<PAGE>
Filed pursuant to Rule 424(B)(5)
SEC File No. 333-74467
PROSPECTUS SUPPLEMENT
(To Prospectus dated April 26, 2000)
$184,864,227
(Approximate)
[FIRST HORIZON LOGO]
Seller and Master Servicer
First Horizon Mortgage Pass-Through Trust 2000-1
Issuer
Mortgage Pass-Through Certificates, Series 2000-1
Distributions payable monthly commencing in May, 2000
- --------------------------------------------------------------------------------
You should The trust will issue:
carefully consider
the risk factors . six classes of senior certificates; and
beginning on page
S-11 of this . six classes of subordinated certificates.
prospectus
supplement and on
page 6 of the
accompanying
prospectus.
For a description of the classes of certificates offered by this prospectus,
see "Summary--Offered Certificates" on page S-5. 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 20 to 30 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.
Lehman Brothers, Inc. will purchase the certificates and, together with
First Tennessee Securities Corporation 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 94.34% 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 April 28, 2000.
- --------------------------------------------------------------------------------
Lehman Brothers First Tennessee Securities Corporation
April 26, 2000
<PAGE>
Important notice about information presented in this
prospectus supplement and the accompanying prospectus:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
If information varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
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 certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
After the initial distribution of the certificates offered hereby, this
prospectus and prospectus supplement may be used by First Tennessee Securities
Corporation, an affiliate of the depositor, the seller and the master servicer,
in connection with market making transactions in such certificates. First
Tennessee Securities Corporation may act as principal or agent in these
transactions. These transactions will be at market prices at the time of sale
and not at the prices of the initial offering. Certain information in this
prospectus supplement will be updated from time to time.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Important notice about information presented in this
prospectus supplement and the accompanying prospectus................................................ S-2
SUMMARY....................................................................................................... S-5
The Issuer........................................................................................... S-5
Offered Certificates................................................................................. S-5
The Mortgage Loans................................................................................... S-6
Cut-off Date......................................................................................... S-7
Closing Date......................................................................................... S-7
Depositor............................................................................................ S-7
Seller and Master Servicer........................................................................... S-7
Trustee.............................................................................................. S-7
Distributions on the Certificates.................................................................... S-7
Optional Termination................................................................................. S-8
Advances............................................................................................. S-9
Credit Enhancement................................................................................... S-9
Tax Status........................................................................................... S-9
ERISA Considerations................................................................................. S-9
Legal Investment..................................................................................... S-10
Ratings.............................................................................................. S-10
RISK FACTORS.................................................................................................. S-11
Certificates may not be appropriate investments
for some investors........................................................................ S-11
Prepayments are unpredictable and will affect the yield on
your certificates.......................................................................... S-12
The effect of prepayments on principal only certificates and
certificates purchased at a premium or discount
may be severe.............................................................................. S-13
Subordination may not be sufficient to protect senior
certificates from losses.................................................................. S-13
Concentration of California
mortgage loans may increase risk of losses................................................ S-14
Residual Certificates have adverse tax consequences.................................................. S-15
Year 2000 computer problems could disrupt distributions on
your certificates......................................................................... S-15
FORWARD LOOKING STATEMENTS.................................................................................... S-16
THE MORTGAGE POOL............................................................................................. S-16
General.............................................................................................. S-16
Assignment of the Mortgage Loans..................................................................... S-23
SERVICING OF MORTGAGE LOANS................................................................................... S-24
General.............................................................................................. S-24
The Master Servicer.................................................................................. S-25
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Foreclosure, Delinquency and Loss Experience......................................................... S-25
Servicing Compensation and Payment of Expenses....................................................... S-28
Adjustment to Master Servicing Fee in Connection with Prepaid Mortgage
Loans....................................................................................... S-29
Advances ............................................................................................ S-29
Unanticipated Recoveries of Losses on the Mortgage Loans............................................. S-30
DESCRIPTION OF THE CERTIFICATES............................................................................... S-30
General ............................................................................................ S-30
Book-Entry Certificates.............................................................................. S-31
Payments on Mortgage Loans; Accounts................................................................. S-32
Distributions on the Certificates.................................................................... S-32
Allocation of Realized Losses on the Certificates.................................................... S-35
Additional Rights of the Residual Certificateholders................................................. S-37
Subordination........................................................................................ S-38
Structuring Assumptions.............................................................................. S-40
Optional Purchase of Defaulted Loans................................................................. S-41
Optional Termination................................................................................. S-41
The Trustee.......................................................................................... S-42
Restrictions on Transfer of the Class A-R Certificates............................................... S-42
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS ................................................................ S-42
General ............................................................................................ S-42
Prepayment Considerations and Risks.................................................................. S-43
Yield Sensitivity of Class PO Certificates........................................................... S-44
Additional Information............................................................................... S-45
Weighted Average Lives of the Offered Certificates................................................... S-45
Decrement Tables..................................................................................... S-46
Last Scheduled Distribution Date..................................................................... S-53
The Class B Certificates............................................................................. S-53
USE OF PROCEEDS............................................................................................... S-54
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ..................................................................... S-54
ERISA CONSIDERATIONS.......................................................................................... S-55
METHOD OF DISTRIBUTION........................................................................................ S-57
LEGAL MATTERS................................................................................................. S-58
RATINGS ..................................................................................................... S-58
GLOSSARY OF TERMS............................................................................................. S-59
</TABLE>
S-4
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of an offering of the
certificates, you should read carefully this entire document and the
accompanying prospectus.
For the definitions of certain capitalized terms used in this prospectus
supplement, see "Glossary of Terms" on page S-59.
The Issuer
The Issuer of the certificates will be First Horizon Mortgage Pass-Through
Trust 2000-1. 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 the non-offered certificates will consist of a pool of
mortgage loans with a principal balance of approximately $186,167,932 as of
April 1, 2000.
