
rights provided by the Mortgage Note or the Mortgage or otherwise available at
law or in equity.
SECTION 3.13 Documents Records and Funds in Possession of Master Servicer
to be Held for the Trustee.
Notwithstanding any other provisions of this Agreement, the Master Servicer
shall transmit to the Trustee as required by this Agreement all documents and
instruments in respect of a Mortgage Loan coming into the possession of the
Master Servicer from time to time and shall account fully
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to the Trustee for any funds received by the Master Servicer or which otherwise
are collected by the Master Servicer as Liquidation Proceeds or Insurance
Proceeds in respect of any Mortgage Loan. All Mortgage Files and funds collected
or held by, or under the control of, the Master Servicer in respect of any
Mortgage Loans, whether from the collection of principal and interest payments
or from Liquidation Proceeds, including but not limited to, any funds on deposit
in the Certificate Account, shall be held by the Master Servicer for and on
behalf of the Trustee and shall be and remain the sole and exclusive property of
the Trustee, subject to the applicable provisions of this Agreement. The Master
Servicer also agrees that it shall not create, incur or subject any Mortgage
File or any funds that are deposited in the Certificate Account, Distribution
Account or any Escrow Account, or any funds that otherwise are or may become due
or payable to the Trustee for the benefit of the Certificateholders, to any
claim, lien, security interest, judgment, levy, writ of attachment or other
encumbrance, or assert by legal action or otherwise any claim or right of setoff
against any Mortgage File or any funds collected on, or in connection with, a
Mortgage Loan, except, however, that the Master Servicer shall be entitled to
set off against and deduct from any such funds any amounts that are properly due
and payable to the Master Servicer under this Agreement.
SECTION 3.14 Servicing Compensation.
As compensation for its activities hereunder, the Master Servicer shall be
entitled to retain or withdraw from the Certificate Account an amount equal to
the Master Servicing Fee for each Mortgage Loan, provided that the aggregate
Master Servicing Fee with respect to any Distribution Date shall be reduced (i)
by an amount equal to the aggregate of the Prepayment Interest Shortfalls, if
any, with respect to such Distribution Date, but not below an amount equal to
one-half of the aggregate Master Servicing Fee for such Distribution Date before
reduction thereof in respect of such Prepayment Interest Shortfalls, and (ii)
with respect to the first Distribution Date, an amount equal to any amount to be
deposited into the Distribution Account by the Depositor pursuant to Section
2.1(a) and not so deposited.
Additional servicing compensation in the form of Excess Proceeds,
Prepayment Interest Excess, prepayment penalties, assumption fees, late payment
charges and all income and gain net of any losses realized from Permitted
Investments shall be retained by the Master Servicer to the extent not required
to be deposited in the Certificate Account pursuant to Section 3.5 hereof. The
Master Servicer shall be required to pay all expenses incurred by it in
connection with its master servicing activities hereunder (including payment of
any premiums for hazard insurance and any Primary Insurance Policy and
maintenance of the other forms of insurance coverage required by this Agreement)
and shall not be entitled to reimbursement therefor except as specifically
provided in this Agreement.
SECTION 3.15 Access to Certain Documentation.
The Master Servicer shall provide to the OTS and the FDIC and to comparable
regulatory authorities supervising Holders of Subordinated Certificates and the
examiners and supervisory agents of the OTS, the FDIC and such other
authorities, access to the documentation regarding the Mortgage Loans required
by applicable regulations of the OTS and the FDIC. Such access shall be afforded
without charge, but only upon reasonable and prior written request and during
normal business hours at the offices designated by the Master Servicer. Nothing
in this Section shall limit the obligation of the Master Servicer to observe any
applicable law prohibiting disclosure of
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information regarding the Mortgagors and the failure of the Master Servicer to
provide access as provided in this Section as a result of such obligation shall
not constitute a breach of this Section.
SECTION 3.16 Annual Statement as to Compliance.
The Master Servicer shall deliver to the Depositor and the Trustee on or
before 120 days after the end of the Master Servicer's fiscal year, commencing
with its 2000 fiscal year, an Officer's Certificate stating, as to the signer
thereof, that (i) a review of the activities of the Master Servicer during the
preceding calendar year and of the performance of the Master Servicer under this
Agreement has been made under such officer's supervision and (ii) to the best of
such officer's knowledge, based on such review, the Master Servicer has
fulfilled all its obligations under this Agreement throughout such year, or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default known to such officer and the nature and status thereof. The
Trustee shall forward a copy of each such statement to each Rating Agency.
SECTION 3.17 Annual Independent Public Accountants' Servicing Statement;
Financial Statements.
On or before 120 days after the end of the Master Servicer's fiscal year,
commencing with its 2000 fiscal year, the Master Servicer at its expense shall
cause a nationally or regionally recognized firm of independent public
accountants (who may also render other services to the Master Servicer, the
Seller or any affiliate thereof) which is a member of the American Institute of
Certified Public Accountants to furnish a statement to the Trustee and the
Depositor to the effect that-such firm has examined certain documents and
records relating to the servicing of the Mortgage Loans under this Agreement or
of mortgage loans under pooling and servicing agreements substantially similar
to this Agreement (such statement to have attached thereto a schedule setting
forth the pooling and servicing agreements covered thereby) and that, on the
basis of such examination, conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FNMA and FHLMC, such servicing has been conducted in
compliance with such pooling and servicing agreements except for such
significant exceptions or errors in records that, in the opinion of such firm,
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FNMA and FHLMC requires it to report. In rendering
such statement, such firm may rely, as to matters relating to direct servicing
of mortgage loans by Subservicers, 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
FNMA and FHLMC (rendered within one year of such statement) of independent
public accountants with respect to the related Subservicer. Copies of such
statement shall be provided by the Trustee to any Certificateholder upon request
at the Master Servicer's expense, provided such statement is delivered by the
Master Servicer to the Trustee.
SECTION 3.18 Errors and Omissions Insurance; Fidelity Bonds.
The Master Servicer shall for so long as it acts as master servicer under
this Agreement, obtain and maintain in force (a) a policy or policies of
insurance covering errors and omissions in the performance of its obligations as
Master Servicer hereunder and (b) a fidelity bond in respect of its officers,
employees and agents. Each such policy or policies and bond shall, together,
comply with the requirements from time to time of FNMA or FHLMC for persons
performing servicing for
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mortgage loans purchased by FNMA or FHLMC. In the event that any such policy or
bond ceases to be in effect, the Master Servicer shall obtain a comparable
replacement policy or bond from an insurer or issuer, meeting the requirements
set forth above as of the date of such replacement.
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ARTICLE IV
DISTRIBUTIONS AND
ADVANCES BY THE MASTER SERVICER
SECTION 4.1 Advances.
The Master Servicer shall determine on or before each Master Servicer
Advance Date whether it is required to make an Advance pursuant to the
definition thereof. If the Master Servicer determines it is required to make an
Advance, it shall, on or before the Master Servicer Advance Date, either (i)
deposit into the Certificate Account an amount equal to the Advance or (ii) make
an appropriate entry in its records relating to the Certificate Account that any
Amount Held for Future Distribution has been used by the Master Servicer in
discharge of its obligation to make any such Advance. Any funds so applied shall
be replaced by the Master Servicer by deposit in the Certificate Account no
later than the close of business on the next Master Servicer Advance Date. The
Master Servicer shall be entitled to be reimbursed from the Certificate Account
for all Advances of its own funds made pursuant to this Section as provided in
Section 3.08. The obligation to make Advances with respect to any Mortgage Loan
shall continue if such Mortgage Loan has been foreclosed or otherwise terminated
and the related Mortgaged Property has not been liquidated.
The Master Servicer shall deliver to the Trustee on the related Master
Servicer Advance Date an Officer's Certificate of a Servicing Officer indicating
the amount of any proposed Advance determined by the Master Servicer to be a
Nonrecoverable Advance.
SECTION 4.2 Priorities of Distribution.
(a) On each Distribution Date, the Trustee shall withdraw the Available
Funds from the Distribution Account and apply such funds to distributions on the
Certificates in the following order and priority and, in each case, to the
extent of Available Funds remaining:
(i) to each interest-bearing Class of Senior Certificates, an amount
allocable to interest equal to the related Class Optimal Interest
Distribution Amount, any shortfall being allocated among such Classes in
proportion to the amount of the Class Optimal Interest Distribution Amount
that would have been distributed in the absence of such shortfall;
(ii) to each Class of Senior Certificates, concurrently, as follows;
(x) to the Class PO Certificates, an amount allocable to
principal equal to the PO Formula Principal Amount, up to the
outstanding Class Certificate Balance of the Class PO
Certificates; and
(y) on each Distribution Date prior to the Senior Credit Support
Depletion Date, the Non-PO Formula Principal Amount, up to the
amount of the Senior Principal Distribution Amount for such
Distribution Date, will be distributed in the following order of
priority:
(1) to the Class A-R Certificates, until the Class Certificate
Balance thereof is reduced to zero;
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(2) concurrently, to the Class A-1, Class A-2 and Class A-3
Certificates, until the respective Class Certificate Balances
thereof are reduced to zero:
(iii) to the Class PO Certificates, any Class PO Deferred Amount, up
to an amount not to exceed the amount calculated pursuant to clause (A) of
the definition of the Subordinated Principal Distribution Amount actually
received or advanced for such Distribution Date (with such amount to be
allocated first from amounts calculated pursuant to (A)(i) and (ii) then
(iii) of the definition of Subordinated Principal Distribution Amount);
(iv) to each Class of Subordinated Certificates, subject to
paragraph (e) below, in the following order of priority:
(A) to the Class M Certificates, an amount allocable to
interest equal to the Class Optimal Interest Distribution
Amount for such Distribution Date;
(B) to the Class M Certificates, an amount allocable to
principal equal to its Pro Rata Share for such Distribution
Date until the Class Certificate Balance thereof is reduced
to zero;
(C) to the Class B-1 Certificates, an amount allocable to
interest equal to the Class Optimal Interest Distribution
Amount for such Class for such Distribution Date;
(D) to the Class B-1 Certificates, an amount allocable to
principal equal to its Pro Rata Share for such Distribution
Date until the Class Certificate Balance thereof is reduced
to zero;
(E) to the Class B-2 Certificates, an amount allocable to
interest equal to the Class Optimal Interest Distribution
Amount for such Class for such Distribution Date;
(F) to the Class B-2 Certificates, an amount allocable to
principal equal to its Pro Rata Share for such Distribution
Date until the Class Certificate Balance thereof is reduced
to zero;
(G) to the Class B-3 Certificates, an amount allocable to
interest equal to the amount of the Class Optimal Interest
Distribution Amount for such Class for such Distribution
Date;
(H) to the Class B-3 Certificates, an amount allocable to
principal equal to its Pro Rata Share for such Distribution
Date until the Class Certificate Balance thereof is reduced
to zero;
(I) to the Class B-4 Certificates, an amount allocable to
interest equal to the amount of the Class Optimal Interest
Distribution Amount for such Class for such Distribution
Date;
(J) to the Class B-4 Certificates, an amount allocable to
principal equal to its Pro Rata Share for such Distribution
Date until the Class Certificate Balance thereof is reduced
to zero;
(K) to the Class B-5 Certificates, an amount allocable to
interest equal to the Class Optimal Interest Distribution
Amount for such Class for such Distribution Date; and
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(L) to the Class B-5 Certificates, an amount allocable to
principal equal to its Pro Rata Share for such Distribution
Date until the Class Certificate Balance thereof is reduced
to zero; and
(v) to the Class A-R Certificates, any remaining funds in the Trust
Fund.
On any Distribution Date, amounts distributed in respect of Class PO Deferred
Amounts will not reduce the Class Certificate Balance of the Class PO
Certificates.
On any Distribution Date, to the extent the Amount Available for Senior
Principal is insufficient to make the full distribution required to be made
pursuant to clause (a)(ii)(x) above, (A) the amount distributable on the Class
PO Certificates in respect of principal shall be equal to the product of (1) the
Amount Available for Senior Principal and (2) 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 and
(B) the amount distributable on the Senior Certificates, other than the Class PO
Certificates, in respect of principal shall be equal to the product of (1) the
Amount Available for Senior Principal and (2) 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.
(b) On each Distribution Date on or after the Senior Credit Support
Depletion Date, notwithstanding the allocation and priority set forth in clause
(a)(ii)(y) above, the portion of Available Funds available to be distributed as
principal of the Senior Certificates (other than the Class PO Certificates)
shall be distributed concurrently, as principal, on such Classes, pro rata, on
the basis of their respective Class Certificate Balances, until the Class
Certificate Balances thereof are reduced to zero.
(c) On each Distribution Date, the amount referred to in clause (i) of the
definition of Class Optimal Interest Distribution Amount for each Class of
Certificates for such Distribution Date shall be reduced by (i) the related
Class' pro rata share of Net Prepayment Interest Shortfalls based on such Class'
Optimal Interest Distribution Amount for such Distribution Date without taking
into account such Net Prepayment Interest Shortfalls and (ii) the related Class'
Allocable Share of (A) after the Special Hazard Coverage Termination Date, with
respect to each Mortgage Loan that became a Special Hazard Mortgage Loan during
the calendar month preceding the month of such Distribution Date, the excess of
one month's interest at the related Adjusted Net Mortgage Rate on the Stated
Principal Balance of such Mortgage Loan as of the Due Date in such month over
the amount of Liquidation Proceeds applied as interest on such Mortgage Loan
with respect to such month, (B) after the Bankruptcy Coverage Termination Date,
with respect to each Mortgage Loan that became subject to a Bankruptcy Loss
during the calendar month preceding the month of such Distribution Date, the
interest portion of the related Debt Service Reduction or Deficient Valuation,
(C) each Relief Act Reduction incurred during the calendar month preceding the
month of such Distribution Date and (D) after the Fraud Coverage Termination
Date, with respect to each Mortgage Loan that became a Fraud Loan during the
calendar month preceding the month of such Distribution Date, the excess of one
month's interest at the related Adjusted Net Mortgage Rate on the Stated
Principal Balance of such Mortgage Loan as of the Due Date in such month over
the amount of Liquidation Proceeds applied as interest on such Mortgage Loan
with respect to such month.
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(d) Notwithstanding the priority and allocation contained in clause (a)(iv)
above, if with respect to any Class of Subordinated Certificates on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and of all Classes of Subordinated Certificates which have a higher
numerical Class designation than such Class (the "Applicable Credit Support
Percentage") is less than the Original Applicable Credit Support Percentage for
such Class, no distribution of Principal Prepayments will be made to any such
Classes (the "Restricted Classes") and the amount of such Principal Prepayments
otherwise distributable to the Restricted Classes shall be distributed to any
Classes of Subordinated Certificates having lower numerical Class designations
than such Class, pro rata, based on their respective Class Certificate Balances
immediately prior to such Distribution Date and shall be distributed in the
sequential order provided in clause (a)(iv) above.
SECTION 4.3 Distributions in Reduction of the Class ____ and Class ____
Certificates.
(a) Except as provided in subclauses (d) and (f) below, on each
Distribution Date on which distributions in reduction of the Class Certificate
Balance of the Class ___ or Class ____ Certificates (together, the "Designated
Certificates" and each a "Designated Certificate") are made, such distributions
will be made in the following priority:
(i) any request by the personal representative of a Deceased Holder or
by a surviving tenant by the entirety, by a surviving joint tenant or by a
surviving tenant in common or other Person empowered to act on behalf of
such Deceased Holder upon his or her death, in an amount up to but not
exceeding $_______ per request; and
(ii) any request by a Living Holder, in an amount up to but not
exceeding $______ per request.
Thereafter, distributions will be made as provided in clauses (i) and (ii)
above up to a second $_______ and $______ per request, respectively. This
sequence of priorities will be repeated for each request for principal
distributions made by the Certificate Owners of Designated Certificates until
all such requests have been honored.
Requests for distributions in reduction of the Certificate Balances of
Designated Certificates presented on behalf of the related Deceased Holders in
accordance with the provisions of clause (i) above will be accepted in the order
of their receipt by the Depository. Requests for distributions in reduction of
the Certificate Balances of Designated Certificates presented in accordance with
the provisions of clause (ii) above will be accepted in the order of priority
established by the random lot procedures of the Depository after all requests
with respect to such Certificates presented in accordance with clause (i) have
been honored. All requests for distributions in reduction of the Certificate
Balances of the Designated Certificates with respect to any Distribution Date
shall be made in accordance with Section 4.3(c) below and must be received by
the Depository and forwarded to, and received by, the Trustee no later than the
close of business on the related Record Date. Requests for distributions which
are received by the Depository and forwarded to the Trustee after the related
Record Date and requests, in either case, for distributions timely received but
not accepted with respect to any Distribution Date, will be treated as requests
for distributions in reduction of the Certificate Balances of the applicable
Designated Certificates on the next succeeding Distribution Date, and each
succeeding Distribution Date thereafter, until each such request is accepted or
is withdrawn as provided in Section 4.3(c). Such requests as are not so
withdrawn shall
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retain their order of priority without the need for any further action on the
part of the appropriate Certificate Owner of the related Designated Certificate,
all in accordance with the procedures of the Depository and the Trustee. Upon
the transfer of beneficial ownership of any Designated Certificate, any
distribution request previously submitted with respect to such Certificate will
be deemed to have been withdrawn only upon the receipt by the Trustee of
notification of such withdrawal using a form required by the Depository.
Distributions in reduction of the Certificate Balances of Designated
Certificates will be applied, in the aggregate, to such related Designated
Certificates in an amount equal to the portion of the Available Funds
distributable to the related Designated Certificates pursuant to Section
4.2(a)(iv), plus any amounts available for distribution from the related
Rounding Account pursuant to Section 4.3(e), provided that the aggregate
distribution in reduction of the Class Certificate Balance of a Designated
Certificate on any Distribution Date is made in an integral multiple of $______.
(b) A "Deceased Holder" is a Certificate Owner of a Class ____ or Class
____ Certificate, as the context requires, who was living at the time such
interest was acquired and whose authorized personal representative, surviving
tenant by the entirety, surviving joint tenant or surviving tenant in common or
other person empowered to act on behalf of such Certificate Owner upon his or
her death, causes to be furnished to the Trustee a certified copy of the death
certificate of such Certificate Owner and any additional evidence of death
required by and satisfactory to the Trustee and any tax waivers requested by the
Trustee. Designated Certificates beneficially owned by tenants by the entirety,
joint tenants or tenants in common will be considered to be beneficially owned
by a single owner. The death of a tenant by the entirety, joint tenant or tenant
in common will be deemed to be the death of the Certificate Owner, and the
Designated Certificates so beneficially owned will be eligible for priority with
respect to distributions in reduction of the Class Certificate Balance of the
related Class of Designated Certificates, subject to the limitations stated
above. Designated Certificates beneficially owned by a trust will be considered
to be beneficially owned by each beneficiary of the trust to the extent of such
beneficiary's beneficial interest therein, but in no event will a trust's
beneficiaries collectively be deemed to be Certificate Owners of a number of
Individual Designated Certificates greater than the number of Individual
Designated Certificates of which such trust is the beneficial owner. The death
of a beneficiary of a trust will be deemed to be the death of a Certificate
Owner of the Designated Certificates beneficially owned by the trust to the
extent of such beneficiary's beneficial interest in such trust. The death of an
individual who was a tenant by the entirety, joint tenant or tenant in common in
a tenancy which is the beneficiary of a trust will be deemed to be the death of
the beneficiary of the trust. The death of a person who, during his or her
lifetime, was entitled to substantially all of the beneficial ownership
interests in Designated Certificates will be deemed to be the death of the
Certificate Owner of such Designated Certificates regardless of the registration
of ownership of such Designated Certificates, if such beneficial interest can be
established to the satisfaction of the Trustee. Such beneficial interest will be
deemed to exist in typical cases of street name or nominee ownership, ownership
by a trustee, ownership under the Uniform Gifts to Minors Act and community
property or other joint ownership arrangements between a husband and wife.
Beneficial interests shall include the power to sell, transfer or otherwise
dispose of a Designated Certificate and the right to receive the proceeds
therefrom, as well as interest and distributions in reduction of the Certificate
Balances of the Designated Certificates payable with respect thereto. The
Trustee shall not be under any duty to determine independently the occurrence of
the death of any deceased Certificate Owner. The Trustee may rely entirely upon
documentation
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delivered to it pursuant to Section 4.3(a) in establishing the eligibility of
any Certificate Owner to receive the priority accorded Deceased Holders in
Section 4.3(a).
(c) Requests for distributions in reduction of the Certificate Balance of a
Designated Certificate must be made by delivering a written request therefor to
the Depository Participant or Indirect Participant that maintains the account
evidencing the Certificate Owner's interest in such Designated Certificate. Such
Depository Participant or Indirect Participant should in turn make the request
of the Depository (or, in the case of an Indirect Participant, such Indirect
Participant must notify the related Depository Participant of such request,
which Depository Participant should make the request of the Depository) on a
form required by the Depository and provided to the Depository Participant. Upon
receipt of such request, the Depository will date and time stamp such request
and forward such request to the Trustee. The Depository may establish such
procedures as it deems fair and equitable to establish the order of receipt or
requests for such distributions received by it on the same day. The Trustee
shall not be liable for any delay in delivery of requests for distributions or
withdrawals of such requests by the Depository, a Depository Participant or any
Indirect Participant.
In the event any requests for distributions in reduction of the Certificate
Balance of a Designated Certificate are rejected by the Trustee for failure to
comply with the requirements of this Section 4.3, the Trustee shall return such
requests to the appropriate Depository Participant with a copy to the Depository
with an explanation as to the reason for such rejection.
The Trustee shall maintain a list of those Depository Participants
representing the Certificate Owners of Designated Certificates that have
submitted requests for distributions in reduction of the Certificate Balances of
such Designated Certificates, together with the order of receipt and the amounts
of such requests. The Trustee shall notify the Depository and the appropriate
Depository Participants as to which requests should be honored on each
Distribution Date. Requests shall be honored by the Depository in accordance
with the procedures, and subject to the priorities and limitations, described in
this Section 4.3. The exact procedures to be followed by the Trustee and the
Depository for purposes of determining such priorities and limitations shall be
those established from time to time by the Trustee or the Depository, as the
case may be. The decisions of the Trustee and the Depository concerning such
matters shall be final and binding on all affected Persons.
Payments in reduction of the Certificate Balance of a Designated
Certificate shall be made on the applicable Distribution Date and the
Certificate Balances as to which such payments are made shall cease to bear
interest after the last day of the month preceding the month in which such
Distribution Date occurs.
Any Certificate Owner of a Designated Certificate which has requested a
distribution may withdraw its request by so notifying in writing the Depository
Participant or Indirect Participant that maintains such Certificate Owner's
account. In the event that such account is maintained by an Indirect
Participant, such Indirect Participant must notify the related Depository
Participant which in turn must forward the withdrawal of such request, on a form
required by the Depository, to the Trustee. If such notice of withdrawal of a
request for distribution has not been received by the Depository and forwarded
to the Trustee on or before the Record Date for the next Distribution Date, the
previously made request for distribution will be irrevocable with respect to the
making of distributions in reduction of the Certificate Balance of such
Designated Certificate on such Distribution Date.