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 $ 102,000,000 7.00% senior/sequential pay
- -------------------------------------------------------------------------------------------------------------------
Class A-2 $ 24,000,000 7.00% senior/sequential pay
- -------------------------------------------------------------------------------------------------------------------
Class A-3 $ 28,868,000 7.00% senior/sequential pay
- -------------------------------------------------------------------------------------------------------------------
Class A-4 $ 20,400,000 7.00% senior/lockout
- -------------------------------------------------------------------------------------------------------------------
Class PO $ 2,987,127 N/A senior/ratio strip
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Class A-R $ 100 7.00% senior/sequential pay
- -------------------------------------------------------------------------------------------------------------------
Class B-1 $ 4,468,000 7.00% subordinated
- -------------------------------------------------------------------------------------------------------------------
Class B-2 $ 1,396,000 7.00% subordinated
- -------------------------------------------------------------------------------------------------------------------
Class B-3 $ 745,000 7.00% subordinated
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The trust will also issue Class B-4, Class B-5 and Class B-6 Certificates
which are not offered by this prospectus supplement.
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. Any difference between the total
principal amount of the certificates on the date they are
S-5
<PAGE>
issued and the approximate total principal amount of the certificates on the
date of this prospectus supplement will not exceed 5%.
All classes of the offered certificates, other than the Class PO and Class
A-R Certificates, will be book-entry certificates.
The trust will issue the certificates in the following minimum
denominations:
---------------------------------------------------------
Class Minimum Denomination
----- --------------------
---------------------------------------------------------
Class A-1 $25,000
---------------------------------------------------------
Class A-2 $25,000
---------------------------------------------------------
Class A-3 $25,000
---------------------------------------------------------
Class A-4 $25,000
---------------------------------------------------------
Class PO $25,000
---------------------------------------------------------
Class A-R $100
---------------------------------------------------------
Class B-1 $100,000
---------------------------------------------------------
Class B-2 $100,000
---------------------------------------------------------
Class B-3 $100,000
---------------------------------------------------------
Certificates with principal balances in excess of these amounts will be
issued in multiples of $1,000 above the minimum denomination.
See "The Mortgage Pool," "Description of the Certificates -- General" and
"--Book-Entry Certificates" in this prospectus supplement and "The Trust Fund --
The Mortgage Loans -- General" in the prospectus.
The Mortgage Loans
First Horizon Home Loan Corporation originated or acquired all of the
mortgage loans. The mortgage loans expected to be sold to the trust have the
following characteristics as of April 1, 2000:
. Total original principal balance (1): $186,167,931.99.
. Original terms to maturity: 20 to 30 years
. Range of maturities: between 228 and 358 months
. Range of annual interest rates: between 6.50% and 7.75%
. Largest geographic concentration: 20.37% of the mortgage loans are
secured by property located in California
- -----------
/(1)/ Approximate, after deducting payments of principal due on or before April
1, 2000, and subject to the variance described in this prospectus supplement.
See "The Mortgage Pool-- General".
S-6
<PAGE>
Cut-off Date
April 1, 2000, 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 April 28, 2000.
Depositor
First Horizon Asset Securities Inc.
Seller and Master Servicer
First Horizon Home Loan Corporation
Trustee
The Bank of New York
Distributions on the Certificates
The trustee will make distributions on the certificates on the 25th day of
each month. If the 25th is not a business day, the trustee will make
distributions on the next business day. The first distribution date will be May
25, 2000.
On each distribution date, the trustee will first pay to the senior
certificates the amounts of interest and principal distributable to them from
available funds. The trustee will then pay interest and principal to the
subordinated certificates from the remaining available funds.
Interest Payments
. The actual amount of interest you receive on your certificates (if
your certificates are interest bearing) on each distribution date will
depend on:
- the amount of interest accrued on your certificates;
- the total amount of funds available for distribution; and
- the amount of any accrued interest not paid on your certificates
on earlier distribution dates.
. If you are the holder of a subordinated certificate, you will receive
interest payments only after the trustee has paid interest and
principal to:
- all of the senior certificates; and
- each class of subordinated certificates that ranks higher than
your certificates.
. The holders of the Class PO Certificates are not entitled to any
interest distributions.
. The trustee will calculate interest on the basis of a 360-day year
consisting of twelve 30-day months.
S-7
<PAGE>
Principal Payments
. After interest payments have been made on all senior certificates
entitled to interest, each class of senior certificates entitled to
principal distributions will also receive a payment of principal. If
you are the holder of subordinated certificates, you will receive
principal payments after (1) interest and principal have been paid on
all the senior certificates and the subordinated certificates ranking
senior to yours (if any) and (2) interest has been paid on your
certificates. You should refer to "Description of the Certificates--
Distributions on the Certificates" for a description of the amount of
principal payable to you and the priority in which it will be paid.
. The amount and timing of principal you receive on your certificates
will depend on:
- the various priorities and formulas described in this prospectus
supplement that determine the allocation of principal payments to
your certificates; and
- the amounts actually available for distribution as principal.
. Because of the principal allocation formulas described in this
prospectus supplement, the senior certificates entitled to principal
distributions -- other than the Class PO Certificates -- will receive
principal payments at a faster rate than the subordinated certificates
for at least the first nine years after the issuance of the
certificates. The Class A-4 Certificates will not benefit from this
accelerated repayment.
You should refer to "Description of the Certificates -- Distributions on the
Certificates -- Allocation of Available Funds."
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 April
1, 2000.
See "Description of the Certificates-- Optional Termination".
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
If you are the holder of a senior certificate, your certificate will
benefit from the credit enhancement provided by the subordination of the
subordinated certificates.
This subordination will benefit the senior certificates in two ways:
S-8
<PAGE>
. The senior certificates will have a preferential right over the
subordinated certificates to receive funds available for interest and
principal distributions.
. The subordinated certificates will absorb all losses on the mortgage
loans up to the level described in this prospectus supplement.
If you are the holder of a senior certificate, you should keep in mind,
however, that the subordination of the subordinated certificates offers only
limited protection against the loss of your investment. If you are the holder of
a subordinated certificate, your certificate will benefit from the credit
enhancement provided by the subordination of any lower-ranking classes of
subordinated certificates. This subordination will, however, offer only limited
protection against the loss of your investment.
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 B-1 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-
2 and Class B-3 Certificates will not be mortgage related securities for
purposes of that act.
See "Legal Investment" in the prospectus.