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(d) To the extent, if any, that distributions in reduction of the Class
Certificate Balance of a Class of Designated Certificates on a Distribution Date
exceed the aggregate Certificate Balances of the Designated Certificates with
respect to which distribution requests have been received by the related Record
Date, as provided in Section 4.3(a) above, distributions in reduction of the
Class Certificate Balance of such Class of Designated Certificates will be made
by mandatory distributions in reduction thereof. The Trustee shall notify the
Depository of the aggregate amount of the mandatory distribution in reduction of
the Class Certificate Balance of the Class of Designated Certificates to be made
on the next Distribution Date. The Depository shall then allocate such aggregate
amount among its Depository Participants on a random lot basis. Each Depository
Participant and, in turn, each Indirect Participant, will then select, in
accordance with its own procedures, Individual Designated Certificates from
among those held in its accounts to receive mandatory distributions in reduction
of the Class Certificate Balance of the related Designated Certificates, such
that the total amount so selected is equal to the aggregate amount of such
mandatory distributions allocated to such Depository Participant by the
Depository and to such Indirect Participant by its related Depository
Participant, as the case may be. Depository Participants and Indirect
Participants which hold Designated Certificates selected for mandatory
distributions in reduction of the Class Certificate Balance are required to
provide notice of such mandatory distributions to the affected Certificate
Owners.
(e) Notwithstanding any provisions herein to the contrary, on each
Distribution Date following the first Distribution Date on or after the Senior
Credit Support Depletion Date, distributions in reduction of the Class
Certificate Balances of the Designated Certificates will be made among the
Holders of the related Class of Designated Certificates, pro rata, based on
Certificate Balances, and will not be made in integral multiples of $_______ or
pursuant to requested distributions or mandatory distributions by random lot.
In the event that Definitive Certificates representing the Designated
Certificates are issued pursuant to Section 5.2(e), an amendment to this
Agreement, which may be approved without the consent of any Certificateholders,
shall establish procedures relating to the manner in which distributions in
reduction of the Class Certificate Balances of the Classes of Designated
Certificates are to be made; provided that such procedures shall be consistent,
to the extent practicable and customary for certificates similar to the
Designated Certificates with the Certificates, with the provisions of this
Section 4.3.
SECTION 4.4 Allocation of Realized Losses.
(a) On or prior to each Determination Date, the Trustee shall determine
the total amount of Realized Losses, including Excess Losses, with respect to
the related Distribution Date. For purposes of allocating losses to the
Subordinated Certificates, the Class M Certificates will be deemed to have a
lower numerical class designation, and to be of a higher relative payment
priority, than each other Class of Subordinated Certificates.
Realized Losses with respect to any Distribution Date shall be allocated as
follows:
(i) the applicable PO Percentage of any Realized Loss, including any
Excess Loss, shall be allocated to the Class PO Certificates until the
Class Certificate Balance thereof is reduced to zero; and
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(ii) (1) the applicable Non-PO Percentage of any Realized Loss
(other than an Excess Loss) shall be allocated first to the Subordinated
Certificates in reverse order of their respective numerical Class
designations (beginning with the Class of Subordinated Certificates then
outstanding with the highest numerical Class designation) until the
respective Class Certificate Balance of each such Class is reduced to zero,
and second to the Senior Certificates (other than the Notional Amount
Certificates and the Class PO Certificates), pro rata on the basis of their
respective Class Certificate Balances or, in the case of the Accrual
Certificates, on the basis of the lesser of its Class Certificate Balance
and its initial Class Certificate Balance, in each case immediately prior
to the related Distribution Date until the respective Class Certificate
Balance of each such Class is reduced to zero; and
(2) the applicable Non-PO Percentage of any Excess Losses shall
be allocated to the Senior Certificates (other than the Notional Amount
Certificates and the Class PO Certificates) and the Subordinated
Certificates then outstanding, pro rata, on the basis of their respective
Class Certificate Balances or, in the case of the Accrual Certificates, on
the basis of the lesser of its Class Certificate Balance and its initial
Class Certificate Balance, in each case immediately prior to the related
Distribution Date.
(b) The Class Certificate Balance of the Class of Subordinated Certificates
then outstanding with the highest numerical Class designation shall be reduced
on each Distribution Date by the sum of (i) the amount of any payments on the
Class PO Certificates in respect of Class PO Deferred Amounts and (ii) the
amount, if any, by which the aggregate of the Class Certificate Balances of all
outstanding Classes of Certificates (after giving effect to the distribution of
principal and the allocation of Realized Losses and Class PO Deferred Amounts on
such Distribution Date) exceeds the Pool Stated Principal Balance for the
following Distribution Date.
(c) Any Realized Loss allocated to a Class of Certificates or any reduction
in the Class Certificate Balance of a Class of Certificates pursuant to Section
4.4(a) above shall be allocated among the Certificates of such Class in
proportion to their respective Certificate Balances.
(d) Any allocation of Realized Losses to a Certificate or to any Component
or any reduction in the Certificate Balance of a Certificate, pursuant to
Section 4.4(a) above shall be accomplished by reducing the Certificate Balance
or Component Balance thereof, as applicable, immediately following the
distributions made on the related Distribution Date in accordance with the
definition of "Certificate Balance" or "Component Balance," as the case may be.
SECTION 4.5 Reserved.
SECTION 4.6 Monthly Statements to Certificateholders.
(a) Not later than each Distribution Date, the Trustee shall prepare and
cause to be forwarded by first class mail to each Certificateholder, the Master
Servicer, the Depositor and each Rating Agency a statement setting forth with
respect to the related distribution:
(i) the amount thereof allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and
Liquidation Proceeds included therein;
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(ii) the amount thereof allocable to interest, any Class Unpaid
Interest Shortfall included in such distribution and any remaining Class
Unpaid Interest Shortfall after giving effect to such distribution;
(iii) if the distribution to the Holders of such Class of
Certificates is less than the full amount that would be distributable to
such Holders if there were sufficient funds available therefor, the amount
of the shortfall and the allocation thereof as between principal and
interest;
(iv) the Class Certificate Balance of each Class of Certificates
after giving effect to the distribution of principal on such Distribution
Date;
(v) the Pool Stated Principal Balance for the following
Distribution Date;
(vi) the Senior Percentage and Subordinated Percentage for the
following Distribution Date;
(vii) the amount of the Master Servicing Fees paid to or retained by
the Master Servicer with respect to such Distribution Date;
(viii) the Pass-Through Rate for each such Class of Certificates with
respect to such Distribution Date;
(ix) the amount of Advances included in the distribution on such
Distribution Date and the aggregate amount of Advances outstanding as of
the close of business on such Distribution Date;
(x) the number and aggregate principal amounts of Mortgage Loans
(A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to 30
days (2) 31 to 60 days (3) 61 to 90 days and (4) 91 or more days and (B) in
foreclosure and delinquent (1) 1 to 30 days (2) 31 to 60 days (3) 61 to 90
days and (4) 91 or more days, as of the close of business on the last day
of the calendar month preceding such Distribution Date;
(xi) with respect to any Mortgage Loan that became an REO Property
during the preceding calendar month, the loan number and Stated Principal
Balance of such Mortgage Loan as of the close of business on the
Determination Date preceding such Distribution Date and the date of
acquisition thereof;
(xii) the total number and principal balance of any REO Properties
(and market value, if available) as of the close of business on the
Determination Date preceding such Distribution Date;
(xiii) the Senior Prepayment Percentage for the following Distribution
Date;
(xiv) the aggregate amount of Realized Losses incurred during the
preceding calendar month;
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(xv) the Special Hazard Loss Coverage Amount, the Fraud Loss
Coverage Amount and the Bankruptcy Loss Coverage Amount, in each case as of
the related Determination Date;
(xvi) with respect to the second Distribution Date, the number and
aggregate balance of any Delay Delivery Mortgage Loans not delivered within
thirty days after the Closing Date;
(b) The Trustee's responsibility for disbursing the above information to
the Certificateholders is limited to the availability, timeliness and accuracy
of the information provided by the Master Servicer.
(c) On or before the fifth Business Day following the end of each
Prepayment Period (but in no event later than the third Business Day prior to
the related Distribution Date), the Master Servicer shall deliver to the Trustee
(which delivery may be by electronic data transmission) a report in
substantially the form set forth as Schedule __ hereto.
(d) Within a reasonable period of time after the end of each calendar
year, the Trustee shall cause to be furnished to each Person who at any time
during the calendar year was a Certificateholder, a statement containing the
information set forth in clauses (a)(i), (a)(ii) and (a)(vii) of this Section
4.6 aggregated for such calendar year or applicable portion thereof during which
such Person was a Certificateholder. Such obligation of the Trustee shall be
deemed to have been satisfied to the extent that substantially comparable
information shall be provided by the Trustee pursuant to any requirements of the
Code as from time to time in effect.
SECTION 4.7 Determination of Pass-Through Rates for COFI Certificates.
The Pass-Through Rate for each Class of COFI Certificates for each Interest
Accrual Period after the initial Interest Accrual Period shall be determined by
the Trustee as provided below on the basis of the Index and the applicable
formulae appearing in footnotes corresponding to the COFI Certificates in the
table relating to the Certificates in the Preliminary Statement.
Except as provided below, with respect to each Interest Accrual Period
following the initial Interest Accrual Period, the Trustee shall not later than
two Business Days following the publication of the applicable Index determine
the Pass-Through Rate at which interest shall accrue in respect of the COFI
Certificates during the related Interest Accrual Period.
Except as provided below, the Index to be used in determining the
respective Pass-Through Rates for the COFI Certificates for a particular
Interest Accrual Period shall be COFI for the second calendar month preceding
such Interest Accrual Period. If at the Outside Reference Date for any Interest
Accrual Period, COFI for the second calendar month preceding such Interest
Accrual Period has not been published, the Trustee shall use COFI for the third
calendar month preceding such Interest Accrual Period. If COFI for neither the
second nor third calendar months preceding any Interest Accrual Period has been
published on or before the related Outside Reference Date, the Index for such
Interest Accrual Period and for all subsequent Interest Accrual Periods shall be
the National Cost of Funds Index for the third calendar month preceding such
Interest Accrual Period (or the fourth preceding calendar month if such National
Cost of Funds Index for the third preceding calendar month has not been
published by such Outside Reference Date). In the event that the
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National Cost of Funds Index for neither the third nor fourth calendar months
preceding an Interest Accrual Period has been published on or before the related
Outside Reference Date, then for such Interest Accrual Period and for each
succeeding Interest Accrual Period, the Index shall be LIBOR, determined in the
manner set forth below.
On each Interest Determination Date so long as the COFI Certificates are
outstanding and the applicable Index therefor is LIBOR, the Trustee shall either
(i) request each Reference Bank to inform the Trustee of the quotation offered
by its principal London office 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 such Interest Determination Date or (ii) in lieu of making any
such request, rely on such Reference Bank quotations that appear at such time on
the Reuters Screen LIBO Page (as defined in the International Swap Dealers
Association Inc. Code of Standard Wording, Assumptions and Provisions for Swaps,
1986 Edition), to the extent available.
SECTION 4.8 Determination of Pass-Through Rates for LIBOR Certificates
(Reference Bank Method).
With respect to any Interest Accrual Period for which the applicable Index
is LIBOR, LIBOR for such Interest Accrual Period will be established by the
Trustee on the related Interest Determination Date as follows:
(a) If on any Interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period
shall be the arithmetic mean of such offered quotations (rounding such
arithmetic mean upwards if necessary to the nearest whole multiple of 1/32%).
(b) If on any Interest Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next Interest
Accrual Period shall be whichever is the higher of (i) LIBOR as determined on
the previous Interest Determination Date or (ii) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum which the Trustee determines
to be either (i) 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 Trustee are quoting, on the
relevant Interest Determination Date, to the principal London offices of at
least two of the Reference Banks to which such quotations are, in the opinion of
the Trustee, being so made, or (ii) in the event that the Trustee can determine
no such arithmetic mean, the lowest one-month United States dollar lending rate
which New York City banks selected by the Trustee are quoting on such Interest
Determination Date to leading European banks.
From such time as the applicable Index becomes LIBOR until all of the COFI
Certificates are paid in full, the Trustee will at all times retain at least
four Reference Banks for the purposes of determining LIBOR with respect to each
interest Determination Date. The Master Servicer initially shall designate the
Reference Banks. 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
Trustee and shall have an established place of business in London. If any such
Reference Bank should be unwilling or unable to act as such or if the Master
Servicer should terminate its appointment as Reference Bank, the Trustee shall
promptly appoint or cause to be appointed another Reference Bank. The Trustee
shall have no liability or responsibility to any Person for (i) the selection of
any Reference Bank for purposes of determining
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LIBOR or (ii) any inability to retain at least four Reference Banks which is
caused by circumstances beyond its reasonable control.
In determining LIBOR and any Pass-Through Rate for the COFI Certificates or
any Reserve Interest Rate, the Trustee may conclusively rely and shall be
protected in relying upon the offered quotations (whether written, oral or on
the Reuters Screen) from the Reference Banks or the New York City banks as to
LIBOR or the Reserve Interest Rate, as appropriate, in effect from time to time.
The Trustee shall not have any liability or responsibility to any Person for (i)
the Trustee's selection of New York City banks for purposes of determining any
Reserve Interest Rate or (ii) its inability, following a good-faith reasonable
effort, to obtain such quotations from the Reference Banks or the _____________
banks or to determine such arithmetic mean, all as provided for in this Section
4.7.
The establishment of LIBOR and each Pass-Through Rate for the COFI
Certificates by the Trustee shall (in the absence of manifest error) be final,
conclusive and binding upon each Holder of a Certificate and the Trustee.
SECTION 4.9 Determination of Pass-Through Rates for LIBOR Certificates
(BBA Method).
(a) On each Interest Determination Date so long as the LIBOR Certificates
are outstanding, the Trustee will determine LIBOR on the basis of the British
Bankers' Association ("BBA") "Interest Settlement Rate" for one-month deposits
in U.S. 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 sixteen BBA designated banks as being, in the view of such
banks, the offered rate at which deposits are being quoted to prime banks in the
London interbank market. Such Interest Settlement Rates are calculated by
eliminating the four highest rates and the four lowest rates, averaging the
eight remaining rates, carrying the result (expressed as a percentage) out to
six decimal places, and rounding to five decimal places. "Telerate Page 3750"
means the display page currently so designated on the Bridge Telerate Service
(formerly Telerate Service) (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices.)
If on the initial LIBOR Determination Date, the Trustee is required but
unable to determine LIBOR in the manner provided in the described above, LIBOR
for the next Interest Accrual Period will be ______%.
(b) If LIBOR cannot be determined as provided in paragraph (A) of this
Section 4.8, the Trustee shall either (i) request each Reference Bank to inform
the Trustee of the quotation offered by its principal London office 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 such Interest Determination Date or
(ii) in lieu of making any such request, rely on such Reference Bank quotations
that appear at such time on the Reuters Screen LIBO Page (as defined in the
International Swap Dealers Association Inc. Code of Standard Wording,
Assumptions and Provisions for Swaps, 1986 Edition), to the extent available.
LIBOR for the next Interest Accrual Period will be established by the Trustee on
each interest Determination Date as follows:
(c) If on any interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period
shall be the arithmetic mean of such
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offered quotations (rounding such arithmetic mean upwards if necessary to the
nearest whole multiple of 1/32%).
(d) If on any Interest Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next Interest
Accrual Period shall be whichever is the higher of (i) LIBOR as determined on
the previous Interest Determination Date or (ii) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum which the Trustee determines
to be either (i) 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 Trustee are quoting, on the
relevant Interest Determination Date, to the principal London offices of at
least two of the Reference Banks to which such quotations are, in the opinion of
the Trustee, being so made, or (ii) in the event that the Trustee can determine
no such arithmetic mean, the lowest one-month United States dollar lending rate
which New York City banks selected by the Trustee are quoting on such Interest
Determination Date to leading European banks.
(e) If on any interest Determination Date the trustee is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR shall be LIBOR as determined on the preceding
Interest Determination Date, or, in the case of the first Interest Determination
Date, _____%.
Until all of the LIBOR Certificates are paid in full, the Trustee will at
all times retain at least four Reference Banks for the purpose of determining
LIBOR with respect to each Interest Determination Date. The Master Servicer
initially shall designate the Reference Banks. 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 Trustee and shall have an established place of business in
London. If any such Reference Bank should be unwilling or unable to act as such
or if the Master Servicer should terminate its appointment as Reference Bank,
the Trustee shall promptly appoint or cause to be appointed another Reference
Bank. The Trustee shall have no liability or responsibility to any Person for
(i) the selection of any Reference Bank for purposes of determining LIBOR or
(ii) any inability to retain at least four Reference Banks which is caused by
circumstances beyond its reasonable control.
(f) The Pass-Through Rate for each Class of LIBOR Certificates for each
Interest Accrual Period shall be determined by the Trustee on each Interest
Determination Date so long as the LIBOR Certificates are outstanding on the
basis of LIBOR and the respective formulae appearing in footnotes corresponding
to the LIBOR Certificates in the table relating to the Certificates in the
Preliminary Statement.
In determining LIBOR, any Pass-Through Rate for the LIBOR Certificates, any
Interest Settlement Rate, or any Reserve Interest Rate, the Trustee may
conclusively rely and shall be protected in relying upon the offered quotations
(whether written, oral or on the Dow Jones Markets) from the BBA designated
banks, the Reference Banks or the New York City banks as to LIBOR, the Interest
Settlement Rate or the Reserve Interest Rate, as appropriate, in effect from
time to time. The Trustee shall not have any liability or responsibility to any
Person for (i) the Trustee's selection of New York City banks for purposes of
determining any Reserve Interest Rate or (ii) its inability, following a good-
faith reasonable effort, to obtain such quotations from, the BBA designated
banks, the Reference Banks or the New York City banks or to determine such
arithmetic mean, all as provided for in this Section 4.8.
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The establishment of LIBOR and each Pass-Through Rate for the LIBOR
Certificates by the Trustee shall (in the absence of manifest error) be final,
conclusive and binding upon each Holder of a Certificate and the Trustee.
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ARTICLE V
THE CERTIFICATES
SECTION 5.1 The Certificates.
The Certificates shall be substantially in the forms attached hereto as
exhibits. The Certificates shall be issuable in registered form, in the minimum
denominations, integral multiples in excess thereof (except that one Certificate
in each Class may be issued in a different amount which must be in excess of the
applicable minimum denomination) and aggregate denominations per Class set forth
in the Preliminary Statement.
Subject to Section 9.2 hereof respecting the final distribution on the
Certificates, on each Distribution Date the Trustee shall make distributions to
each Certificateholder of record on the preceding Record Date either (x) by wire
transfer in immediately available funds to the account of such holder at a bank
or other entity having appropriate facilities therefor, if (i) such Holder has
so notified the Trustee at least five Business Days prior to the related Record
Date and (ii) such Holder shall hold (A) a Notional Amount Certificate, (B) 100%
of the Class Certificate Balance of any Class of Certificates or (C)
Certificates of any Class with aggregate principal Denominations of not less
than $1,000,000 or (y) by check mailed by first class mail to such
Certificateholder at the address of such holder appearing in the Certificate
Register.
The Certificates shall be executed by manual or facsimile signature on
behalf of the Trustee by an authorized officer. Certificates bearing the manual
or facsimile signatures of individuals who were, at the time when such
signatures were affixed, authorized to sign on behalf of the Trustee shall bind
the Trustee, notwithstanding that such individuals or any of them have ceased to
be so authorized prior to the countersignature and delivery of such Certificates
or did not hold such offices at the date of such Certificate. No Certificate
shall be entitled to any benefit under this Agreement, or be valid for any
purpose, unless countersigned by the Trustee by manual signature, and such
countersignature upon any Certificate shall be conclusive evidence, and the only
evidence, that such Certificate has been duly executed and delivered hereunder.
All Certificates shall be dated the date of their countersignature. On the
Closing Date, the Trustee shall countersign the Certificates to be issued at the
direction of the Depositor, or any affiliate thereof.
The Depositor shall provide, or cause to be provided, to the Trustee on a
continuous basis, an adequate inventory of Certificates to facilitate transfers.
SECTION 5.2 Certificate Register; Registration of Transfer and Exchange of
Certificates.
(a) The Trustee shall maintain, or cause to be maintained in accordance
with the provisions of Section 5.6 hereof, a Certificate Register for the Trust
Fund in which, subject to the provisions of subsections (b) and (c) below and to
such reasonable regulations as it may prescribe, the Trustee shall provide for
the registration of Certificates and of transfers and exchanges of Certificates
as herein provided. Upon surrender for registration of transfer of any
Certificate, the Trustee shall execute and deliver, in the name of the
designated transferee or transferees, one or more new Certificates of the same
Class and aggregate Percentage Interest.
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At the option of a Certificateholder, Certificates may be exchanged for
other Certificates of the same Class in authorized denominations and evidencing
the same aggregate Percentage Interest upon surrender of the Certificates to be
exchanged at the office or agency of the Trustee. Whenever any Certificates are
so surrendered for exchange, the Trustee shall execute, authenticate, and
deliver the Certificates which the Certificateholder making the exchange is
entitled to receive. Every Certificate presented or surrendered for registration
of transfer or exchange shall be accompanied by a written instrument of transfer
in form satisfactory to the Trustee duly executed by the holder thereof or his
attorney duly authorized in writing.
No service charge to the Certificateholders shall be made for any
registration of transfer or exchange of Certificates, but payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Certificates may be required.
All Certificates surrendered for registration of transfer or exchange shall
be cancelled and subsequently destroyed by the Trustee in accordance with the
Trustee's customary procedures.
(b) No transfer of a Private Certificate shall be made unless such
transfer is made pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws or is exempt from the
registration requirements under said Act and such state securities laws. In the
event that a transfer is to be made in reliance upon an exemption from the
Securities Act and such laws, in order to assure compliance with the Securities
Act and such laws, the Certificateholder desiring to effect such transfer and
such Certificateholder's prospective transferee shall each certify to the
Trustee in writing the facts surrounding the transfer in substantially the forms
set forth in Exhibit J (the "Transferor Certificate") and (i) deliver a letter
in substantially the form of either Exhibit K (the "Investment Letter") or
Exhibit L (the "Rule 144A Letter") or (ii) there shall be delivered to the
Trustee at the expense of the transferor an Opinion of Counsel that such
transfer may be made pursuant to an exemption from the Securities Act. The
Depositor shall provide to any Holder of a Private Certificate and any
prospective transferee designated by any such Holder, information regarding the
related Certificates and the Mortgage Loans and such other information as shall
be necessary to satisfy the condition to eligibility set forth in Rule
144A(d)(4) for transfer of any such Certificate without registration thereof
under the Securities Act pursuant to the registration exemption provided by Rule
144A. The Trustee and the Master Servicer shall cooperate with the Depositor in
providing the Rule 144A information referenced in the preceding sentence,
including providing to the Depositor such information regarding the
Certificates, the Mortgage Loans and other matters regarding the Trust Fund as
the Depositor shall reasonably request to meet its obligation under the
preceding sentence. Each Holder of a Private Certificate desiring to effect such
transfer shall, and does hereby agree to, indemnify the Trustee and the
Depositor, the Seller and the Master Servicer against any liability that may
result if the transfer is not so exempt or is not made in accordance with such
federal and state laws.
No transfer of an ERISA-Restricted Certificate shall be made unless the
Trustee shall have received either (i) a representation from the transferee of
such Certificate acceptable to and in form and substance satisfactory to the
Trustee (in the event such Certificate is a Private Certificate, such
requirement is satisfied only by the Trustee's receipt of a representation
letter from the transferee substantially in the form of Exhibit K or Exhibit L),
to the effect that such transferee is not an employee benefit plan or
arrangement 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 such plan or
arrangement, nor using the assets of any such plan or arrangement to effect such
transfer, (ii) in the case of a
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Subordinated Certificate or a Residual Certificate, if the purchaser is an
insurance company, a representation that the purchaser is an insurance company
which is purchasing such Certificates with funds contained in an "insurance
company general account" (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and
holding of such Certificates are covered under PTCE 95-60 or (iii) in the case
of any such ERISA-Restricted Certificate presented for registration in the name
of an employee benefit plan subject to ERISA, or a plan or arrangement subject
to Section 4975 of the Code (or comparable provisions of any subsequent
enactments), or a trustee of any such plan or any other person acting on behalf
of any such plan or arrangement, or using such plan's or arrangement's assets,
an Opinion of Counsel satisfactory to the Trustee, which Opinion of Counsel
shall not be an expense of either the Trustee or the Trust Fund, addressed to
the Trustee to the effect that the purchase or holding of such ERISA-Restricted
Certificate will not result in the assets of the Trust Fund being deemed to be
"plan assets" and subject to the prohibited transaction provisions of ERISA and
the Code and will not subject the Trustee to any obligation in addition to those
expressly undertaken in this Agreement or to any liability. For purposes of the
preceding sentence, with respect to an ERISA-Restricted Certificate that is not
a Private Certificate, in the event the representation letter referred to in the
preceding sentence is not so furnished, such representation shall be deemed to
have been made to the Trustee by the transferee's (including an initial
acquiror's) acceptance of the ERISA-Restricted Certificates. Notwithstanding
anything else to the contrary herein, any purported transfer of an ERISA-
Restricted Certificate to or on behalf of an employee benefit plan subject to
ERISA or to the Code without the delivery to the Trustee of an Opinion of
Counsel satisfactory to the Trustee as described above shall be void and of no
effect.
To the extent permitted under applicable law (including, but not limited
to, ERISA), the Trustee shall be under no liability to any Person for any
registration of transfer of any ERISA-Restricted Certificate that is in fact not
permitted by this Section 5.2(b) or for making any payments due on such
Certificate to the Holder thereof or taking any other action with respect to
such Holder under the provisions of this Agreement so long as the transfer was
registered by the Trustee in accordance with the foregoing requirements.
(c) Each Person who has or who acquires any Ownership Interest in a
Residual Certificate shall be deemed by the acceptance or acquisition of such
Ownership Interest to have agreed to be bound by the following provisions, and
the rights of each Person acquiring any Ownership Interest in a Residual
Certificate are expressly subject to the following provisions:
(i) Each Person holding or acquiring any Ownership Interest in a
Residual Certificate shall be a Permitted Transferee and shall promptly
notify the Trustee of any change or impending change in its status as a
Permitted Transferee.
(ii) No Ownership Interest in a Residual Certificate may be
registered on the Closing Date or thereafter transferred, and the Trustee
shall not register the Transfer of any Residual Certificate unless, in
addition to the certificates required to be delivered to the Trustee under
subparagraph (b) above, the Trustee shall have been furnished with an
affidavit (a "Transfer Affidavit") of the initial owner or the proposed
transferee in the form attached hereto as Exhibit I.
(iii) Each Person holding or acquiring any Ownership Interest in a
Residual Certificate shall agree (A) to obtain a Transfer Affidavit from
any other Person to whom such
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Person attempts to Transfer its Ownership Interest in a Residual
Certificate, (B) to obtain a Transfer Affidavit from any Person for whom
such Person is acting as nominee, trustee or agent in connection with any
Transfer of a Residual Certificate and (C) not to Transfer its Ownership
Interest in a Residual Certificate or to cause the Transfer of an Ownership
Interest in a Residual Certificate to any other Person if it has actual
knowledge that such Person is not a Permitted Transferee.
(iv) Any attempted or purported Transfer of any Ownership Interest in
a Residual Certificate in violation of the provisions of this Section
5.2(c) shall be absolutely null and void and shall vest no rights in the
purported Transferee. If any purported transferee shall become a Holder of
a Residual Certificate in violation of the provisions of this Section
5.2(c), then the last preceding Permitted Transferee shall be restored to
all rights as Holder thereof retroactive to the date of registration of
Transfer of such Residual Certificate. The Trustee shall be under no
liability to any Person for any registration of Transfer of a Residual
Certificate that is in fact not permitted by Section 5.2(b) and this
Section 5.2(c) or for making any payments due on such Certificate to the
Holder thereof or taking any other action with respect to such Holder under
the provisions of this Agreement so long as the Transfer was registered
after receipt of the related Transfer Affidavit, Transferor Certificate and
either the Rule 144A Letter or the Investment Letter. The Trustee shall be
entitled but not obligated to recover from any Holder of a Residual
Certificate that was in fact not a Permitted Transferee at the time it
became a Holder or, at such subsequent time as it became other than a
Permitted Transferee, all payments made on such Residual Certificate at and
after either such time. Any such payments so recovered by the Trustee shall
be paid and delivered by the Trustee to the last preceding Permitted
Transferee of such Certificate.
(v) The Depositor shall use its best efforts to make available, upon
receipt of written request from the Trustee, all information necessary to
compute any tax imposed under Section 860E(e) of the Code as a result of a
Transfer of an Ownership Interest in a Residual Certificate to any Holder
who is not a Permitted Transferee.
The restrictions on Transfers of a Residual Certificate set forth in this
Section 5.2(c) shall cease to apply (and the applicable portions of the legend
on a Residual Certificate may be deleted) with respect to Transfers occurring
after delivery to the Trustee of an Opinion of Counsel, which Opinion of Counsel
shall not be an expense of the Trust Fund, the Trustee, the Seller or the Master
Servicer, to the effect that the elimination of such restrictions will not cause
any REMIC hereunder to fail to qualify as a REMIC at any time that the
Certificates are outstanding or result in the imposition of any tax on the Trust
Fund, a Certificateholder or another Person. Each Person holding or acquiring
any Ownership Interest in a Residual Certificate hereby consents to any
amendment of this Agreement which, based on an Opinion of Counsel furnished to
the Trustee, is reasonably necessary (a) to ensure that the record ownership of,
or any beneficial interest in, a Residual Certificate is not transferred,
directly or indirectly, to a Person that is not a Permitted Transferee and (b)
to provide for a means to compel the Transfer of a Residual Certificate which is
held by a Person that is not a Permitted Transferee to a Holder that is a
Permitted Transferee.
(d) The preparation and delivery of all certificates and opinions referred
to above in this Section 5.2 in connection with transfer shall be at the expense
of the parties to such transfers.
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(e) Except as provided below, the Book-Entry Certificates shall at all
times remain registered in the name of the Depository or its nominee and at all
times: (i) registration of the Certificates may not be transferred by the
Trustee except to another Depository; (ii) the Depository shall maintain book-
entry records with respect to the Certificate Owners and with respect to
ownership and transfers of such Book-Entry Certificates; (iii) ownership and
transfers of registration of the Book-Entry Certificates on the books of the
Depository shall be governed by applicable rules established by the Depository;
(iv) the Depository may collect its usual and customary fees, charges and
expenses from its Depository Participants; (v) the Trustee shall deal with the
Depository, Depository Participants and indirect participating firms as
representatives of the Certificate Owners of the Book-Entry Certificates for
purposes of exercising the rights of holders under this Agreement, and requests
and directions for and votes of such representatives shall not be deemed to be
inconsistent if they are made with respect to different Certificate Owners; and
(vi) the Trustee may rely and shall be fully protected in relying upon
information furnished by the Depository with respect to its Depository
Participants and furnished by the Depository Participants with respect to
indirect participating firms and persons shown on the books of such indirect
participating firms as direct or indirect Certificate Owners.
All transfers by Certificate Owners of Book-Entry Certificates shall be
made in accordance with the procedures established by the Depository Participant
or brokerage firm representing such Certificate Owner. Each Depository
Participant shall only transfer Book-Entry Certificates of Certificate Owners it
represents or of brokerage firms for which it acts as agent in accordance with
the Depository's normal procedures.
If (x) (i) the Depository or the Depositor advises the Trustee in writing
that the Depository is no longer willing or able to properly discharge its
responsibilities as Depository, and (ii) the Trustee or the Depositor is unable
to locate a qualified successor, (y) the Depositor at its option advises the
Trustee in writing that it elects to terminate the book-entry system through the
Depository or (z) after the occurrence of an Event of Default, Certificate
Owners representing at least 51% of the Certificate Balance of the Book-Entry
Certificates together advise the Trustee and the Depository through the
Depository Participants in writing that the continuation of a book-entry system
through the Depository is no longer in the best interests of the Certificate
Owners, the Trustee shall notify all Certificate Owners, through the Depository,
of the occurrence of any such event and of the availability of definitive,
fully-registered Certificates (the "Definitive Certificates") to Certificate
Owners requesting the same. Upon surrender to the Trustee of the related Class
of Certificates by the Depository, accompanied by the instructions from the
Depository for registration, the Trustee shall issue the Definitive
Certificates. Neither the Master Servicer, the Depositor nor the Trustee shall
be liable for any delay in delivery of such instruction and each may
conclusively rely on, and shall be protected in relying on, such instructions.
The Master Servicer shall provide the Trustee with an adequate inventory of
certificates to facilitate the issuance and transfer of Definitive Certificates.
Upon the issuance of Definitive Certificates all references herein to
obligations imposed upon or to be performed by the Depository shall be deemed to
be imposed upon and performed by the Trustee, to the extent applicable with
respect to such Definitive Certificates and the Trustee shall recognize the
Holders of the Definitive Certificates as Certificateholders hereunder; provided
that the Trustee shall not by virtue of its assumption of such obligations
become liable to any party for any act or failure to act of the Depository.
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SECTION 5.3 Mutilated, Destroyed, Lost or Stolen Certificates.
If (a) any mutilated Certificate is surrendered to the Trustee, or the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Certificate and (b) there is delivered to the Master Servicer and the
Trustee such security or indemnity as may be required by them to save each of
them harmless, then, in the absence of notice to the Trustee that such
Certificate has been acquired by a bona fide purchaser, the Trustee shall
execute, countersign and deliver, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Certificate, a new Certificate of like
Class, tenor and Percentage Interest. In connection with the issuance of any new
Certificate under this Section 5.3, the Trustee may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and any other expenses (including the fees and expenses of the
Trustee) connected therewith. Any replacement Certificate issued pursuant to
this Section 5.03 shall constitute complete and indefeasible evidence of
ownership, as if originally issued, whether or not the lost, stolen or destroyed
Certificate shall be found at any time.
SECTION 5.4 Persons Deemed Owners.
The Master Servicer, the Trustee and any agent of the Master Servicer or
the Trustee may treat the Person in whose name any Certificate is registered as
the owner of such Certificate for the purpose of receiving distributions as
provided in this Agreement and for all other purposes whatsoever, and neither
the Master Servicer, the Trustee nor any agent of the Master Servicer or the
Trustee shall be affected by any notice to the contrary.
SECTION 5.5 Access to List of Certificateholders' Names and Addresses.
If three or more Certificateholders (a) request such information in writing
from the Trustee, (b) state that such Certificateholders desire to communicate
with other Certificateholders with respect to their rights under this Agreement
or under the Certificates, and (c) provide a copy of the communication which
such Certificateholders propose to transmit, or if the Depositor or Master
Servicer shall request such information in writing from the Trustee, then the
Trustee shall, within ten Business Days after the receipt of such request,
provide the Depositor, the Master Servicer or such Certificateholders at such
recipients' expense the most recent list of the Certificateholders of such Trust
Fund held by the Trustee, if any. The Depositor and every Certificateholder, by
receiving and holding a Certificate, agree that the Trustee shall not be held
accountable by reason of the disclosure of any such information as to the list
of the Certificateholders hereunder, regardless of the source from which such
information was derived.
SECTION 5.6 Maintenance of Office or Agency.
The Trustee will maintain or cause to be maintained at its expense an
office or offices or agency or agencies in New York City where Certificates may
be surrendered for registration of transfer or exchange. The Trustee initially
designates its Corporate Trust Office for such purposes. The Trustee will give
prompt written notice to the Certificateholders of any change in such location
of any such office or agency.
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ARTICLE VI
THE DEPOSITOR AND THE MASTER SERVICER
SECTION 6.1 Respective Liabilities of the Depositor and the Master
Servicer.
The Depositor and the Master Servicer shall each be liable in accordance
herewith only to the extent of the obligations specifically and respectively
imposed upon and undertaken by them herein.
SECTION 6.2 Merger or Consolidation of the Depositor or the Master
Servicer.
The Depositor and the Master Servicer will each keep in full effect its
existence, rights and franchises as a corporation under the laws of the United
States or under the laws of one of the states thereof and will each obtain and
preserve its qualification to do business as a foreign corporation in each
jurisdiction in which such qualification is or shall be necessary to protect the
validity and enforceability of this Agreement, or any of the Mortgage Loans and
to perform its respective duties under this Agreement.
Any Person into which the Depositor or the Master Servicer may be merged or
consolidated, or any Person resulting from any merger or consolidation to which
the Depositor or the Master Servicer shall be a party, or any person succeeding
to the business of the Depositor or the Master Servicer, shall be the successor
of the Depositor or the Master Servicer, as the case may be, hereunder, without
the execution or filing of any paper or any further act on the part of any of
the parties hereto, anything herein to the contrary notwithstanding; provided,
however, that the successor or surviving Person to the Master Servicer shall be
qualified to sell mortgage loans to, and to service mortgage loans on behalf of,
FNMA or FHLMC.
SECTION 6.3 Limitation on Liability of the Depositor, the Seller, the
Master Servicer and Others.
None of the Depositor, the Seller, the Master Servicer or any of the
directors, officers, employees or agents of the Depositor, the Seller or the
Master Servicer shall be under any liability to the Certificateholders for any
action taken or for refraining from the taking of any action in good faith
pursuant to this Agreement, or for errors in judgment; provided, however, that
this provision shall not protect the Depositor, the Seller, the Master Servicer
or any such Person against any breach of representations or warranties made by
it herein or protect the Depositor, the Seller, the Master Servicer or any such
Person from any liability which would otherwise be imposed by reasons of willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties hereunder. The Depositor,
the Seller, the Master Servicer and any director, officer, employee or agent of
the Depositor, the Seller or the Master Servicer may rely in good faith on any
document of any kind prima facie properly executed and submitted by any Person
respecting any matters arising hereunder. The Depositor, the Seller, the Master
Servicer and any director, officer, employee or agent of the Depositor, the
Seller or the Master Servicer shall be indemnified by the Trust Fund and held
harmless against any loss, liability or expense incurred in connection with any
audit, controversy or judicial proceeding relating to a governmental taxing
authority or any legal action relating to this Agreement or the Certificates,
other than any loss, liability or expense related to any specific Mortgage Loan
or Mortgage Loans (except as any such
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loss, liability or expense shall be otherwise reimbursable pursuant to this
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
hereunder or by reason of reckless disregard of obligations and duties
hereunder. None of the Depositor, the Seller or the Master Servicer shall be
under any obligation to appear in, prosecute or defend any legal action that is
not incidental to its respective duties hereunder and which in its opinion may
involve it in any expense or liability; provided, however, that any of the
Depositor, the Seller or the Master Servicer may in its discretion undertake any
such action that it may deem necessary or desirable in respect of this Agreement
and the rights and duties of the parties hereto and interests of the Trustee and
the Certificateholders hereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom shall be expenses, costs and
liabilities of the Trust Fund, and the Depositor, the Seller and the Master
Servicer shall be entitled to be reimbursed therefor out of the Certificate
Account.
SECTION 6.4 Limitation on Resignation of Master Servicer.
The Master Servicer shall not resign from the obligations and duties hereby
imposed on it except (a) upon appointment of a successor servicer and receipt by
the Trustee of a letter from each Rating Agency that such a resignation and
appointment will not result in a downgrading of the rating of any of the
Certificates, or (b) upon determination that its duties hereunder are no longer
permissible under applicable law. Any such determination under clause (b)
permitting the resignation of the Master Servicer shall be evidenced by an
Opinion of Counsel to such effect delivered to the Trustee. No such resignation
shall become effective until the Trustee or a successor master servicer shall
have assumed the Master Servicer's responsibilities, duties, liabilities and
obligations hereunder.
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ARTICLE VII
DEFAULT
SECTION 7.1 Events of Default.
"Event of Default," wherever used herein, means any one of the following
events:
(i) any failure by the Master Servicer to deposit in the Certificate
Account or remit to the Trustee any payment required to be made under the
terms of this Agreement, which failure shall continue unremedied for five
days after the date upon which written notice of such failure shall have
been given 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; or
(ii) any failure by the Master Servicer to observe or perform in any
material respect any other of the covenants or agreements on the part of
the Master Servicer contained in this Agreement, which failure materially
affects the rights of Certificateholders, that failure continues unremedied
for a period of 60 days after the date on which written notice of such
failure shall have been given to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer and the Trustee by the Holders of
Certificates evidencing not less than 25% of the Voting Rights evidenced by
the Certificates; provided, however, that the sixty-day cure period shall
not apply to the initial delivery of the Mortgage File for Delay Delivery
Mortgage Loans nor the failure to substitute or repurchase in lieu thereof;
or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction in the premises for the appointment of a receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Master
Servicer and such decree or order shall have remained in force undischarged
or unstayed for a period of 60 consecutive days; or
(iv) the Master Servicer shall consent to the appointment of a
receiver or liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating to the
Master Servicer or all or substantially all of the property of the Master
Servicer; or
(v) the Master Servicer shall admit in writing its inability to pay
its debts generally as they become due, file a petition to take advantage
of, or commence a voluntary case under, any applicable insolvency or
reorganization statute, make an assignment for the benefit of its
creditors, or voluntarily suspend payment of its obligations.
If an Event of Default described in clauses (i) to (v) of this Section
shall occur, then, and in each and every such case, so long as such Event of
Default shall not have been remedied, the Trustee may, or at the direction of
the Holders of Certificates evidencing not less than 66 2/3% of the Voting
Rights evidenced by the Certificates, the Trustee shall by notice in writing to
the Master Servicer (with a copy to each Rating Agency), terminate all of the
rights and obligations of the Master Servicer under this Agreement and in and to
the Mortgage Loans and the proceeds thereof, other than
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its rights as a Certificateholder hereunder. On and after the receipt by the
Master Servicer of such written notice, all authority and power of the Master
Servicer hereunder, whether with respect to the Mortgage Loans or otherwise,
shall pass to and be vested in the Trustee. The Trustee shall thereupon make any
Advance which the Master Servicer failed to make subject to Section 4.1 hereof,
whether or not the obligations of the Master Service have been terminated
pursuant to this Section. The Trustee is hereby authorized and empowered to
execute and deliver, on behalf of the Master Servicer, as attorney-in-fact or
otherwise, any and all documents and other instruments, and to do or accomplish
all other acts or things necessary or appropriate to effect the purposes of such
notice of termination, whether to complete the transfer and endorsement or
assignment of the Mortgage Loans and related documents, or otherwise. Unless
expressly provided in such written notice, no such termination shall affect any
obligation of the Master Servicer to pay amounts owed pursuant to Article VIII.
The Master Servicer agrees to cooperate with the Trustee in effecting the
termination of the Master Servicer's responsibilities and rights hereunder,
including, without limitation, the transfer to the Trustee of all cash amounts
which shall at the time be credited to the Certificate Account, or thereafter be
received with respect to the Mortgage Loans.
Notwithstanding any termination of the activities of the Master Servicer
hereunder, the Master Servicer shall be entitled to receive, out of any late
collection of a Scheduled Payment on a Mortgage Loan which was due prior to the
notice terminating such Master Servicer's rights and obligations as Master
Servicer hereunder and received after such notice, that portion thereof to which
such Master Servicer would have been entitled pursuant to Sections 3.8(a)(i)
through (viii),and any other amounts payable to such Master Servicer hereunder
the entitlement to which arose prior to the termination of its activities
hereunder.
SECTION 7.2 Trustee to Act; Appointment of Successor.
On and after the time the Master Servicer receives a notice of termination
pursuant to Section 7.1 hereof, the Trustee shall, subject to and to the extent
provided in Section 3.4, be the successor to the Master Servicer in its capacity
as master servicer under this Agreement and the transactions set forth or
provided for herein and shall be subject to all the responsibilities, duties and
liabilities relating thereto placed on the Master Servicer by the terms and
provisions hereof and applicable law including the obligation to make Advances
pursuant to Section 4.1. As compensation therefor, the Trustee shall be entitled
to all funds relating to the Mortgage Loans that the Master Servicer would have
been entitled to charge to the Certificate Account or Distribution Account if
the Master Servicer had continued to act hereunder. Notwithstanding the
foregoing, if the Trustee has become the successor to the Master Servicer in
accordance with Section 7.1 hereof, the Trustee may, if it shall be unwilling to
so act, or shall, if it is prohibited by applicable law from making Advances
pursuant to Section 4.1 hereof or if it is otherwise unable to so act, appoint,
or petition a court of competent jurisdiction to appoint, any established
mortgage loan servicing institution the appointment of which does not adversely
affect the then current rating of the Certificates by each Rating Agency as the
successor to the Master Servicer hereunder in the assumption of all or any part
of the responsibilities, duties or liabilities of the Master Servicer hereunder.
Any successor to the Master Servicer shall be an institution which is a FNMA and
FHLMC approved seller/servicer in good standing, which has a net worth of at
least $10,000,000, and which is willing to service the Mortgage Loans and
executes and delivers to the Depositor and the Trustee an agreement accepting
such delegation and assignment, which contains an assumption by such Person of
the rights, powers, duties, responsibilities, obligations and liabilities of the
Master Servicer (other than liabilities of the Master Servicer under Section 6.3
hereof incurred prior to termination of the Master Servicer under Section
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7.1), with like effect as if originally named as a party to this Agreement; and
provided further that each Rating Agency acknowledges that its rating of the
Certificates in effect immediately prior to such assignment and delegation will
not be qualified or reduced, as a result of such assignment and delegation.