S-9
<PAGE>
Ratings
The classes of certificates listed below will not be offered unless they
are assigned the following ratings by Fitch and S&P.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Class Fitch Rating S&P Rating
----- ------------ ----------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A-1 AAA AAA
- --------------------------------------------------------------------------------------------------------------
Class A-2 AAA AAA
- --------------------------------------------------------------------------------------------------------------
Class A-3 AAA AAA
- --------------------------------------------------------------------------------------------------------------
Class A-4 AAA AAA
- --------------------------------------------------------------------------------------------------------------
Class PO AAA AAAr
- --------------------------------------------------------------------------------------------------------------
Class A-R AAA AAA
- --------------------------------------------------------------------------------------------------------------
Class B-1 AA N/A
- --------------------------------------------------------------------------------------------------------------
Class B-2 A N/A
- --------------------------------------------------------------------------------------------------------------
Class B-3 BBB N/A
- --------------------------------------------------------------------------------------------------------------
</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. You should refer to "Ratings" in this prospectus supplement to learn
more about the significance and limitations of ratings.
S-10
<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.
<TABLE>
<S> <C>
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 lives
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.
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
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 master servicer 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 or expected yield 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
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
you may be able to reinvest the principal at a
higher rate of interest than the pass-through rate
or expected yield 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 certificates and
certificates purchased at a
premium or discount
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 your 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 your certificates at a premium and
principal is repaid faster than you anticipate, then
your yield may be lower than you anticipate.
See "Yield, Prepayment and Maturity Considerations".
Subordination may not be
sufficient to protect senior
certificates from losses................ Credit enhancement will be provided for the certificates,
first, by the right of the holders of certificates to
receive payments of principal before the classes
subordinate to them and, second, by the allocation of
realized losses to junior classes in the inverse order of
their subordination. This form of credit enhancement is
provided by using collections on the mortgage loans
otherwise payable to holders of junior classes to pay
amounts due on more senior classes. Collections otherwise
payable to junior
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
classes comprise the sole source of funds from which this
type of credit enhancement is provided. Realized losses
are allocated to the subordinated certificates, beginning
with the subordinated 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 subordinate classes of
subordinated certificates sequentially, until the class
certificate balances of each succeeding class has been
reduced to zero.
Accordingly, if the class certificate balance of each
junior 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 junior 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 junior class has not been reduced to zero. Among
the subordinated certificates the Class B-1 Certificates
are the least subordinated, that is, they have the highest
payment priority. Then come the Class B-2, Class B-3,
Class B-4, Class B-5 and Class B-6 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 20.37% 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 or uninsured hazards,
such as earthquakes, floods, mudslides and other
natural disasters.
. 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.
. California's economic condition and housing market
may be adversely affected by a variety of
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
events, including natural disasters such as
earthquakes, hurricanes, floods and eruptions,
mudslides and brushfires and civil disturbances such
as riots. If these occur, the rates of delinquency,
foreclosure, bankruptcy and loss on the mortgage
loans may increase.
. 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, except for the
initial principal balance of $100 and related interest.
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.
There is a continuing risk that the transition from the
year 1999 to the year 2000 may interfere with the ability
of
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
computer systems used by the master servicer, the trustee,
The Depository Trust Company and other parties to process
information. All problems associated with this transition
may not yet have been identified and this risk may persist
for some time. This could disrupt collection of payments
on the mortgage loans and the calculation and payment of
principal and interest, if applicable, due on the
certificates.
</TABLE>
FORWARD LOOKING STATEMENTS
We caution you that certain statements contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus consist
of forward-looking statements relating to future economic performance or
projections and other financial items. These statements can be identified by the
use of forward-looking words such as "may," "will," "should," "expects,"
"believes," "anticipates," "estimates," or other comparable words. Forward-
looking statements are subject to a variety of risks and uncertainties that
could cause actual results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business conditions,
regulatory initiatives and compliance with governmental regulations, customer
preferences, effects of prepayments, changes in interest rates and various other
matters, many of which are beyond our control. Because we cannot predict the
future, what actually happens may be very different from what we predict in our
forward-looking statements.
THE MORTGAGE POOL
General
The depositor will purchase mortgage loans in the mortgage pool from the
seller pursuant to a mortgage loan purchase agreement between the seller and the
depositor. The depositor will cause the mortgage loans to be assigned to the
trustee for the benefit of the certificateholders pursuant to a pooling and
servicing agreement among the depositor, First Horizon, as seller and master
servicer, and The Bank of New York, as trustee.
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
S-16
<PAGE>
deficient documentation or which are otherwise defective. The seller 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 and substitution obligations described above. The obligations of the
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 $186,167,932, which is
referred to as the cut-off date pool principal balance. The mortgage loans
provide for the amortization of the amount financed over a series of
substantially equal monthly payments. The due date for each mortgage loan is the
first day of each calendar month. At origination, substantially all of the
mortgage loans had stated terms to maturity of 30 years. Scheduled monthly
payments made by the mortgagors on the mortgage loans either earlier or later
than their scheduled due dates will not affect the amortization schedule or the
relative application of the payments to principal and interest. The mortgagors
may prepay their mortgage loans at any time without penalty.
Substantially all of the mortgage loans are jumbo mortgage loans that have
principal balances at origination that exceed the then applicable limitations
for purchase by Fannie Mae and Freddie Mac.
Each mortgage loan was originated after November 7, 1997.
The latest stated maturity date of any mortgage loan is February 1, 2030.
The earliest stated maturity date of any mortgage loan is April 1, 2019.
As of the cut-off date, no mortgage loan was delinquent more than 59 days.
No mortgage loan will be subject to buydown agreements. No mortgage loan
provides for deferred interest or negative amortization.
No mortgage loan has a loan-to-value ratio at origination of more than 95%.
Generally, each mortgage loan with a loan-to-value ratio at origination of
greater than 80% is covered by a primary mortgage guaranty insurance policy
issued by mortgage insurance company acceptable to Fannie Mae or Freddie Mac.
The primary mortgage guaranty insurance policy provides coverage in an amount
equal to a specified percentage times the sum of the Stated Principal Balance of
the related mortgage loan, the accrued interest on the related mortgage loan and
the related foreclosure expenses. The specified percentage is either 12% for
loan-to-value ratios between 80.01% and 85.00%, 25% for loan-to-value ratios
between 85.01% and 90.00% or 30% for loan-to-value ratios between 90.01% and
95.00%; provided that the specified percentage is 25% for two mortgage loans
with loan-to-value ratios between 90.01% and 95.00%.
S-17
<PAGE>
No primary mortgage guaranty insurance 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 primary mortgage guaranty insurance policy is
prohibited by applicable law.
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
. 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 First Horizon's Streamlined
Documentation Program as described in the prospectus under "The
Mortgage Loan Program --Underwriting Standards."
For mortgage loans originated pursuant to First Horizon'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%.
S-18
<PAGE>
MORTGAGE RATES
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance Percentage of
Mortgage Rates (%) Mortgage Loans Outstanding Mortgage Pool
------------------ -------------- ----------- -------------
<S> <C> <C> <C>
6.500.................................... 6 $ 2,040,656.51 1.10%
6.625.................................... 4 1,202,990.19 0.65%
6.750.................................... 17 6,126,798.55 3.29%
6.875.................................... 51 18,769,400.05 10.08%
7.000.................................... 67 22,843,730.27 12.27%
7.125.................................... 69 22,517,376.22 12.10%
7.250.................................... 125 43,058,591.56 23.13%
7.375.................................... 78 26,862,273.96 14.43%
7.500.................................... 66 22,259,422.05 11.96%
7.625.................................... 27 8,618,586.43 4.63%
7.750.................................... 33 11,868,106.21 6.37%
----- ----------------- ---------
TOTALS:............... 543 $ 186,167,931.99 100.00%
</TABLE>
As of the cut-off date, the weighted average mortgage rate of the mortgage
loans, as so adjusted, is expected to be approximately 7.235%.
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Aggregate
Number of Principal
Mortgage Balance Percentage of
Current Mortgage Loan Amounts Loans Outstanding Mortgage Pool
----------------------------- ----- ----------- -------------
<S> <C> <C> <C>
$ 100,001 - $ 150,000................. 1 $ 112,252.90 0.06%
$ 150,001 - $ 200,000................. 2 390,245.94 0.21%
$ 200,001 - $ 250,000................. 5 1,190,354.61 0.64%
$ 250,001 - $ 300,000................. 194 53,292,640.37 28.63%
$ 300,001 - $ 350,000................. 153 49,675,713.56 26.68%
$ 350,001 - $ 400,000................. 90 33,787,836.41 18.15%
$ 400,001 - $ 450,000................. 40 16,869,972.59 9.06%
$ 450,001 - $ 500,000................. 24 11,548,904.54 6.20%
$ 500,001 - $ 550,000................. 17 9,012,882.74 4.84%
$ 550,001 - $ 600,000................. 9 5,212,092.23 2.80%
$ 600,001 - $ 650,000................. 8 5,075,036.10 2.73%
----- ---------------- --------
TOTALS:........................ 543 $ 186,167,931.99 100.00%
</TABLE>
As of the cut-off date, the weighted average principal balance of the mortgage
loans is expected to be approximately $342,851.
S-19
<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.............................................. 463 $157,862,097.24 84.80%
Alternative....................................... 74 25,927,826.82 13.93%
Limited........................................... 4 1,653,805.47 0.89%
No Income Verification............................ 1 406,144.46 0.22%
No Ratio.......................................... 1 318,058.00 0.17%
------ ----------------- ---------
TOTALS:.................................. 543 $186,167,931.99 100.00%
</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.......................... 12 $ 4,651,014.14 2.50%
50.01 to 55.00........................... 8 3,205,999.70 1.72%
55.01 to 60.00........................... 15 4,726,721.60 2.54%
60.01 to 65.00........................... 17 6,298,794.94 3.38%
65.01 to 70.00........................... 35 13,636,032.37 7.32%
70.01 to 75.00........................... 62 21,441,060.54 11.52%
75.01 to 80.00........................... 306 105,696,183.37 56.77%
80.01 to 85.00........................... 12 3,883,743.86 2.09%
85.01 to 90.00........................... 47 14,620,850.30 7.85%
90.01 to 95.00........................... 29 8,007,531.16 4.30%
---- --------------- -------
TOTALS........................... 543 $186,167,931.99 100.00%
</TABLE>
The weighted average original loan-to-value ratio of the mortgage loans
is expected to be approximately 76.98%.
S-20
<PAGE>
STATE DISTRIBUTION
OF MORTGAGE PROPERTIES
<TABLE>
<CAPTION>
Aggregate
Number of Principal Balance Percent of
State Mortgage Loans Outstanding Mortgage Pool
----- -------------- ----------- -------------
<S> <C> <C> <C>
Arizona....................................... 33 $ 11,992,225.42 6.44%
California.................................... 109 37,915,361.50 20.37%
Colorado...................................... 26 9,000,640.75 4.83%
Connecticut................................... 3 1,251,221.14 0.67%
District of Columbia.......................... 1 313,985.69 0.17%
Delaware...................................... 2 575,925.55 0.31%
Florida....................................... 9 3,026,151.49 1.63%
Georgia....................................... 51 17,850,496.42 9.59%
Illinois...................................... 31 9,823,672.86 5.28%
Indiana....................................... 4 1,469,749.46 0.79%
Kansas........................................ 2 576,892.20 0.31%
Massachusetts................................. 14 4,893,307.79 2.63%
Maryland...................................... 48 17,207,166.60 9.24%
Michigan...................................... 2 680,043.37 0.37%
Missouri...................................... 2 582,767.06 0.31%
North Carolina................................ 9 2,756,811.16 1.48%
Nebraska...................................... 1 291,550.59 0.16%
New Hampshire................................. 2 744,173.05 0.40%
New Jersey.................................... 12 3,662,415.37 1.97%
New Mexico.................................... 1 271,749.36 0.15%
Nevada........................................ 2 556,255.99 0.30%
New York...................................... 2 800,836.62 0.43%
Ohio.......................................... 3 1,247,285.37 0.67%
Oklahoma...................................... 1 273,331.11 0.15%
Oregon........................................ 17 5,793,921.82 3.11%
Pennsylvania.................................. 4 1,634,693.21 0.88%
South Carolina................................ 1 496,840.35 0.27%
Tennessee..................................... 29 9,744,016.90 5.23%
Texas......................................... 21 7,849,196.14 4.22%
Utah.......................................... 1 363,399.42 0.20%
Virginia...................................... 62 20,230,561.04 10.87%
Washington.................................... 38 12,291,287.19 6.60%
------ ---------------- -------
TOTALS:............................. 543 $186,167,931.99 100.00%
</TABLE>
No more than approximately 0.98% of the mortgage loans are secured by
mortgaged properties located in any one postal zip code area.