Pending appointment of a successor to the Master Servicer hereunder, the
Trustee, unless the Trustee is prohibited by law from so acting, shall, subject
to Section 3.4 hereof, act in such capacity as hereinabove provided. In
connection with such appointment and assumption, the Trustee may make such
arrangements for the compensation of such successor out of payments on Mortgage
Loans as it and such successor shall agree; provided, however, that no such
compensation shall be in excess of the Master Servicing Fee permitted the Master
Servicer hereunder. The Trustee and such successor shall take such action,
consistent with this Agreement, as shall be necessary to effectuate any such
succession. Neither the Trustee nor any other successor master servicer shall be
deemed to be in default hereunder by reason of any failure to make, or any delay
in making, any distribution hereunder or any portion thereof or any failure to
perform, or any delay in performing, any duties or responsibilities hereunder,
in either case caused by the failure of the Master Servicer to deliver or
provide, or any delay in delivering or providing, any cash, information,
documents or records to it.
Any successor to the Master Servicer as master servicer shall give notice
to the Mortgagors of such change of servicer and shall, during the term of its
service as master servicer maintain in force the policy or policies that the
Master Servicer is required to maintain pursuant to Section 6.5.
SECTION 7.3 Notification to Certificateholders.
(a) Upon any termination of or appointment of a successor to the Master
Servicer, the Trustee shall give prompt written notice thereof to
Certificateholders, to each Rating Agency.
(b) Within 60 days after the occurrence of any Event of Default, the
Trustee shall transmit by mail to all Certificateholders notice of each such
Event of Default hereunder known to the Trustee, unless such Event of Default
shall have been cured or waived.
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ARTICLE VII
CONCERNING THE TRUSTEE
SECTION 8.1 Duties of Trustee.
The Trustee, prior to the occurrence of an Event of Default and after the
curing of all Events of Default that may have occurred, shall undertake to
perform such duties and only such duties as are specifically set forth in this
Agreement. In case an Event of Default has occurred and remains uncured, the
Trustee shall exercise such of the rights and powers vested in it by this
Agreement, and use the same degree of care and skill in their exercise as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
The Trustee, upon receipt of all resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments furnished to the
Trustee that are specifically required to be furnished pursuant to any provision
of this Agreement shall examine them to determine whether they are in the form
required by this Agreement; provided, however, that the Trustee shall not be
responsible for the accuracy or content of any such resolution, certificate,
statement, opinion, report, document, order or other instrument.
No provision of this Agreement shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act or
its own willful misconduct; provided, however, that:
(i) unless an Event of Default known to the Trustee shall have
occurred and be continuing, the duties and obligations of the Trustee shall
be determined solely by the express provisions of this Agreement, the
Trustee shall not be liable except for the performance of such duties and
obligations as are specifically set forth in this Agreement, no implied
covenants or obligations shall be read into this Agreement against the
Trustee and the Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon any
certificates or opinions furnished to the Trustee and conforming to the
requirements of this Agreement which it believed in good faith to be
genuine and to have been duly executed by the proper authorities respecting
any matters arising hereunder;
(ii) the Trustee shall not be liable for an error of judgment made in
good faith by a Responsible Officer or Responsible Officers of the Trustee,
unless it shall be finally proven that the Trustee was negligent in
ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action
taken, suffered or omitted to be taken by it in good faith in accordance
with the direction of Holders of Certificates evidencing not less than 25%
of the Voting Rights of Certificates relating to the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee under this
Agreement.
SECTION 8.2 Certain Matters Affecting the Trustee.
Except as otherwise provided in Section 8.1:
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(i) the Trustee may request and rely upon and shall be protected in
acting or refraining from acting upon any resolution, Officers'
Certificate, certificate of auditors or any other certificate, statement,
instrument, opinion, report, notice, request, consent, order, appraisal,
bond or other paper or document believed by it to be genuine and to have
been signed or presented by the proper party or parties and the Trustee
shall have no responsibility to ascertain or confirm the genuineness of any
signature of any such party or parties;
(ii) the Trustee may consult with counsel, financial advisers or
accountants and the advice of any such counsel, financial advisers or
accountants and any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken or suffered or
omitted by it hereunder in good faith and in accordance with such Opinion
of Counsel;
(iii) the Trustee shall not be liable for any action taken, suffered
or omitted by it in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this
Agreement;
(iv) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval,
bond or other paper or document, unless requested in writing so to do by
Holders of Certificates evidencing not less than 25% of the Voting Rights
allocated to each Class of Certificates;
(v) the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents,
accountants or attorneys;
(vi) the Trustee shall not be required to risk or expend its own
funds or otherwise incur any financial liability in the performance of any
of its duties or in the exercise of any of its rights or powers hereunder
if it shall have reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not assured
to it;
(vii) the Trustee shall not be liable for any loss on any investment
of funds pursuant to this Agreement (other than as issuer of the investment
security);
(viii) the Trustee shall not be deemed to have knowledge of an Event
of Default until a Responsible Officer of the Trustee shall have received
written notice thereof; and
(ix) the Trustee shall be under no obligation to exercise any of the
trusts, rights or powers vested in it by this Agreement or to institute,
conduct or defend any litigation hereunder or in relation hereto at the
request, order or direction of any of the Certificateholders, pursuant to
the provisions of this Agreement, unless such Certificateholders shall have
offered to the Trustee reasonable security or indemnity satisfactory to the
Trustee against the costs, expenses and liabilities which may be incurred
therein or thereby.
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SECTION 8.3 Trustee Not Liable for Certificates or Mortgage Loans.
The recitals contained herein and in the Certificates shall be taken as the
statements of the Depositor or the Seller, as the case may be, and the Trustee
assumes no responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Agreement or of the
Certificates or of any Mortgage Loan or related document other than with respect
to the Trustee's execution and counter-signature of the Certificates. The
Trustee shall not be accountable for the use or application by the Depositor or
the Master Servicer of any funds paid to the Depositor or the Master Servicer in
respect of the Mortgage Loans or deposited in or withdrawn from the Certificate
Account by the Depositor or the Master Servicer.
SECTION 8.4 Trustee May Own Certificates.
The Trustee in its individual or any other capacity may become the owner or
pledgee of Certificates with the same rights as it would have if it were not the
Trustee.
SECTION 8.5 Trustee's Fees and Expenses.
The Trustee, as compensation for its activities hereunder, shall be
entitled to withdraw from the Distribution Account on each Distribution Date an
amount equal to the Trustee Fee for such Distribution Date. The Trustee and any
director, officer, employee or agent of the Trustee shall be indemnified by the
Master Servicer and held harmless against any loss, liability or expense
(including reasonable attorney's fees) (i) incurred in connection with any claim
or legal action relating to (a) this Agreement, (b) the Certificates or (c) in
connection with the performance of any of the Trustee's duties hereunder, other
than any loss, liability or expense incurred by reason of willful misfeasance,
bad faith or negligence in the performance of any of the Trustee's duties
hereunder or incurred by reason of any action of the Trustee taken at the
direction of the Certificateholders and (ii) resulting from any error in any tax
or information return prepared by the Master Servicer. Such indemnity shall
survive the termination of this Agreement or the resignation or removal of the
Trustee hereunder. Without limiting the foregoing, the Master Servicer covenants
and agrees, except as otherwise agreed upon in writing by the Depositor and the
Trustee, and except for any such expense, disbursement or advance as may arise
from the Trustee's negligence, bad faith or willful misconduct, to pay or
reimburse the Trustee, for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any of the provisions of this
Agreement with respect to: (A) the reasonable compensation and the expenses and
disbursements of its counsel not associated with the closing of the issuance of
the Certificates, (B) the reasonable compensation, expenses and disbursements of
any accountant, engineer or appraiser that is not regularly employed by the
Trustee, to the extent that the Trustee must engage such persons to perform acts
or services hereunder and (C) printing and engraving expenses in connection with
preparing any Definitive Certificates. Except as otherwise provided herein, the
Trustee shall not be entitled to payment or reimbursement for any routine
ongoing expenses incurred by the Trustee in the ordinary course of its duties as
Trustee, Registrar, Tax Matters Person or Paying Agent hereunder or for any
other expenses.
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SECTION 8.6 Eligibility Requirements for Trustee.
The Trustee hereunder shall at all times be a corporation or association
organized and doing business under the laws of a state or the United States of
America, authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000, subject to super-vision or
examination by federal or state authority and with a credit rating which would
not cause either of the Rating Agencies to reduce their respective then current
ratings of the Certificates (or having provided such security from time to time
as is sufficient to avoid such reduction). If such corporation or association
publishes reports of condition at least annually, pursuant to law or to the
requirements of the aforesaid supervising or examining authority, then for the
purposes of this Section 8.6 the combined capital and surplus of such
corporation or association shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. In
case at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section 8.6, the Trustee shall resign immediately in the
manner and with the effect specified in Section 8.7 hereof. The entity serving
as Trustee may have normal banking and trust relationships with the Depositor
and its affiliates or the Master Servicer and its affiliates; provided, however,
that such entity cannot be an affiliate of the Master Servicer other than the
Trustee in its role as successor to the Master Servicer.
SECTION 8.7 Resignation and Removal of Trustee.
The Trustee may at any time resign and be discharged from the trusts hereby
created by giving written notice of resignation to the Depositor and the Master
Servicer and each Rating Agency not less than 60 days before the date specified
in such notice when, subject to Section 8.8, such resignation is to take effect,
and acceptance by a successor trustee in accordance with Section 8.8 meeting the
qualifications set forth in Section 8.6. If no successor trustee meeting such
qualifications shall have been so appointed and have accepted appointment within
30 days after the giving of such notice or resignation, the resigning Trustee
may petition any court of competent jurisdiction for the appointment of a
successor trustee.
If at any time the Trustee shall cease to be eligible in accordance with
the provisions of Section 8.6 hereof and shall fail to resign after written
request thereto by the Depositor, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged as bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation, or a tax
is imposed with respect to the Trust Fund by any state in which the Trustee or
the Trust Fund is located and the imposition of such tax would be avoided by the
appointment of a different trustee, then the Depositor or the Master Servicer
may remove the Trustee and appoint a successor trustee by written instrument, in
triplicate, one copy of which instrument shall be delivered to the Trustee, one
copy of which shall be delivered to the Master Servicer and one copy to the
successor trustee.
The Holders of Certificates entitled to at least 51% of the Voting Rights
may at any time remove the Trustee and appoint a successor trustee by written
instrument or instruments, in triplicate, signed by such Holders or their
attorneys-in-fact duly authorized, one complete set of which instruments shall
be delivered by the successor Trustee to the Master Servicer, one complete set
to
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the Trustee so removed and one complete set to the successor so appointed.
Notice of any removal of the Trustee shall be given to each Rating Agency by the
Successor Trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee pursuant to any of the provisions of this Section 8.7 shall become
effective upon acceptance of appointment by the successor trustee as provided in
Section 8.8 hereof.
SECTION 8.8 Successor Trustee.
Any successor trustee appointed as provided in Section 8.7 hereof shall
execute, acknowledge and deliver to the Depositor and to its predecessor trustee
and the Master Servicer an instrument accepting such appointment hereunder and
thereupon the resignation or removal of the predecessor trustee shall become
effective and such successor trustee, without any further act, deed or
conveyance, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with the like effect as if originally
named as trustee herein. The Depositor, the Master Servicer and the predecessor
trustee shall execute and deliver such instruments and do such other things as
may reasonably be required for more fully and certainly vesting and confirming
in the successor trustee all such rights, powers, duties, and obligations.
No successor trustee shall accept appointment as provided in this Section
8.8 unless at the time of such acceptance such successor trustee shall be
eligible under the provisions of Section 8.6 hereof and its appointment shall
not adversely affect the then current rating of the Certificates.
Upon acceptance of appointment by a successor trustee as provided in this
Section 8.8, the Depositor shall mail notice of the succession of such trustee
hereunder to all Holders of Certificates. If the Depositor fails to mail such
notice within 10 days after acceptance of appointment by the successor trustee,
the successor trustee shall cause such notice to be mailed at the expense of the
Depositor.
SECTION 8.9 Merger or Consolidation of Trustee.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to the business of the Trustee, shall be the successor of
the Trustee hereunder, provided that such corporation shall be eligible under
the provisions of Section 8.6 hereof without the execution or filing of any
paper or further act on the part of any of the parties hereto, anything herein
to the contrary notwithstanding.
SECTION 8.10 Appointment of Co-Trustee or Separate Trustee.
Notwithstanding any other provisions of this Agreement, at any time, for
the purpose of meeting any legal requirements of any jurisdiction in which any
part of the Trust Fund or property securing any Mortgage Note may at the time be
located, the Master Servicer and the Trustee acting jointly shall have the power
and shall execute and deliver all instruments to appoint one or more Persons
approved by the Trustee to act as co-trustee or co-trustees jointly with the
Trustee, or separate trustee or separate trustees, of all or any part of the
Trust Fund, and to vest in such Person or Persons, in such capacity and for the
benefit of the Certificateholders, such title to the Trust Fund or any part
thereof, whichever is applicable, and, subject to the other provisions of this
Section 8.10,
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such powers, duties, obligations, rights and trusts as the Master Servicer and
the Trustee may consider necessary or desirable. If the Master Servicer shall
not have joined in such appointment within 15 days after the receipt by it of a
request to do so, or in the case an Event of Default shall have occurred and be
continuing, the Trustee alone shall have the power to make such appointment. No
co-trustee or separate trustee hereunder shall be required to meet the terms of
eligibility as a successor trustee under Section 8.6 and no notice to
Certificateholders of the appointment of any co-trustee or separate trustee
shall be required under Section 8.8.
Every separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) To the extent necessary to effectuate the purposes of this
Section 8.10, all rights, powers, duties and obligations conferred or
imposed upon the Trustee, except for the obligation of the Trustee under
this Agreement to advance funds on behalf of the Master Servicer, shall be
conferred or imposed upon and exercised or performed by the Trustee and
such separate trustee or co-trustee jointly (it being understood that such
separate trustee or co-trustee is not authorized to act separately without
the Trustee joining in such act), except to the extent that under any law
of any jurisdiction in which any particular act or acts are to be performed
(whether as Trustee hereunder or as successor to the Master Servicer
hereunder), the Trustee shall be incompetent or unqualified to perform such
act or acts, in which event such rights, powers, duties and obligations
(including the holding of title to the applicable Trust Fund or any portion
thereof in any such jurisdiction) shall be exercised and performed singly
by such separate trustee or co-trustee, but solely at the direction of the
Trustee;
(ii) No trustee hereunder shall be held personally liable by
reason of any act or omission of any other trustee hereunder and such
appointment shall not, and shall not be deemed to, constitute any such
separate trustee or co-trustee as agent of the Trustee;
(iii) The Trustee may at any time accept the resignation of or
remove any separate trustee or co-trustee; and
(iv) The Master Servicer, and not the Trustee, shall be liable
for the payment of reasonable compensation, reimbursement and
indemnification to any such separate trustee or co-trustee.
Any notice, request or other writing given to the Trustee shall be deemed
to have been given to each of the separate trustees and co-trustees, when and as
effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article VIII. Each separate trustee and co-trustee, upon its acceptance
of the trusts conferred, shall be vested with the estates or property specified
in its instrument of appointment, either jointly with the Trustee or separately,
as may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee and a copy thereof given to the
Master Servicer and the Depositor.
Any separate trustee or co-trustee may, at any time, constitute the Trustee
its agent or attorney-in-fact, with full power and authority, to the extent not
prohibited by law, to do any lawful
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act under or in respect of this Agreement on its behalf and in its name. If any
separate trustee or co-trustee shall die, become incapable of acting, resign or
be removed, all of its estates, properties, rights, remedies and trusts shall
vest in and be exercised by the Trustee, to the extent permitted by law, without
the appointment of a new or successor trustee.
SECTION 8.1 Tax Matters.
It is intended that the assets with respect to which any REMIC election is
to be made, as set forth in the Preliminary Statement, shall constitute, and
that the conduct of matters relating to such assets shall be such as to qualify
such assets as, a "real estate mortgage investment conduit" as defined in and in
accordance with the REMIC Provisions. In furtherance of such intention, the
Trustee covenants and agrees that it shall act as agent (and the Trustee is
hereby appointed to act as agent) on behalf of any such REMIC and that in such
capacity it shall: (a) prepare and file, or cause to be prepared and filed, in a
timely manner, a U.S. Real Estate Mortgage Investment Conduit Income Tax Return
(Form 1066 or any successor form adopted by the Internal Revenue Service) and
prepare and file or cause to be prepared and filed with the Internal Revenue
Service and applicable state or local tax authorities income tax or information
returns for each taxable year with respect to any such REMIC, containing such
information and at the times and in the manner as may be required by the Code or
state or local tax laws, regulations, or rules, and furnish or cause to be
furnished to Certificateholders the schedules, statements or information at such
times and in such manner as may be required thereby; (b) within thirty days of
the Closing Date, furnish or cause to be furnished to the Internal Revenue
Service, on Forms 8811 or as otherwise may be required by the Code, the name,
title, address, and telephone number of the person that the holders of the
Certificates may contact for tax information relating thereto, together with
such additional information as may be required by such Form, and update such
information at the time or times in the manner required by the Code; (c) make or
cause to be made elections that such assets be treated as a REMIC on the federal
tax return for its first taxable year (and, if necessary, under applicable state
law); (d) prepare and forward, or cause to be prepared and forwarded, to the
Certificateholders and to the Internal Revenue Service and, if necessary, state
tax authorities, all information returns and reports as and when required to be
provided to them in accordance with the REMIC Provisions, including without
limitation, the calculation of any original issue discount using the Prepayment
Assumption; (e) provide information necessary for the computation of tax imposed
on the transfer of a Residual Certificate to a Person that is not a Permitted
Transferee, or an agent (including a broker, nominee or other middleman) of a
Non-Permitted Transferee, or a pass-through entity in which a Non-Permitted
Transferee is the record holder of an interest (the reasonable cost of computing
and furnishing such information may be charged to the Person liable for such
tax); (f) to the extent that they are under its control conduct matters relating
to such assets at all times that any Certificates are outstanding so as to
maintain the status as a REMIC under the REMIC Provisions; (g) not knowingly or
intentionally take any action or omit to take any action that would cause the
termination of the REMIC status; (h) pay, from the sources specified in the last
paragraph of this Section 8.11, the amount of any federal or state tax,
including prohibited transaction taxes as described below, imposed on any such
REMIC prior to its termination when and as the same shall be due and payable
(but such obligation shall not prevent the Trustee or any other appropriate
Person from contesting any such tax in appropriate proceedings and shall not
prevent the Trustee from withholding payment of such tax, if permitted by law,
pending the outcome of such proceedings); (i) ensure that federal, state or
local income tax or information returns shall be signed by the Trustee or such
other person as may be required to sign such returns by the Code or state or
local laws, regulations or rules; (j) maintain records relating to any such
REMIC, including but not limited to the income, expenses,
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assets and liabilities thereof and the fair market value and adjusted basis of
the assets determined at such intervals as may be required by the Code, as may
be necessary to prepare the foregoing returns, schedules, statements or
information; and (k) as and when necessary and appropriate, represent any such
REMIC in any administrative or judicial proceedings relating to an examination
or audit by any governmental taxing authority, request an administrative
adjustment as to any taxable year of any such REMIC, enter into settlement
agreements with any governmental taxing agency, extend any statute of
limitations relating to any tax item of any such REMIC, and otherwise act on
behalf of any such REMIC in relation to any tax matter or controversy involving
it.
In order to enable the Trustee to perform its duties as set forth herein,
the Depositor shall provide, or cause to be provided, to the Trustee within ten
(10) days after the Closing Date all information or data that the Trustee
requests in writing and determines to be relevant for tax purposes to the
valuations and offering prices of the Certificates, including, without
limitation, the price, yield, prepayment assumption and projected cash flows of
the Certificates and the Mortgage Loans. Thereafter, the Depositor shall provide
to the Trustee promptly upon written request therefor, any such additional
information or data that the Trustee may, from time to time, reasonably request
in order to enable the Trustee to perform its duties as set forth herein. The
Depositor hereby indemnifies the Trustee for any losses, liabilities, damages,
claims or expenses of the Trustee arising from any errors or miscalculations of
the Trustee that result from any failure of the Depositor to provide, or to
cause to be provided, accurate information or data to the Trustee on a timely
basis.
In the event that any tax is imposed on "prohibited transactions" of the
REMIC as defined in Section 860F(a)(2) of the Code, on the "net income from
foreclosure property" of the REMIC as defined in Section 860G(c) of the Code, on
any contribution to the REMIC after the Startup Day pursuant to Section 860G(d)
of the Code, or any other tax is imposed, including, without limitation, any
minimum tax imposed upon the REMIC pursuant to Sections 23153 and 24874 of the
California Revenue and Taxation Code, if not paid as otherwise provided for
herein, such tax shall be paid by (i) the Trustee, if any such other tax arises
out of or results from a breach by the Trustee of any of its obligations under
this Agreement, (ii) the Master Servicer, in the case of any such minimum tax,
or if such tax arises out of or results from a breach by the Master Servicer or
Seller of any of their obligations under this Agreement, (iii) the Seller, if
any such tax arises out of or results from the Seller's obligation to repurchase
a Mortgage Loan pursuant to Section 2.2 or 2.3 or (iv) in all other cases, or in
the event that the Trustee, the Master Servicer or the Seller fails to honor its
obligations under the preceding clauses (i),(ii) or (iii), any such tax will be
paid with amounts otherwise to be distributed to the Certificateholders, as
provided in Section 3.8(b).
SECTION 8.1 Periodic Filings.
Pursuant to written instructions from the Depositor, the Trustee shall
prepare, execute and file all periodic reports required under the Securities
Exchange Act of 1934 in conformity with the terms of the "no-action" relief
granted by the SEC to issuers of asset-backed securities such as the
Certificates. In connection with the preparation and filing of such periodic
reports, the Depositor and the Master Servicer shall timely provide to the
Trustee all material information available to them which is required to be
included in such reports and not known to them to be in the possession of the
Trustee and such other information as the Trustee reasonably may request from
either of them and otherwise reasonably shall cooperate with the Trustee. The
Trustee shall have no liability with respect to any failure to properly prepare
or file such periodic reports resulting from or relating to
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the Trustee's inability or failure to obtain any information not resulting from
its own negligence or willful misconduct.
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Article ix
Termination
Section 9.1 Termination upon Liquidation or Purchase of all Mortgage
Loans.