S-21
<PAGE>
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.......................................... 383 $128,840,418.60 69.21%
Refinance (rate/term)............................. 113 40,148,439.03 21.57%
Refinance (cash out).............................. 47 17,179,074.36 9.23%
---- ----------------- ---------
TOTALS:.................................. 543 $186,167,931.99 100.00%
</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..................................... 364 $125,573,950.45 67.45%
Deminimus Planned Unit............................ 112 38,687,991.32 20.78%
Planned Unit...................................... 54 17,762,722.54 9.54%
Condominium....................................... 9 2,814,694.27 1.51%
2-4 Family........................................ 3 930,105.70 0.50%
High Rise Condo................................... 1 398,467.71 0.21%
------ ---------------- ---------
TOTALS:.................................. 543 $186,167,931.99 100.00%
</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................................. 535 $183,465,540.71 98.55%
Second Residence.................................. 7 2,390,324.74 1.28%
Investor Property................................. 1 312,066.54 0.17%
------ ------------------ ---------
TOTALS:.................................. 543 $186,167,931.99 100.00%
</TABLE>
The information shown in the above table is based upon representations
of the mortgagor at the time of origination of the mortgage loans.
S-22
<PAGE>
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>
217 - 228............................. 1 $ 434,803.11 0.23%
229 - 240............................. 2 516,137.32 0.28%
325 - 336............................. 5 1,813,765.91 0.97%
337 - 348............................. 88 29,819,236.13 16.02%
349 - 360............................. 447 153,583,989.52 82.50%
--- ---------------- --------
TOTALS:...................... 543 $ 186,167,931.99 100.00%
</TABLE>
As of the cut-off date, the weighted average remaining term to maturity
of the mortgage loans is expected to be approximately 350 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,
. 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 25% 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 California and in other states where, in the
opinion of counsel, no recording is required to protect the trustee's interests
in the
S-23
<PAGE>
mortgage loan against the claim of any subsequent transferee or any successor to
or creditor of the depositor or the seller.
The trustee (or the custodian, as applicable) will review each mortgage
file within 90 days of the closing date, or promptly after the trustee's (or
custodian'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 custodian), or within
such longer period not to exceed 720 days after the closing date as provided in
the pooling and servicing agreement in the case of missing documents not
returned from the public recording office, the seller will be obligated to
repurchase the affected mortgage loan from the trust fund. Rather than
repurchase the mortgage loan as provided above, the seller may, at its option,
remove the affected mortgage loan (referred to as a deleted mortgage loan) from
the trust fund and substitute in its place another mortgage loan (referred to as
a replacement mortgage loan); however, a substitution will only be permitted
within two years of the closing date and may not be made unless an opinion of
counsel is provided to the trustee to the effect that the substitution will not
disqualify the REMIC or result in a prohibited transaction tax under the Code.
On the date of substitution, any replacement mortgage loan will
. 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 will deposit 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.
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.
S-24
<PAGE>
The Master Servicer
First Horizon will act as master servicer for the mortgage loans
pursuant to the pooling and servicing agreement. First Horizon is engaged
primarily in the mortgage banking business, and as such, originates, purchases,
sells and services mortgage loans. First Horizon originates mortgage loans
through a retail branch system and through mortgage loan brokers and
correspondents nationwide. First Horizon's mortgage loans are principally
first-lien, fixed or adjustable rate mortgage loans secured by single-family
residences.
At March 31, 2000, First Horizon provided servicing for approximately
$50.564 billion aggregate principal amount of mortgage loans, substantially all
of which are being serviced for unaffiliated persons.
The principal executive offices of First Horizon are located at 4000
Horizon Way, Irving, Texas 75063.
First Horizon initially services substantially all of the mortgage
loans it originates or acquires. In addition, First Horizon 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 First Horizon receives servicing
fees. First Horizon 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 First Horizon 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.
A general deterioration of the real estate market in regions where the
Mortgaged Properties are located may result in increases in delinquencies of
loans secured by real estate, slower absorption rates of real estate into the
market and lower sales prices for real estate. A general weakening of the
economy may result in decreases in the financial strength of borrowers and
decreases in the value of collateral serving as security for loans. If the real
estate market and economy were to decline, the master servicer may experience an
increase in delinquencies on the loans it services and higher net losses on
liquidated loans.
The master servicer generally follows the guidelines established by
Fannie Mae with respect to foreclosure and liquidation of mortgage loans. These
guidelines provide for the commencement of foreclosure proceedings when a
scheduled monthly payment has become 90 days past due.
The following table summarizes the delinquency, foreclosure and loss
experience, respectively, on the dates indicated, of all jumbo first lien
mortgage loans serviced or master
S-25
<PAGE>
serviced by the master servicer. The delinquency, foreclosure and loss
percentages may be affected by the size and relative lack of seasoning of the
master servicer's jumbo loan servicing portfolio which increased from
approximately $1.332 billion at December 31, 1997, to approximately $3.169
billion at December 31, 1998, to approximately $4.787 billion at December 31,
1999, and to approximately $4.942 billion at March 31, 2000. Accordingly, the
information should not be considered as a basis for assessing the likelihood,
amount or severity of delinquency or losses on the mortgage loans and no
assurances can be given that the foreclosure, delinquency and loss experience
presented in the table below will be indicative of the experience on the
mortgage loans underlying the certificates:
[Remainder of Page Intentionally Left Blank]
S-26
<PAGE>
Delinquency and Foreclosure Experience in First Horizon's Portfolio
of One-to-Four Family, Jumbo Residential Mortgage Loans
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1998 1999
---- ---- ----
No. of % of Principal % of No. of % of Principal % of No. of % of Principal % of
Loans Loans Balance($) Balance Loans Loans Balance($) Balance Loans Loans Balance($) Balance
----- ----- ---------- ------- ----- ----- ---------- ------- ----- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JUMBO LOAN
PORTFOLIO
Total Portfolio 4,543 1,332,476 10,160 3,169,165 14,855 4,786,907
Period of Delinquency
30-59 Days 77 1.69 20,763 1.56 120 1.18 35,247 1.11 175 1.18 53,661 1.12
60-89 Days 17 0.37 9,405 0.71 16 0.16 6,473 0.20 20 0.13 7,663 0.16
90 Days or more 38 0.84 8,501 0.64 32 0.31 8,932 0.28 31 0.21 8,248 0.17
Foreclosures Pending 25 0.55 5,816 0.44 15 0.15 3,432 0.11 18 0.12 4,869 0.10
Total Delinquencies 157 3.46 44,485 3.34 183 1.80 54,084 1.71 244 1.64 74,441 1.56
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
--------------------
No. of % of Principal % of
Loans Loans Balance($) Balance
----- ----- ---------- -------
<S> <C> <C> <C> <C>
JUMBO LOAN
PORTFOLIO
Total Portfolio 15,299 4,941,782
Period of Delinquency
30-59 Days 208 1.36 67,514 1.37
60-89 Days 18 0.12 7,343 0.15
90 Days or more 25 0.16 6,901 0.14
Foreclosures Pending 19 0.12 5,336 0.11
Total Delinquencies 270 1.76 87,094 1.76
</TABLE>
The above table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All dollar
amounts are reported in thousands. 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-27
<PAGE>
The delinquency levels for the master servicer's jumbo loan servicing
portfolio have declined over the years shown in the above tables. This decline
is attributable primarily to the growth and relative lack of seasoning in the
master servicer's jumbo loan servicing portfolio and to generally favorable and
improving economic conditions over this time period. There can be no assurance
that the experience shown in the above tables will be indicative of future loss
and delinquency experience of the master servicer's jumbo loan servicing
portfolio or of the mortgage loans in the trust.
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, including certain mortgage loans for
which the servicing rights have been sold by the master servicer but not yet
transferred. 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.
Delinquency and Foreclosure Experience in First Horizon's Total Portfolio
of One-to-Four Family, Residential Mortgage Loans
<TABLE>
<CAPTION>
As of December 31, As of March 31,
------------------ ---------------
1999 2000
---- ----
No. of % of Principal % of No. of % of Principal % of
Loans Loans Balance Balance Loans Loans Balance($) Balance
------ ----- --------- ------- ------ ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL SERVICING
PORTFOLIO
Total Portfolio 466,658 48,934,414 479,952 50,564,151
Period of Delinquency
30-59 Days 15,188 3.25 1,329,712 2.72 14,988 3.12 1,351,360 2.67
60-89 Days 3,622 0.78 298,429 0.61 3,242 0.68 275,906 0.55
90 Days or more 5,266 1.13 411,977 0.84 4,909 1.02 385,029 0.76
Foreclosures Pending 2,020 0.43 172,461 0.35 2,142 0.45 183,755 0.36
Total Delinquencies 26,096 5.59 2,212,579 4.52 25,281 5.27 2,196,050 4.34
</TABLE>
The above table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All dollar
amounts are reported in thousands.
There can be no assurance that factors beyond the master servicer's
control, such as weakening national or local economic conditions, higher
interest rates, higher unemployment rates, a decline in the availability of
refinancing, or downturns in real estate markets, will not result in increased
rates of delinquencies and foreclosure losses in the future.
Servicing Compensation and Payment of Expenses
The master servicing fee with respect to the mortgage pool is payable
out of the interest payments on each mortgage loan. The master servicing fee
will be equal to 0.244% per annum of the Stated Principal Balance of each such
mortgage loan. The master servicer is obligated to pay some, but not all, of the
ongoing expenses associated with the trust fund and incurred by the master
servicer in connection with its responsibilities under the pooling and servicing
agreement. Those amounts will be paid by the master servicer out of its master
servicing fee. The amount of
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<PAGE>
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.
In addition to the master servicing compensation described above, First
Horizon, in its individual capacity, will be entitled to receive excess spread
with respect to each Non-Discount mortgage loan on each distribution date in an
amount equal to the product of (i) the excess of the mortgage rate thereof over
7.25% per annum, and (ii) the Stated Principal Balance thereof.
Adjustment to Master Servicing Fee in Connection with Prepaid Mortgage Loans
When a borrower prepays a mortgage loan between due dates, the borrower
is required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Except for the month of the cut-off date, principal
prepayments by borrowers received by the master servicer from the first day
through the fifteenth day of a calendar month will be distributed to
certificateholders on the distribution date in the same month in which the
prepayments are received and, accordingly, no shortfall in the amount of
interest to be distributed to certificateholders with respect to the prepaid
mortgage loans results. Conversely, principal prepayments by borrowers received
by the master servicer from the sixteenth day or, in the case of the first
distribution date, from the cut-off date through the last day of a calendar
month will be distributed to certificateholders on the distribution date in the
month after the month of receipt and, accordingly, a shortfall in the amount of
interest to be distributed to certificateholders with respect to the prepaid
mortgage loans would result. Pursuant to the pooling and servicing agreement,
the master servicing fee for any month will be reduced, but not by more than
0.083% of the Pool Principal Balance as of the related determination date, 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 0.083%
of the Pool Principal Balance as of the related determination 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.
Advances
Subject to the following limitations, the master servicer will be
required to advance before each distribution date, from its own funds or funds
in the Certificate Account that do not constitute Available Funds for the
distribution date, an amount equal to the aggregate of payments of principal and
interest on the mortgage loans (net of the master servicing fee with respect to
the related mortgage loans) which were due on the related due date and which
were delinquent on the related determination date, together with an amount
equivalent to interest on each mortgage loan as to which the related mortgaged
property has been acquired by the trust fund through foreclosure or deed-in-lieu
of foreclosure. The determination date will be the third business day after the
15th day of each month; 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
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<PAGE>
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.