Subject to Section 9.3, the obligations and responsibilities of the
Depositor, the Master Servicer and the Trustee created hereby with respect to
the Trust Fund shall terminate upon the earlier of (a) the purchase by the
Master Servicer of all Mortgage Loans (and REO Properties) remaining in the
Trust Fund at the price equal to the sum of (i) 100% of the Stated Principal
Balance of each Mortgage Loan plus one month's accrued interest thereon at the
applicable Adjusted Mortgage Rate and (ii) the lesser of (x) the appraised value
of any REO Property as determined by the higher of two appraisals completed by
two independent appraisers selected by the Master Servicer at the expense of the
Master Servicer and (y) the Stated Principal Balance of each Mortgage Loan
related to any REO Property, in each case plus accrued and unpaid interest
thereon at the applicable Adjusted Mortgage Rate and (b) the later of (i) the
maturity or other liquidation (or any Advance with respect thereto) of the last
Mortgage Loan remaining in the Trust Fund and the disposition of all REO
Property and (ii) the distribution to Certificateholders of all amounts required
to be distributed to them pursuant to this Agreement. In no event shall the
trusts created hereby continue beyond the earlier of (i) the expiration of 21
years from the death of the survivor of the descendants of Joseph P. Kennedy,
the late Ambassador of the United States to the Court of St. James's, living on
the date hereof, and (ii) the Latest Possible Maturity Date. The right to
purchase all Mortgage Loans and REO Properties pursuant to clause (a) above
shall be conditioned upon the Pool Stated Principal Balance, at the time of any
such repurchase, aggregating less than ten percent of the aggregate Cut-off Date
Principal Balance of the Mortgage Loans.
Section 9.2 Final Distribution on the Certificates.
If on any Determination Date, the Master Servicer determines that there are
no Outstanding Mortgage Loans and no other funds or assets in the Trust Fund
other than the funds in the Certificate Account, the Master Servicer shall
direct the Trustee promptly to send a final distribution notice to each
Certificateholder. If the Master Servicer elects to terminate the Trust Fund
pursuant to clause (a) of Section 9.1, at least 20 days prior to the date notice
is to be mailed to the affected Certificateholders, the Master Servicer shall
notify the Depositor and the Trustee of the date the Master Servicer intends to
terminate the Trust Fund and of the applicable repurchase price of the Mortgage
Loans and REO Properties.
Notice of any termination of the Trust Fund, specifying the Distribution
Date on which Certificateholders may surrender their Certificates for payment of
the final distribution and cancellation, shall be given promptly by the Trustee
by letter to Certificateholders mailed not earlier than the 15th day and no
later than the 10th day of the month next preceding the month of such final
distribution. Any such notice shall specify (a) the Distribution Date upon which
final distribution on the Certificates will be made upon presentation and
surrender of Certificates at the office therein designated, (b) the amount of
such final distribution, (c) the location of the office or agency at which such
presentation and surrender must be made, and (d) that the Record Date otherwise
applicable to such Distribution Date is not applicable, distributions being made
only upon presentation and surrender of the Certificates at the office therein
specified. The Master Servicer will give such notice to each Rating Agency at
the time such notice is given to Certificateholders.
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In the event such notice is given, the Master Servicer shall cause all
funds in the Certificate Account to be remitted to the Trustee for deposit in
the Distribution Account on the Business Day prior to the applicable
Distribution Date in an amount equal to the final distribution in respect of the
Certificates. Upon such final deposit with respect to the Trust Fund and the
receipt by the Trustee of a Request for Release therefor, the Trustee shall
promptly release to the Master Servicer the Mortgage Files for the Mortgage
Loans.
Upon presentation and surrender of the Certificates, the Trustee shall
cause to be distributed to the Certificateholders of each Class, in the order
set forth in Section 4.2 hereof, on the final Distribution Date, in the case of
the Certificateholders, in proportion to their respective Percentage Interests,
with respect to Certificateholders of the same Class, an amount equal to (i) as
to each Class of Regular Certificates, the Certificate Balance thereof plus (a)
accrued interest thereon (or on their Notional Amount, if applicable) in the
case of an interest bearing Certificate and (b) any Class PO Deferred Amounts in
the case of the Class PO Certificates, and (ii) as to the Residual Certificates,
the amount, if any, which remains on deposit in the Distribution Account (other
than the amounts retained to meet claims) after application pursuant to clause
(i) above.
In the event that any affected Certificateholders shall not surrender
Certificates for cancellation within six months after the date specified in the
above mentioned written notice, the Trustee shall give a second written notice
to the remaining Certificateholders to surrender their Certificates for
cancellation and receive the final distribution with respect thereto. If within
six months after the second notice all the applicable Certificates shall not
have been surrendered for cancellation, the Trustee may take appropriate steps,
or may appoint an agent to take appropriate steps, to contact the remaining
Certificateholders concerning surrender of their Certificates, and the cost
thereof shall be paid out of the funds and other assets which remain a part of
the Trust Fund. If within one year after the second notice all Certificates
shall not have been surrendered for cancellation, the Class A-R
Certificateholders shall be entitled to all unclaimed funds and other assets of
the Trust Fund which remain subject hereto.
Section 9.3 Additional Termination Requirements.
(a) In the event the Master Servicer exercises its purchase option as
provided in Section 9.1, the Trust Fund shall be terminated in accordance with
the following additional requirements, unless the Trustee has been supplied with
an Opinion of Counsel, at the expense of the Master Servicer, to the effect that
the failure to comply with the requirements of this Section 9.3 will not (i)
result in the imposition of taxes on "prohibited transactions" on any REMIC as
defined in section 860F of the Code, or (ii) cause any REMIC to fail to qualify
as a REMIC at any time that any Certificates are outstanding:
(1) Within 90 days prior to the final Distribution Date set forth in
the notice given by the Master Servicer under Section 9.2, the Master
Servicer shall prepare and the Trustee, at the expense of the "tax matters
person," shall adopt a plan of complete liquidation within the meaning of
section 860F(a)(4) of the Code which, as evidenced by an Opinion of Counsel
(which opinion shall not be an expense of the Trustee or the Tax Matters
Person), meets the requirements of a qualified liquidation; and
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(2) Within 90 days after the time of adoption of such a plan of
complete liquidation, the Trustee shall sell all of the assets of the Trust
Fund to the Master Servicer for cash in accordance with Section 9.1.
(b) The Trustee as agent for any REMIC hereby agrees to adopt and sign such
a plan of complete liquidation upon the written request of the Master Servicer,
and the receipt of the Opinion of Counsel referred to in Section 9.3(a)(1) and
to take such other action in connection therewith as may be reasonably requested
by the Master Servicer.
(c) By their acceptance of the Certificates, the Holders thereof hereby
authorize the Master Servicer to prepare and the Trustee to adopt and sign a
plan of complete liquidation.
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ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION 10.1 Amendment.
This Agreement may be amended from time to time by the Depositor, the
Master Servicer and the Trustee without the consent of any of the
Certificateholders (i) to cure any ambiguity or mistake, (ii) to correct any
defective provision herein or to supplement any provision herein which may be
inconsistent with any other provision herein, (iii) to add to the duties of the
Depositor, the Seller or the Master Servicer, (iv) to add any other provisions
with respect to matters or questions arising hereunder or (v) to modify, alter,
amend, add to or rescind any of the terms or provisions contained in this
Agreement; provided that any action pursuant to clauses (iv) or (v) above shall
not, as evidenced by an Opinion of Counsel (which Opinion of Counsel shall not
be an expense of the Trustee or the Trust Fund), adversely affect in any
material respect the interests of any Certificateholder; provided, however, that
the amendment shall not be deemed to adversely affect in any material respect
the interests of the Certificateholders if the Person requesting the amendment
obtains a letter from each Rating Agency stating that the amendment would not
result in the downgrading or withdrawal of the respective ratings then assigned
to the Certificates; it being understood and agreed that any such letter in and
of itself will not represent a determination as to the materiality of any such
amendment and will represent a determination only as to the credit issues
affecting any such rating. The Trustee, the Depositor and the Master Servicer
also may at any time and from time to time amend this Agreement without the
consent of the Certificateholders to modify, eliminate or add to any of its
provisions to such extent as shall be necessary or helpful to (i) maintain the
qualification of any REMIC as a REMIC under the Code, (ii) avoid or minimize the
risk of the imposition of any tax on any REMIC pursuant to the Code that would
be a claim at any time prior to the final redemption of the Certificates or
(iii) comply with any other requirements of the Code, provided that the Trustee
has been provided an Opinion of Counsel, which opinion shall be an expense of
the party requesting such opinion but in any case shall not be an expense of the
Trustee or the Trust Fund, to the effect that such action is necessary or
helpful to, as applicable, (i) maintain such qualification, (ii) avoid or
minimize the risk of the imposition of such a tax or (iii) comply with any such
requirements of the Code.
This Agreement may also be amended from time to time by the Depositor, the
Master Servicer and the Trustee with the consent of the Holders of a Majority in
Interest of each Class of Certificates affected thereby for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement or of modifying in any manner the rights of the
Holders of Certificates; provided, however, that no such amendment shall (i)
reduce in any manner the amount of, or delay the timing of, payments required to
be distributed on any Certificate without the consent of the Holder of such
Certificate, (ii) adversely affect in any material respect the interests of the
Holders of any Class of Certificates in a manner other than as described in (i),
without the consent of the Holders of Certificates of such Class evidencing, as
to such Class, Percentage Interests aggregating 66%, or (iii) reduce the
aforesaid percentages of Certificates the Holders of which are required to
consent to any such amendment, without the consent of the Holders of all such
Certificates then outstanding.
Notwithstanding any contrary provision of this Agreement, the Trustee shall
not consent to any amendment to this Agreement unless it shall have first
received an Opinion of Counsel, which
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opinion shall not be an expense of the Trustee or the Trust Fund, to the effect
that such amendment will not cause the imposition of any tax on any REMIC or the
Certificateholders or cause any REMIC to fail to qualify as a REMIC at any time
that any Certificates are outstanding.
Promptly after the execution of any amendment to this Agreement requiring
the consent of Certificateholders, the Trustee shall furnish written
notification of the substance or a copy of such amendment to each
Certificateholder and each Rating Agency.
It shall not be necessary for the consent of Certificateholders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent shall approve the substance thereof. The manner of
obtaining such consents and of evidencing the authorization of the execution
thereof by Certificateholders shall be subject to such reasonable regulations as
the Trustee may prescribe.
Nothing in this Agreement shall require the Trustee to enter into an
amendment without receiving an Opinion of Counsel (which Opinion shall not be an
expense of the Trustee or the Trust Fund, satisfactory to the Trustee that (i)
such amendment is permitted and is not prohibited by this Agreement and that all
requirements for amending this Agreement have been complied with; and (ii)
either (A) the amendment does not adversely affect in any material respect the
interests of any Certificateholder or (B) the conclusion set forth in the
immediately preceding clause (A) is not required to be reached pursuant to this
Section 10.1.
SECTION 10.2 Recordation of Agreement; Counterparts.
This Agreement is subject to recordation in all appropriate public offices
for real property records in all the counties or other comparable jurisdictions
in which any or all of the properties subject to the Mortgages are situated, and
in any other appropriate public recording office or elsewhere, such recordation
to be effected by the Master Servicer at its expense, but only upon direction by
the Trustee accompanied by an Opinion of Counsel to the effect that such
recordation materially and beneficially affects the interests of the
Certificateholders.
For the purpose of facilitating the recordation of this Agreement as herein
provided and for other purposes, this Agreement may be executed simultaneously
in any number of counterparts, each of which counterparts shall be deemed to be
an original, and such counterparts shall constitute but one and the same
instrument.
SECTION 10.3 Governing Law.
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
SUBSTANTIVE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO
BE PERFORMED IN THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES
OF THE PARTIES HERETO AND THE CERTIFICATEHOLDERS SHALL BE DETERMINED IN
ACCORDANCE WITH SUCH LAWS.
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SECTION 10.4 Intention of Parties.
It is the express intent of the parties hereto that the conveyance of the
Trust Fund by the Depositor to the Trustee be, and be construed as, an absolute
sale thereof to the Trustee. It is, further, not the intention of the parties
that such conveyance be deemed a pledge thereof by the Depositor to the Trustee.
However, in the event that, notwithstanding the intent of the parties, such
assets are held to be the property of the Depositor, or if for any other reason
this Agreement is held or deemed to create a security interest in such assets,
then (i) this Agreement shall be deemed to be a security agreement within the
meaning of the Uniform Commercial Code of the State of New York and (ii) the
conveyance provided for in this Agreement shall be deemed to be an assignment
and a grant by the Depositor to the Trustee, for the benefit of the
Certificateholders, of a security interest in all of the assets that constitute
the Trust Fund, whether now owned or hereafter acquired.
The Depositor for the benefit of the Certificateholders shall, to the
extent consistent with this Agreement, take such actions as may be necessary to
ensure that, if this Agreement were deemed to create a security interest in the
Trust Fund, such security interest would be deemed to be a perfected security
interest of first priority under applicable law and will be maintained as such
throughout the term of the Agreement. The Depositor shall arrange for filing any
Uniform Commercial Code continuation statements in connection with any security
interest granted or assigned to the Trustee for the benefit of the
Certificateholder.
SECTION 10.5 Notices.
(a) The Trustee shall use its best efforts to promptly provide notice to
each Rating Agency with respect to each of the following of which it has actual
knowledge:
1. Any material change or amendment to this Agreement;
2. The occurrence of any Event of Default that has not been cured;
3. The resignation or termination of the Master Servicer or the Trustee
and the appointment of any successor;
4. The repurchase or substitution of Mortgage Loans pursuant to Section
2.3; and
5. The final payment to Certificateholders.
6. Any rating action involving the long-term credit rating of the Master
Servicer, which notice shall be made by first-class mail within two
Business Days after the Trustee gains actual knowledge thereof.
In addition, the Trustee shall promptly furnish to each Rating Agency
copies of the following:
1. Each report to Certificateholders described in Section 4.4;
2. Each annual statement as to compliance described in Section 3.16;
3. Each annual independent public accountants' servicing report described
in Section 3.17; and
4. Any notice of a purchase of a Mortgage Loan pursuant to Section 2.2,
2.3 or 3.11.
(b) All directions, demands and notices hereunder shall be in writing and
shall be deemed to have been duly given when delivered to (a) in the case of the
Depositor, First Horizon Asset
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Securities Inc., 2974 LBJ Freeway, Dallas, Texas 75234, Attention: Wade Walker,
(b) in the case of the Master Servicer, FT Mortgage Companies, 2974 LBJ Freeway,
Dallas, Texas 75234, Attention: Wade Walker or such other address as may be
hereafter furnished to the Depositor and the Trustee by the Master Servicer in
writing, (c) in the case of the Trustee, ___________________, Attention:
_____________ or such other address as the Trustee may hereafter furnish to the
Depositor or Master Servicer, (d) in the case of the Rating Agencies, the
address specified therefor in the definition corresponding to the name of such
Rating Agency. Notices to Certificateholders shall be deemed given when mailed,
first class postage prepaid, to their respective addresses appearing in the
Certificate Register.
SECTION 10. Severability of Provisions.
If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be for any reason whatsoever held invalid, then such
covenants, agreements, provisions or terms shall be deemed severable from the
remaining covenants, agreements, provisions or terms of this Agreement and shall
in no way affect the validity or enforceability of the other provisions of this
Agreement or of the Certificates or the rights of the Holders thereof.
SECTION 10. Assignment.
Notwithstanding anything to the contrary contained herein, except as
provided in Section 6.02, this Agreement may not be assigned by the Master
Servicer without the prior written consent of the Trustee and Depositor.
SECTION 10. Limitation on Rights of Certificateholders.
The death or incapacity of any Certificateholder shall not operate to
terminate this Agreement or the trust created hereby, nor entitle such
Certificateholder's legal representative or heirs to claim an accounting or to
take any action or commence any proceeding in any court for a petition or
winding up of the trust created hereby, or otherwise affect the rights,
obligations and liabilities of the parties hereto or any of them.
No Certificateholder shall have any right to vote (except as provided
herein) or in any manner otherwise control the operation and management of the
Trust Fund, or the obligations of the parties hereto, nor shall anything herein
set forth or contained in the terms of the Certificates be construed so as to
constitute the Certificateholders from time to time as partners or members of an
association; nor shall any Certificateholder be under any liability to any third
party by reason of any action taken by the parties to this Agreement pursuant to
any provision hereof.
No Certificateholder shall have any right by virtue or by availing itself
of any provisions of this Agreement to institute any suit, action or proceeding
in equity or at law upon or under or with respect to this Agreement, unless such
Holder previously shall have given to the Trustee a written notice of an Event
of Default and of the continuance thereof, as herein provided, and unless the
Holders of Certificates evidencing not less than 25% of the Voting Rights
evidenced by the Certificates shall also have made written request to the
Trustee to institute such action, suit or proceeding in its own name as Trustee
hereunder and shall have offered to the Trustee such reasonable indemnity as it
may require against the costs, expenses, and liabilities to be incurred therein
or thereby, and the Trustee, for 60 days after its receipt of such notice,
request and offer of
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indemnity shall have neglected or refused to institute any such action, suit or
proceeding; it being understood and intended, and being expressly covenanted by
each Certificateholder with every other Certificateholder and the Trustee, that
no one or more Holders of Certificates shall have any right in any manner
whatever by virtue or by availing itself or themselves of any provisions of this
Agreement to affect, disturb or prejudice the rights of the Holders of any other
of the Certificates, or to obtain or seek to obtain priority over or preference
to any other such Holder or to enforce any right under this Agreement, except in
the manner herein provided and for the common benefit of all Certificateholders.
For the protection and enforcement of the provisions of this Section 10.8, each
and every Certificateholder and the Trustee shall be entitled to such relief as
can be given either at law or in equity.
SECTION 10. Inspection and Audit Rights.
The Master Servicer agrees that, on reasonable prior notice, it will permit
and will cause each Subservicer to permit any representative of the Depositor or
the Trustee during the Master Servicer's normal business hours, to examine all
the books of account, records, reports and other papers of the Master Servicer
relating to the Mortgage Loans, to make copies and extracts therefrom, to cause
such books to be audited by independent certified public accountants selected by
the Depositor or the Trustee and to discuss its affairs, finances and accounts
relating to the Mortgage Loans with its officers, employees and independent
public accountants (and by this provision the Master Servicer hereby authorizes
said accountants to discuss with such representative such affairs, finances and
accounts), all at such reasonable times and as often as may be reasonably
requested. Any out-of-pocket expense incident to the exercise by the Depositor
or the Trustee of any right under this Section 10.9 shall be borne by the party
requesting such inspection; all other such expenses shall be borne by the Master
Servicer or the related Subservicer.
SECTION 10. Certificates Nonassessable and Fully Paid.
It is the intention of the Depositor that Certificate-holders shall not be
personally liable for obligations of the Trust Fund, that the interests in the
Trust Fund represented by the Certificates shall be nonassessable for any reason
whatsoever, and that the Certificates, upon due authentication thereof by the
Trustee pursuant to this Agreement, are and shall be deemed fully paid.
* * * * * *
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IN WITNESS WHEREOF, the Depositor, the Trustee, the Seller and the Master
Servicer have caused their names to be signed hereto by their respective
officers thereunto duly authorized as of the day and year first above written.
FIRST HORIZON ASSET SECURITIES INC.
as Depositor
By:___________________________
Name:________________________
Title:_______________________
______________________________
as Trustee
By:___________________________
Name:________________________
Title:_______________________
FT MORTGAGE COMPANIES,
as Seller and Master Servicer
By:___________________________
Name:_______________________
Title:______________________
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EXHIBIT A
[FORM OF SENIOR CERTIFICATE]
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE").
Certificate No. :
Cut-off Date :
First Distribution Date :
Initial Certificate Balance
of this Certificate
("Denomination") : $
Initial Certificate Balances
of all Certificates
of this Class : $
CUSIP :
First Horizon Mortgage Pass-Through Trust 1999-__
Mortgage Pass-Through Certificates, Series 199-__
Class [________]
evidencing a percentage interest in the distributions allocable to the
Certificates of the above-referenced Class with respect to a Trust Fund
consisting primarily of a pool of conventional mortgage loans (the
"Mortgage Loans") secured by first liens on one- to four-family residential
properties.
<PAGE>
First Horizon Asset Securities Inc., as Depositor
Principal in respect of this Certificate is distributable monthly as set
forth herein. Accordingly, the Certificate Balance at any time may be less than
the Certificate Balance as set forth herein. This Certificate does not evidence
an obligation of, or an interest in, and is not guaranteed by the Depositor, the
Seller, the Master Servicer or the Trustee referred to below or any of their
respective affiliates. Neither this Certificate nor the Mortgage Loans are
guaranteed or insured by any governmental agency or instrumentality.
This certifies that ________________________________ is the registered
owner of the Percentage Interest evidenced by this Certificate (obtained by
dividing the denomination of this Certificate by the aggregate Initial
Certificate Balances of all Certificates of the Class to which this Certificate
belongs) in certain monthly distributions with respect to a Trust Fund
consisting primarily of the Mortgage Loans deposited by First Horizon Asset
Securities Inc. (the "Depositor"). The Trust Fund was created pursuant to a
Pooling and Servicing Agreement dated as of the Cut-off Date specified above
(the "Agreement") among the Depositor, FT Mortgage Companies, as seller (in such
capacity, the "Seller") and as master servicer (in such capacity, the "Master
Servicer"), and The Bank of New York, as trustee (the "Trustee"). To the extent
not defined herein, the capitalized terms used herein have the meanings assigned
in the Agreement. This Certificate is issued under and is subject to the terms,
provisions and conditions of the Agreement, to which Agreement the Holder of
this Certificate by virtue of the acceptance hereof assents and by which such
Holder is bound.
Reference is hereby made to the further provisions of this Certificate set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
This Certificate shall not be entitled to any benefit under the Agreement
or be valid for any purpose unless manually countersigned by an authorized
signatory of the Trustee.
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated: ____________, 19__
THE BANK OF NEW YORK,
as Trustee
By ______________________
Countersigned:
By ___________________________
Authorized Signatory of
THE BANK OF NEW YORK,
as Trustee
A-2
<PAGE>
EXHIBIT B
[FORM OF SUBORDINATED CERTIFICATE]
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE").
THIS CERTIFICATE IS SUBORDINATED IN RIGHT OF PAYMENT TO CERTAIN CERTIFICATES AS
DESCRIBED IN THE AGREEMENT REFERRED TO HEREIN.
[THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF APPLYING THE
U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES UNDER THE CODE TO
THIS CERTIFICATE. THE ISSUE DATE OF THIS CERTIFICATE IS ___________, 199_. THE
INITIAL PER ANNUM RATE OF INTEREST ON THIS CERTIFICATE IS ____%. ASSUMING THAT
THE MORTGAGE LOANS PREPAY AT AN ASSUMED RATE OF PREPAYMENT OF ____% PER ANNUM
(THE "PREPAYMENT ASSUMPTION"), THIS CERTIFICATE HAS BEEN ISSUED WITH
$___________ OF OID PER $1,000 OF THE ORIGINAL PRINCIPAL AMOUNT OF THIS
CERTIFICATE; THE ANNUAL YIELD TO MATURITY OF THIS CERTIFICATE FOR PURPOSES OF
COMPUTING THE ACCRUAL OF OID IS APPROXIMATELY __________% (COMPOUNDED MONTHLY);
THE AMOUNT OF OID ALLOCABLE TO THE SHORT FIRST ACCRUAL PERIOD IS $______ PER
$1,000 OF THE ORIGINAL PRINCIPAL AMOUNT OF THIS CERTIFICATE COMPUTED USING THE
MONTHLY YIELD AND DAILY COMPOUNDING DURING THE SHORT ACCRUAL PERIOD. NO
REPRESENTATION IS MADE THAT THE MORTGAGE LOANS WILL PREPAY AT A RATE BASED ON
THE PREPAYMENT ASSUMPTION OR AT ANY OTHER RATE. THE ACTUAL YIELD TO MATURITY MAY
DIFFER FROM THAT SET FORTH ABOVE, AND THE ACCRUAL OF OID WILL BE ADJUSTED, IN
ACCORDANCE WITH SECTION 1272(a)(6) OF THE CODE, TO TAKE INTO ACCOUNT EVENTS
WHICH HAVE OCCURRED DURING ANY ACCRUAL PERIOD. THE PREPAYMENT ASSUMPTION IS
INTENDED TO BE THE PREPAYMENT ASSUMPTION REFERRED TO IN SECTION
1272(a)(6)(B)(iii) OF THE CODE.]
<PAGE>
[THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). ANY RESALE OR TRANSFER OF THIS CERTIFICATE WITHOUT
REGISTRATION THEREOF UNDER THE ACT MAY ONLY BE MADE IN A TRANSACTION EXEMPTED
FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND IN ACCORDANCE WITH THE
PROVISIONS OF THE AGREEMENT REFERRED TO HEREIN.]
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED UNLESS THE
TRANSFEREE REPRESENTS TO THE TRUSTEE THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE
BENEFIT PLAN SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS
AMENDED ("ERISA"), OR A PLAN SUBJECT TO SECTION 4975 OF THE CODE, OR, IF SUCH
PURCHASER IS AN INSURANCE COMPANY, A REPRESENTATION IN ACCORDANCE WITH THE
PROVISIONS OF THE AGREEMENT REFERRED TO HEREIN, OR DELIVERS TO THE TRUSTEE AN
OPINION OF COUNSEL IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT REFERRED
TO HEREIN. [SUCH REPRESENTATION SHALL BE DEEMED TO HAVE BEEN MADE TO THE TRUSTEE
BY THE TRANSFEREE'S ACCEPTANCE OF A CERTIFICATE OF THIS CLASS AND BY A
BENEFICIAL OWNER'S ACCEPTANCE OF ITS INTEREST IN A CERTIFICATE OF THIS CLASS.]
NOTWITHSTANDING ANYTHING ELSE TO THE CONTRARY HEREIN, ANY PURPORTED TRANSFER OF
THIS CERTIFICATE TO OR ON BEHALF OF AN EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA OR
TO THE CODE WITHOUT THE OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE AS
DESCRIBED ABOVE SHALL BE VOID AND OF NO EFFECT.
B-2
<PAGE>
Certificate No. :
Cut-off Date :
First Distribution Date :
Initial Certificate Balance
of this Certificate
("Denomination") : $
Initial Certificate Balances
of all Certificates
of this Class : $
First Horizon Mortgage Pass-Through Trust 1999-__
Mortgage Pass-Through Certificates, Series 1999-__
Class [___]
evidencing a percentage interest in the distributions allocable to the
Certificates of the above-referenced Class with respect to a Trust Fund
consisting primarily of a pool of conventional mortgage loans (the
"Mortgage Loans") secured by first liens on one- to four-family residential
properties.
First Horizon Asset Securities Inc., as Depositor
Principal in respect of this Certificate is distributable monthly as set
forth herein. Accordingly, the Certificate Balance at any time may be less than
the Certificate Balance as set forth herein. This Certificate does not evidence
an obligation of, or an interest in, and is not guaranteed by the Depositor, the
Seller, the Master Servicer or the Trustee referred to below or any of their
respective affiliates. Neither this Certificate nor the Mortgage Loans are
guaranteed or insured by any governmental agency or instrumentality.
This certifies that _________________________________ is the registered
owner of the Percentage Interest evidenced by this Certificate (obtained by
dividing the denomination of this Certificate by the aggregate Initial
Certificate Balances of the denominations of all Certificates of the Class to
which this Certificate belongs) in certain monthly distributions with respect to
a Trust Fund consisting primarily of the Mortgage Loans deposited by First
Horizon Asset Securities Inc. (the "Depositor"). The Trust Fund was created
pursuant to a Pooling and Servicing Agreement dated as of the Cut-off Date
specified above (the "Agreement") among the Depositor, FT Mortgage Companies, as
seller (in such capacity, the "Seller"), and as master servicer (in such
capacity, the "Master Servicer"), and The Bank of New York, as trustee (the
"Trustee"). To the extent not defined herein, the capitalized terms used herein
have the meanings assigned in the Agreement. This Certificate is issued under
and is subject to the terms, provisions and conditions of the Agreement, to
which Agreement the
B-3
<PAGE>
Holder of this Certificate by virtue of the acceptance hereof assents and by
which such Holder is bound.
[No transfer of a Certificate of this Class shall be made unless such
transfer is made pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws or is exempt from the
registration requirements under said Act and such laws. In the event that a
transfer is to be made in reliance upon an exemption from the Securities Act and
such laws, in order to assure compliance with the Securities Act and such laws,
the Certificateholder desiring to effect such transfer and such
Certificateholder's prospective transferee shall each certify to the Trustee in
writing the facts surrounding the transfer. In the event that such a transfer
is to be made within three years from the date of the initial issuance of
Certificates pursuant hereto, there shall also be delivered (except in the case
of a transfer pursuant to Rule 144A of the Securities Act) to the Trustee an
Opinion of Counsel that such transfer may be made pursuant to an exemption from
the Securities Act and such state securities laws, which Opinion of Counsel
shall not be obtained at the expense of the Trustee, the Seller, the Master
Servicer or the Depositor. The Holder hereof desiring to effect such transfer
shall, and does hereby agree to, indemnify the Trustee and the Depositor against
any liability that may result if the transfer is not so exempt or is not made in
accordance with such federal and state laws.]
No transfer of a Certificate of this Class shall be made unless the Trustee
shall have received either (i) a representation [letter] from the transferee of
such Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or Section 4975 of the Code, nor a person acting
on behalf of any such plan, which representation letter shall not be an expense
of the Trustee or the Master Servicer, (ii) if the purchaser is an insurance
company, a representation that the purchaser is an insurance company which is
purchasing such Certificates with funds contained in an "insurance company
general account" (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and
holding of such Certificates are covered under PTCE 95-60 or (iii) in the case
of any such Certificate presented for registration in the name of an employee
benefit plan subject to ERISA or Section 4975 of the Code (or comparable
provisions of any subsequent enactments), or a trustee of any such plan or any
other person acting on behalf of any such plan, an Opinion of Counsel
satisfactory to the Trustee and the Master Servicer to the effect that the
purchase or holding of such Certificate will not result in the assets of the
Trust Fund being deemed to be "plan assets" and subject to the prohibited
transaction provisions of ERISA and the Code and will not subject the Trustee to
any obligation in addition to those undertaken in the Agreement, which Opinion
of Counsel shall not be an expense of the Trustee or the Master Servicer. [Such
representation shall be deemed to have been made to the Trustee by the
Transferee's acceptance of a Certificate of this Class and by a beneficial
owner's acceptance of its interest in a Certificate of this Class.]
Notwithstanding anything else to the contrary herein, any purported transfer of
a Certificate of this Class to or on behalf of an employee benefit plan subject
to ERISA or to the Code without the opinion of counsel satisfactory to the
Trustee as described above shall be void and of no effect.
B-4
<PAGE>
Reference is hereby made to the further provisions of this Certificate set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
This Certificate shall not be entitled to any benefit under the Agreement
or be valid for any purpose unless manually countersigned by an authorized
signatory of the Trustee.
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated: ____________, 19__
THE BANK OF NEW YORK,
as Trustee
By ______________________
Countersigned:
By ___________________________
Authorized Signatory of
THE BANK OF NEW YORK,
as Trustee
B-5
<PAGE>
EXHIBIT C
[FORM OF RESIDUAL CERTIFICATE]
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "RESIDUAL
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE").
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED UNLESS THE
PROPOSED TRANSFEREE DELIVERS TO THE TRUSTEE A TRANSFER AFFIDAVIT IN ACCORDANCE
WITH THE PROVISIONS OF THE AGREEMENT REFERRED TO HEREIN.
[THIS CERTIFICATE REPRESENTS THE "TAX MATTERS PERSON RESIDUAL INTEREST" ISSUED
UNDER THE POOLING AND SERVICING AGREEMENT REFERRED TO BELOW AND MAY NOT BE
TRANSFERRED TO ANY PERSON EXCEPT IN CONNECTION WITH THE ASSUMPTION BY THE
TRANSFEREE OF THE DUTIES OF THE SERVICER UNDER SUCH AGREEMENT.]
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED UNLESS THE
TRANSFEREE REPRESENTS TO THE TRUSTEE THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE
BENEFIT PLAN SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS
AMENDED ("ERISA"), OR A PLAN SUBJECT TO SECTION 4975 OF THE CODE, OR, IF SUCH
PURCHASER IS AN INSURANCE COMPANY, A REPRESENTATION IN ACCORDANCE WITH THE
PROVISIONS OF THE AGREEMENT REFERRED TO HEREIN, OR DELIVERS TO THE TRUSTEE AN
OPINION OF COUNSEL IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT REFERRED
TO HEREIN. [SUCH REPRESENTATION SHALL BE DEEMED TO HAVE BEEN MADE TO THE TRUSTEE
BY THE TRANSFEREE'S ACCEPTANCE OF A CERTIFICATE OF THIS CLASS AND BY A
BENEFICIAL OWNER'S ACCEPTANCE OF ITS INTEREST IN A CERTIFICATE OF THIS CLASS.]
NOTWITHSTANDING ANYTHING ELSE TO THE CONTRARY HEREIN, ANY PURPORTED TRANSFER OF
THIS CERTIFICATE TO OR ON BEHALF OF AN EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA OR
TO THE CODE WITHOUT THE OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE AS
DESCRIBED ABOVE SHALL BE VOID AND OF NO EFFECT.
<PAGE>
Certificate No. :
Cut-off Date :
Initial Certificate Balance
of this Certificate
("Denomination") : $
Initial Certificate Balances
of all Certificates of
this Class : $
CUSIP :
First Horizon Mortgage Pass-Through Trust 1999-__
Mortgage Pass-Through Certificates, Series 199-__
evidencing the distributions allocable to the Class A-R Certificates with
respect to a Trust Fund consisting primarily of a pool of conventional
mortgage loans (the "Mortgage Loans") secured by first liens on one- to
four-family residential properties.
First Horizon Asset Securities Inc., as Depositor
Principal in respect of this Certificate is distributable monthly as set
forth herein. Accordingly, the Certificate Balance at any time may be less than
the Certificate Balance as set forth herein. This Certificate does not evidence
an obligation of, or an interest in, and is not guaranteed by the Depositor, the
Seller, the Master Servicer or the Trustee referred to below or any of their
respective affiliates. Neither this Certificate nor the Mortgage Loans are
guaranteed or insured by any governmental agency or instrumentality.
This certifies that ________________________________ is the registered
owner of the Percentage Interest (obtained by dividing the denomination of this
Certificate by the aggregate Initial Certificate Balances of the denominations
of all Certificates of the Class to which this Certificate belongs) in certain
monthly distributions with respect to a Trust Fund consisting of the Mortgage
Loans deposited by First Horizon Asset Securities Inc. (the "Depositor"). The
Trust Fund was created pursuant to a Pooling and Servicing Agreement dated as of
the Cut-off Date specified above (the "Agreement") among the Depositor, FT
Mortgage Companies, as seller (in such capacity, the "Seller") and as master
servicer (in such capacity, the "Master Servicer"), and The Bank of New York, as
trustee (the "Trustee"). To the extent not defined herein, the capitalized
terms used herein have the meanings assigned in the Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Agreement, to which Agreement the Holder of this Certificate by virtue of the
acceptance hereof assents and by which such Holder is bound.
C-2
<PAGE>
Any distribution of the proceeds of any remaining assets of the Trust Fund
will be made only upon presentment and surrender of this Class A-R Certificate
at the Corporate Trust Office or the office or agency maintained by the Trustee
in New York, New York.
No transfer of a Class A-R Certificate shall be made unless the Trustee
shall have received either (i) a representation [letter] from the transferee of
such Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or Section 4975 of the Code, nor a person acting
on behalf of any such plan, which representation letter shall not be an expense
of the Trustee or the Master Servicer, (ii) if the purchaser is an insurance
company, a representation that the purchaser is an insurance company which is
purchasing such Certificate with funds contained in an "insurance company
general account" (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the purchase and
holding of such Certificate are covered under PTCE 95-60 or (iii) in the case of
any such Certificate presented for registration in the name of an employee
benefit plan subject to ERISA or Section 4975 of the Code (or comparable
provisions of any subsequent enactments), or a trustee of any such plan or any
other person acting on behalf of any such plan, an Opinion of Counsel
satisfactory to the Trustee and the Master Servicer to the effect that the
purchase or holding of such Class A-R Certificate will not result in the assets
of the Trust Fund being deemed to be "plan assets" and subject to the prohibited
transaction provisions of ERISA and the Code and will not subject the Trustee to
any obligation in addition to those undertaken in the Agreement, which Opinion
of Counsel shall not be an expense of the Trustee or the Master Servicer. [Such
representation shall be deemed to have been made to the Trustee by the
Transferee's acceptance of this Class A-R Certificate and by a beneficial
owner's acceptance of its interest in such Certificate.] Notwithstanding
anything else to the contrary herein, any purported transfer of a Class A-R
Certificate to or on behalf of an employee benefit plan subject to ERISA or to
the Code without the opinion of counsel satisfactory to the Trustee as described
above shall be void and of no effect.
Each Holder of this Class A-R Certificate will be deemed to have agreed to
be bound by the restrictions of the Agreement, including but not limited to the
restrictions that (i) each person holding or acquiring any Ownership Interest in
this Class A-R Certificate must be a Permitted Transferee, (ii) no Ownership
Interest in this Class A-R Certificate may be transferred without delivery to
the Trustee of (a) a transfer affidavit of the proposed transferee and (b) a
transfer certificate of the transferor, each of such documents to be in the form
described in the Agreement, (iii) each person holding or acquiring any Ownership
Interest in this Class A-R Certificate must agree to require a transfer
affidavit and to deliver a transfer certificate to the Trustee as required
pursuant to the Agreement, (iv) each person holding or acquiring an Ownership
Interest in this Class A-R Certificate must agree not to transfer an Ownership
Interest in this Class A-R Certificate if it has actual knowledge that the
proposed transferee is not a Permitted Transferee and (v) any attempted or
purported transfer of any Ownership Interest in this Class A-R Certificate in
violation of such restrictions will be absolutely null and void and will vest no
rights in the purported transferee.
Reference is hereby made to the further provisions of this Certificate set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
C-3
<PAGE>
This Certificate shall not be entitled to any benefit under the Agreement
or be valid for any purpose unless manually countersigned by an authorized
signatory of the Trustee.
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated: ____________, 19__
THE BANK OF NEW YORK,
as Trustee
By ______________________
Countersigned:
By ___________________________
Authorized Signatory of
THE BANK OF NEW YORK,
as Trustee
C-4
<PAGE>
EXHIBIT D
[FORM OF NOTIONAL AMOUNT CERTIFICATE]
[SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE").]
THIS CERTIFICATE HAS NO PRINCIPAL BALANCE AND IS NOT ENTITLED TO ANY
DISTRIBUTIONS IN RESPECT OF PRINCIPAL.
[THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF APPLYING THE
U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES UNDER THE CODE TO
THIS CERTIFICATE. THE ISSUE DATE OF THIS CERTIFICATE IS __________, 199-. THE
INITIAL PER ANNUM RATE OF INTEREST ON THIS CERTIFICATE IS ____%. ASSUMING THAT
THE MORTGAGE LOANS PREPAY AT AN ASSUMED RATE OF PREPAYMENT OF ____% PER ANNUM
(THE "PREPAYMENT ASSUMPTION"), THIS CERTIFICATE HAS BEEN ISSUED WITH $__________
OF OID ON THE INITIAL POOL STATED PRINCIPAL BALANCE; THE ANNUAL YIELD TO
MATURITY OF THIS CERTIFICATE FOR PURPOSES OF COMPUTING THE ACCRUAL OF OID IS
APPROXIMATELY ____% (COMPOUNDED MONTHLY); THE AMOUNT OF OID ALLOCABLE TO THE
SHORT FIRST ACCRUAL PERIOD IS $__________ ON THE INITIAL POOL STATED PRINCIPAL
BALANCE; AND THE METHOD USED TO CALCULATE THE ANNUAL YIELD TO MATURITY AND THE
AMOUNT OF OID ALLOCABLE TO THE SHORT FIRST ACCRUAL PERIOD IS THE EXACT METHOD AS
DEFINED IN PROPOSED TREASURY REGULATIONS. NO REPRESENTATION IS MADE THAT THE
MORTGAGE LOANS WILL PREPAY AT A RATE BASED ON THE PREPAYMENT ASSUMPTION OR AT
ANY OTHER RATE. THE ACTUAL YIELD TO MATURITY MAY DIFFER FROM THAT SET FORTH
ABOVE, AND THE ACCRUAL OF OID WILL BE ADJUSTED, IN ACCORDANCE WITH SECTION
1272(a)(6) OF THE CODE, TO TAKE INTO ACCOUNT EVENTS WHICH HAVE OCCURRED DURING
ANY ACCRUAL PERIOD. THE PREPAYMENT ASSUMPTION IS INTENDED TO BE THE PREPAYMENT
ASSUMPTION REFERRED TO IN SECTION 1272(a)(6)(B)(iii) OF THE CODE.]
<PAGE>
Certificate No. :
Cut-off Date :
First Distribution Date :
Initial Notional Amount
of this Certificate
("Denomination") :
Initial Notional Amount
of all Certificates
of this Class :
CUSIP :
First Horizon Mortgage Pass-Through Trust 1999-__
Mortgage Pass-Through Certificates, Series 199-__
evidencing the distributions allocable to the Class X Certificates with
respect to a Trust Fund consisting primarily of a pool of conventional
mortgage loans (the "Mortgage Loans") secured by first liens on one- to
four-family residential properties.
First Horizon Asset Securities Inc., as Depositor
This Certificate does not evidence an obligation of, or an interest in, and
is not guaranteed by the Depositor, the Seller, the Master Servicer or the
Trustee referred to below or any of their respective affiliates. Neither this
Certificate nor the Mortgage Loans are guaranteed or insured by any governmental
agency or instrumentality.
This certifies that is the registered owner of the Percentage Interest
evidenced by this Certificate specified above in certain monthly distributions
with respect to a Trust Fund consisting primarily of the Mortgage Loans
deposited by First Horizon Asset Securities Inc. (the "Depositor"). The Trust
Fund was created pursuant to a Pooling and Servicing Agreement dated as of Cut-
off Date specified above (the "Agreement") among the Depositor, FT Mortgage
Companies, as seller (in such capacity, the "Seller") and as master servicer (in
such capacity, the "Master Servicer"), and The Bank of New York, as trustee (the
"Trustee"). To the extent not defined herein, the capitalized terms used herein
have the meanings assigned in the Agreement. This Certificate is issued under
and is subject to the terms, provisions and conditions of the Agreement, to
which Agreement the Holder of this Certificate by virtue of the acceptance
hereof assents and by which such Holder is bound.
D-2
<PAGE>
Reference is hereby made to the further provisions of this Certificate set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
This Certificate shall not be entitled to any benefit under the Agreement
or be valid for any purpose unless manually countersigned by an authorized
signatory of the Trustee.
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed. Dated: ____________, 19__
THE BANK OF NEW YORK,
as Trustee
By ______________________
Countersigned:
By ___________________________
Authorized Signatory of
THE BANK OF NEW YORK,
as Trustee
D-3
<PAGE>
EXHIBIT E
[Form of Reverse of Certificates]
First Horizon Mortgage Pass-Through Trust 1999-__
Mortgage Pass-Through Certificates
This Certificate is one of a duly authorized issue of Certificates
designated as First Horizon Mortgage Pass-Through Trust 1999-__ Mortgage Pass-
Through Certificates, of the Series specified on the face hereof (herein
collectively called the "Certificates"), and representing a beneficial ownership
interest in the Trust Fund created by the Agreement.
The Certificateholder, by its acceptance of this Certificate, agrees that
it will look solely to the funds on deposit in the Distribution Account for
payment hereunder and that the Trustee is not liable to the Certificateholders
for any amount payable under this Certificate or the Agreement or, except as
expressly provided in the Agreement, subject to any liability under the
Agreement.
This Certificate does not purport to summarize the Agreement and reference
is made to the Agreement for the interests, rights and limitations of rights,
benefits, obligations and duties evidenced thereby, and the rights, duties and
immunities of the Trustee.
Pursuant to the terms of the Agreement, a distribution will be made on the
25th day of each month or, if such 25th day is not a Business Day, the Business
Day immediately following (the "Distribution Date"), commencing on the first
Distribution Date specified on the face hereof, to the Person in whose name this
Certificate is registered at the close of business on the applicable Record Date
in an amount equal to the product of the Percentage Interest evidenced by this
Certificate and the amount required to be distributed to Holders of Certificates
of the Class to which this Certificate belongs on such Distribution Date
pursuant to the Agreement. The Record Date applicable to each Distribution Date
is the last Business Day of the month next preceding the month of such
Distribution Date.
Distributions on this Certificate shall be made by wire transfer of
immediately available funds to the account of the Holder hereof at a bank or
other entity having appropriate facilities therefor, if such Certificateholder
shall have so notified the Trustee in writing at least five Business Days prior
to the related Record Date and such Certificateholder shall satisfy the
conditions to receive such form of payment set forth in the Agreement, or, if
not, by check mailed by first class mail to the address of such
Certificateholder appearing in the Certificate Register. The final distribution
on each Certificate will be made in like manner, but only upon presentment and
surrender of such Certificate at the Corporate Trust Office or such other
location specified in the notice to Certificateholders of such final
distribution.
The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Trustee and the rights of the Certificateholders under the Agreement at any time
by the Depositor, the Master Servicer and the Trustee with the consent of the
Holders of Certificates affected by such amendment evidencing the
<PAGE>
requisite Percentage Interest, as provided in the Agreement. Any such consent by
the Holder of this Certificate shall be conclusive and binding on such Holder
and upon all future Holders of this Certificate and of any Certificate issued
upon the transfer hereof or in exchange therefor or in lieu hereof whether or
not notation of such consent is made upon this Certificate. The Agreement also
permits the amendment thereof, in certain limited circumstances, without the
consent of the Holders of any of the Certificates.