Unanticipated Recoveries of Losses on the Mortgage Loans
Holders of certificates that had previously been allocated a Realized
Loss in respect of a mortgage loan -- which holders may, in the event of a
transfer of any such certificate, be different from the holders at the time the
Realized Loss was allocated -- may receive distributions if the servicer
subsequently makes an Unanticipated Recovery in respect of such mortgage loan as
a result of events such as an unanticipated insurance settlement, tax refund or
mortgagor bankruptcy distribution. In such event, the trustee will distribute to
the holders of each outstanding class to which such Realized Loss had previously
been allocated its share of such Unanticipated Recovery in an amount not to
exceed the amount of such loss previously allocated to such class. This
distribution will be made on the distribution date in the calendar month
following receipt of the Unanticipated Recovery. Any distributions of
Unanticipated Recoveries will not reduce the principal balances of the class of
certificates receiving such recoveries. The Class PO Certificates will be
allocated a percentage of any Unanticipated Recovery equal to the percentage of
the loss previously allocated to it in respect of the related mortgage loans,
and the other classes of certificates that were allocated a portion of such loss
will receive a pro rata share of the balance. Notwithstanding the foregoing, no
certificateholder will be entitled to receive any share of an Unanticipated
Recovery following the distribution date on which the principal balance of its
certificates has been reduced to zero, including following the termination of
the trust.
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-5.
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
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<PAGE>
. in the case of any class of subordinated 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 subordinated
certificates then outstanding with the highest numerical class designation will
be reduced if and to the extent that the aggregate of the class certificate
balances of all classes of certificates, following all distributions and the
allocation of Realized Losses on a distribution date, exceeds the Pool Principal
Balance as of the due date occurring in the month of the distribution date. The
notional amount certificates do not have principal balances and are not entitled
to any distributions in respect of principal of the mortgage loans.
The senior certificates will have an initial aggregate class
certificate balance of approximately $178,255,227 and will evidence in the
aggregate an initial beneficial ownership interest of approximately 95.75% in
the trust fund. The Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and
Class B-6 Certificates will each evidence in the aggregate an initial beneficial
ownership interest of approximately 2.40%, 0.75%, 0.40%, 0.30%, 0.20% and 0.20%,
respectively, in the trust fund.
The Class PO and Class A-R Certificates will be issued in fully
registered certificated form. All of the other classes of offered certificates
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 the
minimum denominations set forth on page S-6 and integral multiples of $1,000 in
excess thereof. One investor of each class of book-entry certificates may hold a
beneficial interest in a book entry certificate that is not an integral multiple
of $1,000. The depositor has been informed by the depository that its nominee
will be CEDE & Co. Accordingly, CEDE & Co. is expected to be the holder of
record of the book-entry certificates. Except as described in the prospectus
under "Description of the Certificates -- Book-Entry Certificates," no
beneficial owner of a book-entry certificate will be entitled to receive a
physical certificate.
Unless and until definitive certificates are issued, it is anticipated
that the only certificateholder of the book-entry certificates will be CEDE &
Co., as nominee of the depository. Beneficial owners of the book-entry
certificates will not be certificateholders, as that term is used in the pooling
and servicing agreement. Beneficial owners are only permitted to exercise the
rights of certificateholders indirectly through financial intermediaries and the
depository. Monthly and annual reports on the trust fund provided to CEDE & Co.,
as nominee of the depository, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the financial intermediaries to whose
depository accounts the book-entry certificates of the beneficial owners are
credited.
For a description of the procedures generally applicable to the
book-entry certificates, see "Description of the Certificates -- Book-Entry
Certificates" in the prospectus.
S-31
<PAGE>
Payments on Mortgage Loans; Accounts
On or before the closing date, the master servicer will establish a
Certificate Account, which will be maintained in trust for the benefit of the
certificateholders. Funds credited to the Certificate Account may be invested
for the benefit and at the risk of the master servicer in Permitted Investments,
as defined in the pooling and servicing agreement, that are scheduled to mature
on or before the business day preceding the next distribution date. On or before
the business day before each distribution date, the master servicer will
withdraw from the Certificate Account the amount of Available Funds and will
deposit the Available Funds into the Distribution Account. The trustee will be
entitled to withdraw its fee from the amounts on deposit in the Distribution
Account each month immediately prior to making the distributions on the
Certificates.
Distributions on the Certificates
Allocation of Available Funds
Interest and principal on the certificates will be distributed monthly
on the 25th day of each month or, if such 25th day is not a business day, on the
succeeding business day, commencing in May 2000. These distributions will be in
an aggregate amount equal to the Available Funds for the related distribution
date. Distributions will be made to holders of record on the close of business
on the last business day of the month prior to the month in which the related
distribution date occurs.
On each distribution date, the Available Funds will be distributed in
the following order of priority among the certificates:
first, to the classes of senior certificates entitled to
distributions of interest, the Accrued Certificate Interest on each
such class for such distribution date, any shortfall in available
amounts being allocated among such classes in proportion to the amount
of Accrued Certificate Interest otherwise distributable thereon;
second, to the classes of senior certificates entitled to
distributions of interest, any Accrued Certificate Interest thereon
remaining undistributed from previous distribution dates, to the extent
of remaining Available Funds, any shortfall in available amounts being
allocated among such classes in proportion to the amount of such
Accrued Certificate Interest remaining undistributed for each such
class for such distribution date;
third, to the classes of senior certificates entitled to principal
distributions, in reduction of the class certificate balances thereof,
to the extent of remaining Available Funds, concurrently, as follows:
(1) to the classes of senior certificates, other than the
Class PO Certificates, the Senior Optimal Principal Amount for
such distribution date, in the order of priority set forth below;
and
(2) to the Class PO Certificates, the Class PO Principal
Distribution Amount for such distribution date;
fourth, to the Class PO Certificates, to the extent of remaining
Available Funds, the Class PO Deferred Amount for such distribution
date, until the class certificate balance thereof has been reduced to
zero; provided that, (1) on any distribution date, distributions
pursuant to this priority fourth shall not exceed the Subordinated
Optimal Principal Amount for such distribution date, (2) such
distributions shall not reduce the class certificate balance of the
Class PO Certificates and (3) no distribution will be made in respect
of the Class PO Deferred Amount after the Cross Over Date;
S-32
<PAGE>
fifth, to the Class B-1 Certificates, to the extent of remaining
Available Funds, in the following order: (1) the Accrued Certificate
Interest thereon for such distribution date, (2) any Accrued
Certificate Interest thereon remaining undistributed from previous
distribution dates and (3) such class's Allocable Share for such
distribution date;
sixth, to the Class B-2 Certificates, to the extent of remaining
Available Funds, in the following order: (1) the Accrued Certificate
Interest thereon for such distribution date, (2) any Accrued
Certificate Interest thereon remaining undistributed from previous
distribution dates and (3) such class's Allocable Share for such
distribution date;
seventh, to the Class B-3 Certificates, to the extent of remaining
Available Funds, in the following order: (1) the Accrued Certificate
Interest thereon for such distribution date, (2) any Accrued
Certificate Interest thereon remaining undistributed from previous
distribution dates and (3) such class's Allocable Share for such
distribution date; and
eighth, to the Class B-4, Class B-5 and Class B-6 Certificates, to
the extent of remaining Available Funds: (1) the Accrued Certificate
Interest thereon for such distribution date, (2) any Accrued
Certificate Interest thereon remaining undistributed from previous
distribution dates and (3) such class's Allocable Share for such
distribution date.