As provided in the Agreement and subject to certain limitations therein set
forth, the transfer of this Certificate is registrable in the Certificate
Register of the Trustee upon surrender of this Certificate for registration of
transfer at the Corporate Trust Office or the office or agency maintained by the
Trustee in New York, New York, accompanied by a written instrument of transfer
in form satisfactory to the Trustee and the Certificate Registrar duly executed
by the holder hereof or such holder's attorney duly authorized in writing, and
thereupon one or more new Certificates of the same Class in authorized
denominations and evidencing the same aggregate Percentage Interest in the Trust
Fund will be issued to the designated transferee or transferees.
The Certificates are issuable only as registered Certificates without
coupons in denominations specified in the Agreement. As provided in the
Agreement and subject to certain limitations therein set forth, Certificates are
exchangeable for new Certificates of the same Class in authorized denominations
and evidencing the same aggregate Percentage Interest, as requested by the
Holder surrendering the same.
No service charge will be made for any such registration of transfer or
exchange, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
The Depositor, the Master Servicer, the Seller and the Trustee and any
agent of the Depositor or the Trustee may treat the Person in whose name this
Certificate is registered as the owner hereof for all purposes, and neither the
Depositor, the Trustee, nor any such agent shall be affected by any notice to
the contrary.
On any Distribution Date on which the Pool Stated Principal Balance is less
than 10% of the Cut-off Date Pool Principal Balance, the Master Servicer will
have the option to repurchase, in whole, from the Trust Fund all remaining
Mortgage Loans and all property acquired in respect of the Mortgage Loans at a
purchase price determined as provided in the Agreement. In the event that no
such optional termination occurs, the obligations and responsibilities created
by the Agreement will terminate upon the later of the maturity or other
liquidation (or any advance with respect thereto) of the last Mortgage Loan
remaining in the Trust Fund or the disposition of all property in respect
thereof and the distribution to Certificateholders of all amounts required to be
distributed pursuant to the Agreement. In no event, however, will the trust
created by the Agreement continue beyond the expiration of 21 years from the
death of the last survivor of the descendants living at the date of the
Agreement of a certain person named in the Agreement.
Any term used herein that is defined in the Agreement shall have the
meaning assigned in the Agreement, and nothing herein shall be deemed
inconsistent with that meaning.
E-2
<PAGE>
ASSIGNMENT
----------
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto
_______________________
----------------------------------
----------------------------------
----------------------------------
(Please print or typewrite name and address including postal zip code of
assignee)
the Percentage Interest evidenced by the within Certificate and hereby
authorizes the transfer of registration of such Percentage Interest to assignee
on the Certificate Register of the Trust Fund.
I (We) further direct the Trustee to issue a new Certificate of a like
denomination and Class, to the above named assignee and deliver such Certificate
to the following address:
- -----------------------------
Dated:
-------------------------------------
Signature by or on behalf of assignor
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for purposes of distribution:
Distributions shall be made, by wire transfer or otherwise, in immediately
available funds to _____________________________,
________________,
for the account of _________________________,
account number ______________, or, if mailed by check, to_____________________.
Applicable statements should be mailed to_____________________________________,
________________________.
This information is provided by ___________________________,
the assignee named above, or ___________________________________,
as its agent.
E-3
<PAGE>
EXHIBIT F
FORM OF INITIAL CERTIFICATION OF TRUSTEE
[date]
[Depositor]
[Master Servicer]
[Seller]
_____________________
_____________________
Re: Pooling and Servicing Agreement among First Horizon Asset
Securities Inc., as Depositor, FT Mortgage Companies, as Seller
and Master Servicer, and The Bank of New York, as Trustee,
Mortgage Pass-Through Certificates, Series 199 -
Gentlemen:
In accordance with Section 2.02 of the above-captioned Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement"), the undersigned, as
Trustee, hereby certifies that, as to each Mortgage Loan listed in the Mortgage
Loan Schedule (other than any Mortgage Loan listed in the attached schedule), it
has received:
(i) the original Mortgage Note, endorsed as provided in the following
form: "Pay to the order of ________, without recourse"; and
(ii) a duly executed assignment of the Mortgage (which may be included in
a blanket assignment or assignments); provided, however, that it has received no
assignment with respect to any Mortgage for which the related Mortgaged Property
is located in the Commonwealth of Puerto Rico.
Based on its review and examination and only as to the foregoing documents,
such documents appear regular on their face and related to such Mortgage Loan.
The Trustee has made no independent examination of any documents contained
in each Mortgage File beyond the review specifically required in the Pooling and
Servicing Agreement. The Trustee makes no representations as to: (i) the
validity, legality, sufficiency, enforceability or genuineness of any of the
documents contained in each Mortgage File of any of the Mortgage Loans
identified on the Mortgage Loan Schedule, or (ii) the collectability,
insurability, effectiveness or suitability of any such Mortgage Loan.
<PAGE>
Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the Pooling and Servicing Agreement.
THE BANK OF NEW YORK,
as Trustee
By:_____________________________
Name:___________________________
Title:__________________________
F-2
<PAGE>
EXHIBIT G
[RESERVED]
G-1
<PAGE>
EXHIBIT H
FORM OF FINAL CERTIFICATION OF TRUSTEE
[date]
[Depositor]
[Master Servicer]
[Seller]
_____________________
_____________________
Re: Pooling and Servicing Agreement among First Horizon Asset
Securities Inc., as Depositor, FT Mortgage Companies, as Seller
and Master Servicer, and The Bank of New York, as Trustee,
Mortgage Pass-Through Certificates, Series 199 -
Gentlemen:
In accordance with Section 2.02 of the above-captioned Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement"), the undersigned, as
Trustee, hereby certifies that as to each Mortgage Loan listed in the Mortgage
Loan Schedule (other than any Mortgage Loan paid in full or listed on the
attached Document Exception Report) it has received:
(i) The original Mortgage Note, endorsed in the form provided in Section
2.01(c) of the Pooling and Servicing Agreement, with all intervening
endorsements showing a complete chain of endorsement from the originator to the
Seller.
(ii) The original recorded Mortgage.
(iii) A duly executed assignment of the Mortgage in the form provided
in Section 2.01(c) of the Pooling and Servicing Agreement; provided, however,
that it has received no assignment with respect to any Mortgage for which the
related Mortgaged Property is located in the Commonwealth of Puerto Rico, or, if
the Depositor has certified or the Trustee otherwise knows that the related
Mortgage has not been returned from the applicable recording office, a copy of
the assignment of the Mortgage (excluding information to be provided by the
recording office).
(iv) The original or duplicate original recorded assignment or
assignments of the Mortgage showing a complete chain of assignment from the
originator to the Seller.
(v) The original or duplicate original lender's title policy and all
riders thereto or, any one of an original title binder, an original preliminary
title report or an original title commitment, or a copy thereof certified by the
title company.
<PAGE>
Based on its review and examination and only as to the foregoing documents,
(a) such documents appear regular on their face and related to such Mortgage
Loan, and (b) the information set forth in items (i), (ii), (iii), (iv), (vi)
and (xi) of the definition of the "Mortgage Loan Schedule" in Section 1.01 of
the Pooling and Servicing Agreement accurately reflects information set forth in
the Mortgage File.
The Trustee has made no independent examination of any documents contained
in each Mortgage File beyond the review specifically required in the Pooling and
Servicing Agreement. The Trustee makes no representations as to: (i) the
validity, legality, sufficiency, enforceability or genuineness of any of the
documents contained in each Mortgage File of any of the Mortgage Loans
identified on the Mortgage Loan Schedule, or (ii) the collectability,
insurability, effectiveness or suitability of any such Mortgage Loan.
Notwithstanding anything herein to the contrary, the Trustee has made no
determination and makes no representations as to whether (i) any endorsement is
sufficient to transfer all right, title and interest of the party so endorsing,
as noteholder or assignee thereof, in and to that Mortgage Note or (ii) any
assignment is in recordable form or sufficient to effect the assignment of and
transfer to the assignee thereof, under the Mortgage to which the assignment
relates.
Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the Pooling and Servicing Agreement.
THE BANK OF NEW YORK,
as Trustee
By :____________________________
Name:___________________________
Title:__________________________
H-2
<PAGE>
EXHIBIT I
TRANSFER AFFIDAVIT
First Horizon Mortgage Pass-Through Trust 1999-__
Mortgage Pass-Through Certificates
Series 199__
STATE OF )
) ss.:
COUNTY OF )
The undersigned, being first duly sworn, deposes and says as follows:
1. The undersigned is an officer of ____________________, the proposed
Transferee of an Ownership Interest in a Class A-R Certificate (the
"Certificate") issued pursuant to the Pooling and Servicing Agreement, (the
"Agreement"), relating to the above-referenced Series, by and among First
Horizon Asset Securities Inc., as depositor (the "Depositor"), FT Mortgage
Companies, as seller and master servicer and The Bank of New York, as Trustee.
Capitalized terms used, but not defined herein or in Exhibit 1 hereto, shall
have the meanings ascribed to such terms in the Agreement. The Transferee has
authorized the undersigned to make this affidavit on behalf of the Transferee.
2. The Transferee is, as of the date hereof, and will be, as of the date
of the Transfer, a Permitted Transferee. The Transferee is acquiring its
Ownership Interest in the Certificate either (i) for its own account or (ii) as
nominee, trustee or agent for another Person and has attached hereto an
affidavit from such Person in substantially the same form as this affidavit.
The Transferee has no knowledge that any such affidavit is false.
3. The Transferee has been advised of, and understands that (i) a tax
will be imposed on Transfers of the Certificate to Persons that are not
Permitted Transferees; (ii) such tax will be imposed on the transferor, or, if
such Transfer is through an agent (which includes a broker, nominee or
middleman) for a Person that is not a Permitted Transferee, on the agent; and
(iii) the Person otherwise liable for the tax shall be relieved of liability for
the tax if the subsequent Transferee furnished to such Person an affidavit that
such subsequent Transferee is a Permitted Transferee and, at the time of
Transfer, such Person does not have actual knowledge that the affidavit is
false.
4. The Transferee has been advised of, and understands that a tax will be
imposed on a "pass-through entity" holding the Certificate if at any time during
the taxable year of the pass-through entity a Person that is not a Permitted
Transferee is the record holder of an interest in such entity. The Transferee
understands that such tax will not be imposed for any period with
<PAGE>
respect to which the record holder furnishes to the pass-through entity an
affidavit that such record holder is a Permitted Transferee and the pass-through
entity does not have actual knowledge that such affidavit is false. (For this
purpose, a "pass-through entity" includes a regulated investment company, a real
estate investment trust or common trust fund, a partnership, trust or estate,
and certain cooperatives and, except as may be provided in Treasury Regulations,
persons holding interests in pass-through entities as a nominee for another
Person.)
5. The Transferee has reviewed the provisions of Section 5.02(c) of the
Agreement (attached hereto as Exhibit 2 and incorporated herein by reference)
and understands the legal consequences of the acquisition of an Ownership
Interest in the Certificate including, without limitation, the restrictions on
subsequent Transfers and the provisions regarding voiding the Transfer and
mandatory sales. The Transferee expressly agrees to be bound by and to abide by
the provisions of Section 5.02(c) of the Agreement and the restrictions noted on
the face of the Certificate. The Transferee understands and agrees that any
breach of any of the representations included herein shall render the Transfer
to the Transferee contemplated hereby null and void.
6. The Transferee agrees to require a Transfer Affidavit from any Person
to whom the Transferee attempts to Transfer its Ownership Interest in the
Certificate, and in connection with any Transfer by a Person for whom the
Transferee is acting as nominee, trustee or agent, and the Transferee will not
Transfer its Ownership Interest or cause any Ownership Interest to be
Transferred to any Person that the Transferee knows is not a Permitted
Transferee. In connection with any such Transfer by the Transferee, the
Transferee agrees to deliver to the Trustee a certificate substantially in the
form set forth as Exhibit J to the Agreement (a "Transferor Certificate") to the
effect that such Transferee has no actual knowledge that the Person to which the
Transfer is to be made is not a Permitted Transferee.
7. The Transferee does not have the intention to impede the assessment or
collection of any tax legally required to be paid with respect to the
Certificate.
8. The Transferee's taxpayer identification number is ____________.
9. The Transferee is a U.S. Person as defined in Code Section
7701(a)(30).
10. The Transferee is aware that the Certificate may be a "noneconomic
residual interest" within the meaning of proposed Treasury regulations
promulgated pursuant to the Code and that the transferor of a noneconomic
residual interest will remain liable for any taxes due with respect to the
income on such residual interest, unless no significant purpose of the transfer
was to impede the assessment or collection of tax.
11. The Transferee is not an employee benefit plan that is subject to
ERISA or a plan that is subject to Section 4975 of the Code, and the Transferee
is not acting on behalf of such a plan.
* * *
I-2
<PAGE>
IN WITNESS WHEREOF, the Transferee has caused this instrument to be
executed on its behalf, pursuant to authority of its Board of Directors, by its
duly authorized officer and its corporate seal to be hereunto affixed, duly
attested, this _____ day of __________________, 19__.
________________________
Print Name of Transferee
By:____________________
Name:
Title:
[Corporate Seal]
ATTEST:
______________________
[Assistant] Secretary
Personally appeared before me the above-named _____________, known or
proved to me to be the same person who executed the foregoing instrument and to
be the ____________________ of the Transferee, and acknowledged that he executed
the same as his free act and deed and the free act and deed of the Transferee.
Subscribed and sworn before me this _____ day of _________, 19__.
_______________
NOTARY PUBLIC
My Commission expires the ____ day of
________________, 19__.
I-3
<PAGE>
EXHIBIT 1
to EXHIBIT I
Certain Definitions
-------------------
"Ownership Interest": As to any Certificate, any ownership interest in
such Certificate, including any interest in such Certificate as the Holder
thereof and any other interest therein, whether direct or indirect, legal or
beneficial.
"Permitted Transferee": Any Person other than (i) the United States, any
State or political subdivision thereof, or any agency or instrumentality of any
of the foregoing, (ii) a foreign government, International Organization or any
agency or instrumentality of either of the foregoing, (iii) an organization
(except certain farmers' cooperatives described in Code Section 521) which is
exempt from tax imposed by Chapter 1 of the Code (including the tax imposed by
Code Section 511 on unrelated business taxable income) on any excess inclusions
(as defined in Code Section 860E(c)(1)) with respect to any Class A-R
Certificate, (iv) rural electric and telephone cooperatives described in Code
Section 1381(a)(2)(c), (v) a Person that is not a citizen or resident of the
United States, a corporation, partnership, or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust whose income from sources without 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, and
(vi) any other Person so designated by the Trustee based upon an Opinion of
Counsel that the Transfer of an Ownership Interest in a Class A-R Certificate to
such Person may cause the Trust Fund to fail to qualify as a REMIC at any time
that certain Certificates are Outstanding. The terms "United States," "State"
and "International Organization" shall have the meanings set forth in Code
Section 7701 or successor provisions. A corporation will not be treated as an
instrumentality of the United States or of any State or political subdivision
thereof if all of its activities are subject to tax, and, with the exception of
the FHLMC, a majority of its board of directors is not selected by such
governmental unit.
"Person": Any individual, corporation, partnership, joint venture, bank,
joint stock company, trust (including any beneficiary thereof), unincorporated
organization or government or any agency or political subdivision thereof.
"Transfer": Any direct or indirect transfer or sale of any Ownership
Interest in a Certificate, including the acquisition of a Certificate by the
Depositor.
"Transferee": Any Person who is acquiring by Transfer any Ownership
Interest in a Certificate.
I-4
<PAGE>
EXHIBIT 2
to EXHIBIT I
Section 5.02(c) of the Agreement
--------------------------------
(c) Each Person who has or who acquires any Ownership Interest in a Class
A-R Certificate shall be deemed by the acceptance or acquisition of such
Ownership Interest to have agreed to be bound by the following provisions, and
the rights of each Person acquiring any Ownership Interest in a Class A-R
Certificate are expressly subject to the following provisions:
(i) Each Person holding or acquiring any Ownership Interest in a
Class A-R Certificate shall be a Permitted Transferee and shall promptly
notify the Trustee of any change or impending change in its status as a
Permitted Transferee.
(ii) No Ownership Interest in a Class A-R Certificate may be
registered on the Closing Date or thereafter transferred, and the Trustee
shall not register the Transfer of any Class A-R Certificate unless, in
addition to the certificates required to be delivered to the Trustee under
subparagraph (b) above, the Trustee shall have been furnished with an
affidavit (a "Transfer Affidavit") of the initial owner or the proposed
transferee in the form attached hereto as Exhibit I.
(iii) Each Person holding or acquiring any Ownership Interest in a
Class A-R Certificate shall agree (A) to obtain a Transfer Affidavit from
any other Person to whom such Person attempts to Transfer its Ownership
Interest in a Class A-R Certificate, (B) to obtain a Transfer Affidavit
from any Person for whom such Person is acting as nominee, trustee or agent
in connection with any Transfer of a Class A-R Certificate and (C) not to
Transfer its Ownership Interest in a Class A-R Certificate or to cause the
Transfer of an Ownership Interest in a Class A-R Certificate to any other
Person if it has actual knowledge that such Person is not a Permitted
Transferee.
(iv) Any attempted or purported Transfer of any Ownership Interest
in a Class A-R Certificate in violation of the provisions of this Section
5.02(c) shall be absolutely null and void and shall vest no rights in the
purported Transferee. If any purported transferee shall become a Holder of
a Class A-R Certificate in violation of the provisions of this Section
5.02(c), then the last preceding Permitted Transferee shall be restored to
all rights as Holder thereof retroactive to the date of registration of
Transfer of such Class A-R Certificate. The Trustee shall be under no
liability to any Person for any registration of Transfer of a Class A-R
Certificate that is in fact not permitted by Section 5.02(b) and this
Section 5.02(c) or for making any payments due on such Certificate to the
Holder thereof or taking any other action with respect to such Holder under
the provisions of this Agreement so long as the Transfer was registered
after receipt of the related Transfer Affidavit, Transferor Certificate and
either the Rule 144A Letter or the Investment Letter. The Trustee shall be
entitled but not obligated to recover from any Holder of a Class A-R
Certificate that was in fact not a Permitted Transferee at the time it
became a Holder or, at such subsequent time as it became other than a
Permitted Transferee, all payments made on such Class A-R
I-5
<PAGE>
Certificate at and after either such time. Any such payments so recovered
by the Trustee shall be paid and delivered by the Trustee to the last
preceding Permitted Transferee of such Certificate.
(v) The Depositor shall use its best efforts to make available,
upon receipt of written request from the Trustee, all information necessary
to compute any tax imposed under Section 860E(e) of the Code as a result of
a Transfer of an Ownership Interest in a Class A-R Certificate to any
Holder who is not a Permitted Transferee.
I-6
<PAGE>
EXHIBIT J
FORM OF TRANSFEROR CERTIFICATE
__________, 199__
First Horizon Asset Securities Inc.
2974 LBJ Freeway
Dallas, Texas 75234
The Bank of New York
101 Barclay Street, 12E
New York, NY 10286
Attention: Mortgage-Backed Securities Group Series 199 -
Re: First Horizon Mortgage Pass-Through Trust 1999-__ Mortgage Pass-
Through Certificates, Series 199 - , Class
Ladies and Gentlemen:
In connection with our disposition of the above Certificates we certify
that (a) we understand that the Certificates have not been registered under the
Securities Act of 1933, as amended (the "Act"), and are being disposed by us in
a transaction that is exempt from the registration requirements of the Act, (b)
we have not offered or sold any Certificates to, or solicited offers to buy any
Certificates from, any person, or otherwise approached or negotiated with any
person with respect thereto, in a manner that would be deemed, or taken any
other action which would result in, a violation of Section 5 of the Act and (c)
to the extent we are disposing of a Class A-R Certificate, we have no knowledge
the Transferee is not a Permitted Transferee.
Very truly yours,
___________________________
Print Name of Transferor
By: _____________________
Authorized Officer
<PAGE>
EXHIBIT K
FORM OF INVESTMENT LETTER (NON-RULE 144A)
__________, 199__
First Horizon Asset Securities Inc.
2974 LBJ Freeway
Dallas, Texas 75234
The Bank of New York
101 Barclay Street, 12E
New York, NY 10286
Attention: Mortgage-Backed Securities Group Series 199 -
Re: First Horizon Mortgage Pass-Through Trust 1999-__ Mortgage Pass-
Through Certificates, Series 199 - , Class
Ladies and Gentlemen:
In connection with our acquisition of the above Certificates we certify
that (a) we understand that the Certificates are not being registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities laws and
are being transferred to us in a transaction that is exempt from the
registration requirements of the Act and any such laws, (b) we are an
"accredited investor," as defined in Regulation D under the Act, and have such
knowledge and experience in financial and business matters that we are capable
of evaluating the merits and risks of investments in the Certificates, (c) we
have had the opportunity to ask questions of and receive answers from the
Depositor concerning the purchase of the Certificates and all matters relating
thereto or any additional information deemed necessary to our decision to
purchase the Certificates, (d) either (i) we are not an employee benefit plan
that is subject to the Employee Retirement Income Security Act of 1974, as
amended, or a plan or arrangement that is subject to Section 4975 of the
Internal Revenue Code of 1986, as amended, nor are we acting on behalf of any
such plan or arrangement nor are we using the assets of any such plan or
arrangement to effect such acquisition or (ii)if we are an insurance company, a
representation that we are an insurnace company which is purchaseing such
Certificates with funds contained in an "insurance company general account" (as
such term is defined in Section V(e) of Prohibited Transaction Class Exemption
95-60 ("PTCE 95-60")) and that the purchase and holding of such Certificates are
covered under PTCE 95-60, (e) if an insurance company, we are purchasing the
Certificates with funds contained in an "insurance company general account" (as
defined in Section V(e) of Prohibited Transaction Class Exemption 95-60 ("PTCE
95-60")) and our purchase and holding of the Certificates are covered under PTCE
95-60, (f) we are acquiring the Certificates for investment for our own account
and not with a view to any distribution of such Certificates (but without
prejudice to our right at all times to sell or otherwise dispose of the
Certificates in accordance with clause (h) below), (g) we have not offered or
sold any Certificates to, or solicited offers to buy any Certificates from, any
person, or otherwise approached or negotiated
<PAGE>
with any person with respect thereto, or taken any other action which would
result in a violation of Section 5 of the Act, and (h) we will not sell,
transfer or otherwise dispose of any Certificates unless (1) such sale, transfer
or other disposition is made pursuant to an effective registration statement
under the Act or is exempt from such registration requirements, and if
requested, we will at our expense provide an opinion of counsel satisfactory to
the addressees of this Certificate that such sale, transfer or other disposition
may be made pursuant to an exemption from the Act, (2) the purchaser or
transferee of such Certificate has executed and delivered to you a certificate
to substantially the same effect as this certificate, and (3) the purchaser or
transferee has otherwise complied with any conditions for transfer set forth in
the Pooling and Servicing Agreement.
Very truly yours,
________________________
Print Name of Transferee
By: _____________________
Authorized Officer
K-2
<PAGE>
EXHIBIT L
FORM OF RULE 144A LETTER
____________, 199__
First Horizon Asset Securities Inc.
2974 LBJ Freeway
Dallas, Texas 75234
The Bank of New York
101 Barclay Street, 12E
New York, NY 10286
Attention: Mortgage-Backed Securities Group Series 199 -
Re: First Horizon Mortgage Pass-Through Trust 1999-__ Mortgage Pass-
Through Certificates, Series 199 - , Class
Ladies and Gentlemen:
In connection with our acquisition of the above Certificates we certify
that (a) we understand that the Certificates are not being registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities laws and
are being transferred to us in a transaction that is exempt from the
registration requirements of the Act and any such laws, (b) we have such
knowledge and experience in financial and business matters that we are capable
of evaluating the merits and risks of investments in the Certificates, (c) we
have had the opportunity to ask questions of and receive answers from the
Depositor concerning the purchase of the Certificates and all matters relating
thereto or any additional information deemed necessary to our decision to
purchase the Certificates, (d) we are not an employee benefit plan that is
subject to the Employee Retirement Income Security Act of 1974, as amended, or a
plan or arrangement that is subject to Section 4975 of the Internal Revenue Code
of 1986, as amended, nor are we acting on behalf of any such plan or arrangement
nor using the assets of any such plan or arrangement to effect such acquisition,
(e) if an insurance company, we are purchasing the Certificates with funds
contained in an "insurance company general account" (as defined in Section V(e)
of Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60")) and our purchase
and holding of the Certificates are covered under PTCE 95-60, (f) we have not,
nor has anyone acting on our behalf offered, transferred, pledged, sold or
otherwise disposed of the Certificates, any interest in the Certificates or any
other similar security to, or solicited any offer to buy or accept a transfer,
pledge or other disposition of the Certificates, any interest in the
Certificates or any other similar security from, or otherwise approached or
negotiated with respect to the Certificates, any interest in the Certificates or
any other similar security with, any person in any manner, or made any general
solicitation by means of general advertising or in any other manner, or taken
any other action, that would constitute a distribution of the Certificates under
the Act or that would render the disposition of the Certificates a violation of
Section 5 of the Act or require registration pursuant thereto, nor will act, nor
has authorized or will authorize any person to
<PAGE>
act, in such manner with respect to the Certificates, (g) we are a "qualified
institutional buyer" as that term is defined in Rule 144A under the Act ("Rule
144A") and have completed either of the forms of certification to that effect
attached hereto as Annex 1 or Annex 2, (h) we are aware that the sale to us is
being made in reliance on Rule 144A, and (i) we are acquiring the Certificates
for our own account or for resale pursuant to Rule 144A and further, understand
that such Certificates may be resold, pledged or transferred only (A) to a
person reasonably believed to be a qualified institutional buyer that purchases
for its own account or for the account of a qualified institutional buyer to
whom notice is given that the resale, pledge or transfer is being made in
reliance on Rule 144A, or (B) pursuant to another exemption from registration
under the Act.
Very truly yours,
________________________
Print Name of Transferee
By: _____________________
Authorized Officer
L-2
<PAGE>
ANNEX 1 TO EXHIBIT L
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Transferees Other Than Registered Investment Companies]
The undersigned (the "Buyer") hereby certifies as follows to the parties
listed in the Rule 144A Transferee Certificate to which this certification
relates with respect to the Certificates described therein:
1. As indicated below, the undersigned is the President, Chief Financial
Officer, Senior Vice President or other executive officer of the Buyer.
2. In connection with purchases by the Buyer, the Buyer is a "qualified
institutional buyer" as that term is defined in Rule 144A under the Securities
Act of 1933, as amended ("Rule 144A") because (i) the Buyer owned and/or
invested on a discretionary basis $____________ /1/ in securities (except for
the excluded securities referred to below) as of the end of the Buyer's most
recent fiscal year (such amount being calculated in accordance with Rule 144A
and (ii) the Buyer satisfies the criteria in the category marked below.
___ Corporation, etc. The Buyer is a corporation (other than a bank,
----------------
savings and loan association or similar institution), Massachusetts or
similar business trust, partnership, or charitable organization described
in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended.
___ Bank. The Buyer (a) is a national bank or banking institution
----
organized under the laws of any State, territory or the District of
Columbia, the business of which is substantially confined to banking and is
supervised by the State or territorial banking commission or similar
official or is a foreign bank or equivalent institution, and (b) has an
audited net worth of at least $25,000,000 as demonstrated in its latest
annual financial statements, a copy of which is attached hereto.
----------------------------------
___ Savings and Loan. The Buyer (a) is a savings and loan association,
----------------
building and loan association, cooperative bank, homestead association or
similar institution, which is supervised and examined by a State or Federal
authority having supervision over any such institutions or is a foreign
savings and loan association or equivalent institution and (b) has an
audited net worth of at least $25,000,000 as demonstrated in its latest
annual financial statements, a copy of which is attached hereto.
----------------------------------
__________________
/1/ Buyer must own and/or invest on a discretionary basis at least
$100,000,000 in securities unless Buyer is a dealer, and, in that case,
Buyer must own and/or invest on a discretionary basis at least $10,000,000
in securities.
L-3
<PAGE>
___ Broker-dealer. The Buyer is a dealer registered pursuant to Section
-------------
15 of the Securities Exchange Act of 1934.
___ Insurance Company. The Buyer is an insurance company whose primary
-----------------
and predominant business activity is the writing of insurance or the
reinsuring of risks underwritten by insurance companies and which is
subject to supervision by the insurance commissioner or a similar official
or agency of a State, territory or the District of Columbia.
___ State or Local Plan. The Buyer is a plan established and maintained
-------------------
by a State, its political subdivisions, or any agency or instrumentality of
the State or its political subdivisions, for the benefit of its employees.
___ ERISA Plan. The Buyer is an employee benefit plan within the meaning
----------
of Title I of the Employee Retirement Income Security Act of 1974.
___ Investment Advisor. The Buyer is an investment advisor registered
------------------
under the Investment Advisors Act of 1940.
___ Small Business Investment Company. Buyer is a small business
---------------------------------
investment company licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of 1958.
___ Business Development Company. Buyer is a business development company
----------------------------
as defined in Section 202(a)(22) of the Investment Advisors Act of 1940.
3. The term "securities" as used herein does not include (i) securities
---------- ----------------
of issuers that are affiliated with the Buyer, (ii) securities that are part of
an unsold allotment to or subscription by the Buyer, if the Buyer is a dealer,
(iii) securities issued or guaranteed by the U.S. or any instrumentality
thereof, (iv) bank deposit notes and certificates of deposit, (v) loan
participations, (vi) repurchase agreements, (vii) securities owned but subject
to a repurchase agreement and (viii) currency, interest rate and commodity
swaps.
4. For purposes of determining the aggregate amount of securities owned
and/or invested on a discretionary basis by the Buyer, the Buyer used the cost
of such securities to the Buyer and did not include any of the securities
referred to in the preceding paragraph, except (i) where the Buyer reports its
securities holdings in its financial statements on the basis of their market
value, and (ii) no current information with respect to the cost of those
securities has been published. If clause (ii) in the preceding sentence applies,
the securities may be valued at market. Further, in determining such aggregate
amount, the Buyer may have included securities owned by subsidiaries of the
Buyer, but only if such subsidiaries are consolidated with the Buyer in its
financial statements prepared in accordance with generally accepted accounting
principles and if the investments of such subsidiaries are managed under the
Buyer's direction. However, such securities were not included if the Buyer is a
majority-owned, consolidated subsidiary of another enterprise and the Buyer is
not itself a reporting company under the Securities Exchange Act of 1934, as
amended.
L-4
<PAGE>
5. The Buyer acknowledges that it is familiar with Rule 144A and
understands that the seller to it and other parties related to the Certificates
are relying and will continue to rely on the statements made herein because one
or more sales to the Buyer may be in reliance on Rule 144A.
6. Until the date of purchase of the Rule 144A Securities, the Buyer will
notify each of the parties to which this certification is made of any changes in
the information and conclusions herein. Until such notice is given, the Buyer's
purchase of the Certificates will constitute a reaffirmation of this
certification as of the date of such purchase. In addition, if the Buyer is a
bank or savings and loan is provided above, the Buyer agrees that it will
furnish to such parties updated annual financial statements promptly after they
become available.
_____________________
Print Name of Buyer
By:__________________
Name:
Title:
Date:________________
L-5
<PAGE>
ANNEX 2 TO EXHIBIT L
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
--------------------------------------------------------
[For Transferees That are Registered Investment Companies]
The undersigned (the "Buyer") hereby certifies as follows to the parties
listed in the Rule 144A Transferee Certificate to which this certification
relates with respect to the Certificates described therein:
1. As indicated below, the undersigned is the President, Chief Financial
Officer or Senior Vice President of the Buyer or, if the Buyer is a "qualified
institutional buyer" as that term is defined in Rule 144A under the Securities
Act of 1933, as amended ("Rule 144A") because Buyer is part of a Family of
Investment Companies (as defined below), is such an officer of the Adviser.
2. In connection with purchases by Buyer, the Buyer is a "qualified
institutional buyer" as defined in SEC Rule 144A because (i) the Buyer is an
investment company registered under the Investment Company Act of 1940, as
amended and (ii) as marked below, the Buyer alone, or the Buyer's Family of
Investment Companies, owned at least $100,000,000 in securities (other than the
excluded securities referred to below) as of the end of the Buyer's most recent
fiscal year. For purposes of determining the amount of securities owned by the
Buyer or the Buyer's Family of Investment Companies, the cost of such securities
was used, except (i) where the Buyer or the Buyer's Family of Investment
Companies reports its securities holdings in its financial statements on the
basis of their market value, and (ii) no current information with respect to the
cost of those securities has been published. If clause (ii) in the preceding
sentence applies, the securities may be valued at market.
___ The Buyer owned $____________ in securities (other than the excluded
securities referred to below) as of the end of the Buyer's most recent
fiscal year (such amount being calculated in accordance with Rule 144A).
___ The Buyer is part of a Family of Investment Companies which owned in
the aggregate $_________ in securities (other than the excluded securities
referred to below) as of the end of the Buyer's most recent fiscal year
(such amount being calculated in accordance with Rule 144A).
3. The term "Family of Investment Companies" as used herein means two or
------------------------------
more registered investment companies (or series thereof) that have the same
investment adviser or investment advisers that are affiliated (by virtue of
being majority owned subsidiaries of the same parent or because one investment
adviser is a majority owned subsidiary of the other).
4. The term "securities" as used herein does not include (i) securities
----------
of issuers that are affiliated with the Buyer or are part of the Buyer's Family
of Investment Companies, (ii) securities issued or guaranteed by the U.S. or any
instrumentality thereof, (iii) bank deposit notes and
L-6
<PAGE>
certificates of deposit, (iv) loan participations, (v) repurchase agreements,
(vi) securities owned but subject to a repurchase agreement and (vii) currency,
interest rate and commodity swaps.
5. The Buyer is familiar with Rule 144A and understands that the parties
listed in the Rule 144A Transferee Certificate to which this certification
relates are relying and will continue to rely on the statements made herein
because one or more sales to the Buyer will be in reliance on Rule 144A. In
addition, the Buyer will only purchase for the Buyer's own account.
6. Until the date of purchase of the Certificates, the undersigned will
notify the parties listed in the Rule 144A Transferee Certificate to which this
certification relates of any changes in the information and conclusions herein.
Until such notice is given, the Buyer's purchase of the Certificates will
constitute a reaffirmation of this certification by the undersigned as of the
date of such purchase.
______________________
Print Name of Buyer or Adviser
By:___________________
Name:
Title:
IF AN ADVISER:
______________________
Print Name of Buyer
Date:_________________
L-7
<PAGE>
EXHIBIT M
REQUEST FOR RELEASE
(for Trustee)
First Horizon Mortgage Pass-Through Trust 1999-__
Mortgage Pass-Through Certificates
Series 199__
Loan Information
- ----------------
Name of Mortgagor:
Servicer
Loan No.: _______________
Trustee
- -------
Name: _______________
Address: _______________
Trustee
Mortgage File No.: _______________
The undersigned Master Servicer hereby acknowledges that it has received
from The Bank of New York, as Trustee for the Holders of Mortgage Pass-Through
Certificates, of the above-referenced Series, the documents referred to below
(the "Documents"). All capitalized terms not otherwise defined in this Request
for Release shall have the meanings given them in the Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") relating to the above-
referenced Series among the Trustee, FT Mortgage Companies, as Seller and Master
Servicer and First Horizon Asset Securities Inc., as Depositor.
( ) Mortgage Note dated ____________, 19__, in the original principal sum of
$__________, made by __________________. payable to, or endorsed to the
order of, the Trustee.
( ) Mortgage recorded on _________________ as instrument no.
_____________________ in the County Recorder's Office of the County of
___________________, State of _______________ in book/reel/docket
________________ of official records at page/image ________________.
( ) Deed of Trust recorded on __________________ as instrument no.
_________________ in the County Recorder's Office of the County of
________________, State of _______________ in book/reel/docket
_______________ of official records at page/image ________________.
<PAGE>
( ) Assignment of Mortgage or Deed of Trust to the Trustee, recorded on
_________________ as instrument no. ____________ in the County Recorder's
Office of the County of __________, State of ________________ in
book/reel/docket _______________ of official records at page/image
_______________.
( ) Other documents, including any amendments, assignments or other assumptions
of the Mortgage Note or Mortgage.
( )
( )
( )
( )
The undersigned Master Servicer hereby acknowledges and agrees as follows:
(1) The Master Servicer shall hold and retain possession of the Documents
in trust for the benefit of the Trustee, solely for the purposes provided in the
Agreement.
(2) The Master Servicer shall not cause or knowingly permit the Documents
to become subject to, or encumbered by, any claim, liens, security interest,
charges, writs of attachment or other impositions nor shall the Servicer assert
or seek to assert any claims or rights of setoff to or against the Documents or
any proceeds thereof.
(3) The Master Servicer shall return each and every Document previously
requested from the Mortgage File to the Trustee when the need therefor no longer
exists, unless the Mortgage Loan relating to the Documents has been liquidated
and the proceeds thereof have been remitted to the Certificate Account and
except as expressly provided in the Agreement.
(4) The Documents and any proceeds thereof, including any proceeds of
proceeds, coming into the possession or control of the Master Servicer shall at
all times be earmarked for the account of the Trustee, and the Master Servicer
shall keep the Documents and any proceeds separate and distinct from all other
property in the Master Servicer's possession, custody or control.
FT MORTGAGE COMPANIES
By _____________
Its_____________
Date: _________________, 19__
M-2
<PAGE>
EXHIBIT N
REQUEST FOR RELEASE OF DOCUMENTS
To: The Bank of New York Attn: Mortgage Custody Services
Re: The Pooling & Servicing Agreement dated _______ among FT Mortgage
Companies, as Master Servicer, First Horizon Asset Securities Inc. and The Bank
of New York as Trustee
Ladies and Gentlemen:
In connection with the administration of the Mortgage Loans held by you as
Trustee for First Horizon Asset Securities Inc., we request the release of the
Mortgage Loan File for the Mortgage Loan(s) described below, for the reason
indicated.
FT Account#: Pool #:
Mortgagor's Name, Address and Zip Code:
- --------------------------------------
Mortgage Loan Number:
- --------------------
Reason for Requesting Documents (check one)
- -------------------------------
_______1. Mortgage Loan paid in full (FT Mortgage hereby certifies that all
amounts have been received.)
_______2. Mortgage Loan Liquidated (FT Mortgage hereby certifies that all
proceeds of foreclosure, insurance, or other liquidation have been
finally received.)
_______3. Mortgage Loan in Foreclosure.
_______4. Other (explain): ____________________________________
If item 1 or 2 above is checked, and if all or part of the Mortgage File was
previously released to us, please release to us our previous receipt on file
with you, as well as an additional documents in your possession relating to the
above-specified Mortgage Loan. If item 3 or 4 is checked, upon return of all of
the above documents to you as Trustee, please acknowledge your receipt by
signing in the space indicated below, and returning this form.
N-1
<PAGE>
FT MORTGAGE COMPANIES
By:________________________
Name:______________________
Title:_____________________
Date:______________________
TRUSTEE CONSENT TO RELEASE AND
ACKNOWLEDGEMENT OF RECEIPT
By:________________________
Name:______________________
Title:_____________________
Date:______________________
N-2
<PAGE>
[LETTERHEAD OF ANDREWS & KURTH L.L.P APPEARS HERE]
EXHIBIT 5.1
May 20, 1999
First Horizon Asset Securities Inc.
2974 LBJ Freeway
Dallas, Texas 75234
Re: First Horizon Asset Securities Inc.
Registration Statement on Form S-3 (File No. 333-74467)
(the "Registration Statement")
Ladies and Gentlemen:
We have acted as special counsel for First Horizon Asset Securities Inc., a
corporation organized under the laws of the State of Delaware (the "Company"),
and certain trusts, all of the beneficial ownership of which will be initially
owned by the Company (together with the Company, each an "Issuer"), in
connection with the proposed issuance by the Issuer of its Mortgage Pass-Through
Certificates (the "Pass-Through Certificates"). The Pass-Through Certificates of
a series are to be issued pursuant to a Pooling and Servicing Agreement, among
the Company, as Depositor, FT Mortgage Companies, as Seller and Master Servicer,
and The Bank of New York, as Trustee authorizing such series. The Pooling and
Servicing Agreement, in the form filed with the Securities and Exchange
Commission on May 20, 1999 as Exhibit 4.1 to the Registration Statement, is
herein referred to as the "Agreement." Capitalized terms used herein without
definition shall have the meanings assigned to such terms in the Agreement.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of the Company's organizational documents, the form of
Agreement and the form of Pass-Through Certificates included therein and such
other documents, records, certificates of the Issuer and public officials and
other instruments as we have deemed necessary for the purposes of rendering this
opinion. In addition, we have assumed that the Agreement as completed for each
series will be duly executed and delivered by each of the parties thereto; that
the Pass-Through Certificates as completed for each series will be duly executed
and delivered substantially in the forms contemplated by the Agreement; and that
the Pass-Through Certificates for each series will be sold as described in the
Registration Statement.
<PAGE>
First Horizon Asset Securities Inc.
May 20, 1999
Page 2
Based upon the foregoing and subject to the limitations and qualifications
set forth below, we are of the opinion that the Pass-Through Certificates are in
due and proper form and, assuming the due authorization, execution and delivery
of the Agreement for each series by each of the Depositor, the Seller, the
Master Servicer and the Trustee, and the due authorization of the Pass-Through
Certificates for each series by all necessary action on the part of the
applicable Issuer, when the Pass-Through Certificates for each series have been
validly executed, authenticated and issued in accordance with the applicable
Agreement and delivered against payment therefor, the Pass-Through Certificates
for each series will be validly issued and outstanding, fully paid and non-
assessable, and entitled to the benefits of the related Agreement in accordance
with their terms.
The opinion expressed above is subject to the qualification that we do not
purport to be experts as to the laws of any jurisdiction other than the United
States of America and the laws of the States of Texas and New York, and we
express no opinion herein as to the effect that the laws and decisions of courts
of any such other jurisdiction may have upon such opinions.
We consent to the use and filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus Supplement and Prospectus contained therein. In
giving such consent we do not imply or admit that we are within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
Andrews & Kurth L.L.P
By: /s/ David Barbour
--------------------------------
David Barbour, Partner
<PAGE>
[LETTERHEAD OF ANDREW & KURTH L.L.P APPEARS HERE]
EXHIBIT 8.1
May 20, 1999
First Horizon Asset Securities Inc.
2974 LBJ Freeway
Dallas, Texas 75234
Re: First Horizon Asset Securities Inc.
Registration Statement on Form S-3 (File No. 333-74467)
(the "Registration Statement")
Ladies and Gentlemen:
We have acted as counsel for First Horizon Asset Securities Inc., a
corporation organized under the laws of the State of Delaware (the "Company"),
and certain trusts, all of the beneficial ownership of which will be initially
owned by the Company (together with the Company, each an "Issuer"), in
connection with the proposed issuance by each Issuer of its Mortgage Pass-
Through Certificates (the "Pass-Through Certificates"). The Pass-Through
Certificates of a series are to be issued pursuant to a Pooling and Servicing
Agreement (a "Pooling and Servicing Agreement") between the Company, as
Depositor, FT Mortgage Companies, as Seller and Master Servicer, and The Bank of
New York, as Trustee. The Pooling and Servicing Agreement, in the form filed
with the Securities and Exchange Commission on May 20, 1999 as Exhibit 4.1 to
the Registration Statement, is herein referred to as the "Agreement."
Capitalized terms used herein without definition shall have the meanings
assigned to such terms in the Agreement.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, the form of Agreement and the form of Pass-Through
Certificates included therein, and such other documents, records, certificates
of the Issuer and public officials and other instruments as we have deemed
necessary for the purposes of rendering this opinion. In addition, we have
assumed that the Agreement as completed for the Pass-Through Certificates will
be duly executed and delivered by each of the parties thereto; that the Pass-
Through Certificates as completed will be duly executed and delivered
substantially in the forms contemplated by the Agreement; and that the Pass-
Through Certificates will be sold as described in the Registration Statement.
On the basis of the foregoing and subject to the limitations and
qualifications set forth below, we are of the opinion that the description of
federal income tax consequences appearing under the heading "Material Federal
Income Tax Consequences" in the prospectus contained in the Registration
Statement accurately describes the material federal income tax consequences to
holders
<PAGE>
First Horizon Asset Securities Inc.
May 20, 1999
Page 2
of Pass-Through Certificates, under existing law and subject to the
qualifications and assumptions stated therein.
The opinion herein is based upon our interpretations of current law,
including court authority and existing Final and Temporary Regulations, which
are subject to change both prospectively and retroactively, and upon the facts
and assumptions discussed herein. This opinion letter is limited to the matters
set forth herein, and no opinions are intended to be implied or may be inferred
beyond those expressly stated herein. Our opinion is rendered as of the date
hereof and we assume no obligation to update or supplement this opinion or any
matter related to this opinion to reflect any change of fact, circumstances, or
law after the date hereof. In addition, our opinion is based on the assumption
that the matter will be properly presented to the applicable court. We must
note that our opinion represents merely our best legal judgment on the matters
presented and that others may disagree with our conclusion. Our opinion is not
binding on the Internal Revenue Services or a court and there can be no
assurance that the Internal Revenue Service will not take a contrary position or
that a court would agree with our opinion if litigated. In the event any one of
the statements, representations or assumptions we have relied upon to issue this
opinion is incorrect, our opinion might be adversely affected and may not be
relied upon.
We consent to the use and filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus contained therein. In giving such consent we do not
imply or admit that we are within the category of persons whose consent is
required under Section 7 of the 1933 Act or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
Andrews & Kurth L.L.P.