Amounts allocated to the senior certificates (other than the Class PO
Certificates) pursuant to priority third above will be distributed in the
following order of priority:
(a) to the Class A-4 Certificates, in an amount equal to the Class
A-4 Principal Distribution Amount for such distribution date, until the
class certificate balance thereof has been reduced to zero; and
(b) to the Class A-R, Class A-1, Class A-2 and Class A-3
Certificates, in that order, until the class certificate balance of
each such class has been reduced to zero.
On each distribution date after the Cross-Over Date, distributions of
principal on the outstanding senior certificates entitled to principal
distributions (other than the Class PO Certificates) will be made pro rata among
all such certificates, regardless of the allocation, or sequential nature, of
principal payments described above.
Interest
Interest will accrue on the certificates offered hereby at the
respective pass-through rates set forth in the table on page S-5 during each
Interest Accrual Period. The interest accrual period for each class of
certificates entitled to distributions of interest will be the one-month period
ending on the last day of the month preceding the month in which a distribution
date occurs. Interest will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
The Class PO Certificates are Principal Only certificates and will not
accrue interest.
As to any distribution date and any mortgage loan with respect to which
a prepayment in full has occurred, the resulting "Interest Shortfall" generally
will equal the difference between (a) one month's interest at the Net Mortgage
Rate on the Stated Principal Balance of such mortgage loan, and (b) the amount
of interest at the Net Mortgage Rate actually received with respect to such
mortgage loan. In the case of a partial prepayment, the resulting "Interest
Shortfall" will equal one month's interest at the applicable Net Mortgage Rate
on the amount of such prepayment.
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<PAGE>
Any Net Interest Shortfall, the interest portion of any Excess Losses
through the Cross- Over Date and, after the Cross-Over Date, the interest
portion of any Realized Losses (see "-- Allocation of Realized Losses on the
Certificates" below) will, on each distribution date, be allocated among all the
outstanding certificates entitled to distributions of interest in proportion to
the amount of Accrued Certificate Interest that would have been allocated
thereto in the absence of such shortfall and losses. See "Servicing of the
Mortgage Loans -- Adjustment to Master Servicing Fee in Connection with Prepaid
Mortgage Loans" herein.
The interest portion of any Realized Losses (other than Excess Losses)
occurring prior to the Cross-Over Date will not be allocated among any
certificates, but will reduce the amount of Available Funds on the related
distribution date. As a result of the subordination of the subordinated
certificates in right of distribution, such losses will be borne first by the
outstanding subordinated certificates in inverse order of priority.
If Available Funds are insufficient on any distribution date to
distribute the aggregate Accrued Certificate Interest on the senior certificates
entitled to distributions of interest to their certificateholders, any shortfall
in available amounts will be allocated among such classes of senior certificates
in proportion to the amounts of Accrued Certificate Interest otherwise
distributable thereon. The amount of any such undistributed Accrued Certificate
Interest will be added to the amount of interest to be distributed on the senior
certificates entitled to distributions of interest on subsequent distribution
dates in accordance with priority second of the second paragraph under "--
Allocations of Available Funds" above. No interest will accrue on any Accrued
Certificate Interest remaining undistributed from previous distribution dates.
Principal
Distributions in reduction of the Certificate Principal Balance of each
certificate entitled to principal distributions will be made on each
distribution date.
All payments and other amounts received in respect of principal of the
mortgage loans will be allocated between (1) the senior certificates entitled to
principal distributions (other than the Class PO Certificates) and the
subordinated certificates, on the one hand, and (2) the Class PO Certificates,
on the other, in each case based on the applicable Non-PO Percentage and the
applicable PO Percentage, respectively, of such amounts.
The initial class certificate balance of the Class PO Certificates will
be approximately $2,987,127.
Distributions in reduction of the class certificate balance of each
class of senior certificates entitled to principal distributions will be made on
each distribution date as described under "-- Allocation of Available Funds"
above. In accordance with priority third of the Available Funds Allocation, the
Available Funds remaining after the distribution of interest will be allocated
to such senior certificates in an aggregate amount not to exceed the sum of the
Senior Optimal Principal Amount and the Class PO Principal Distribution Amount
for such distribution date. Distributions in reduction of the class certificate
balances of the Class B-1, Class B-2 and Class B-3 Certificates will be made
pursuant to priorities fifth, sixth and seventh, respectively, of the Available
Funds Allocation. In accordance with each such priority, the Available Funds, if
any, remaining after distributions of principal and interest on the senior
certificates and payments in respect of the Class PO Deferred Amount on such
distribution date will be allocated to each class of the Class B Certificates in
an amount equal to each such class's Allocable Share for such distribution date,
provided that no distribution of principal will be made on any such class until
any class ranking prior thereto has received distributions of interest and
principal, and such class has received distributions of interest, on such
distribution date. The Class A-4 Certificates will not receive any distributions
in respect of scheduled payments of principal and prepayments or certain other
unscheduled recoveries of principal on the mortgage loans during the first five
years after the date of initial issuance of the certificates, except as
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<PAGE>
otherwise described herein on or following the earlier of the Group I Final
Distribution Date and the Cross-Over Date.
If, on any distribution date, the class certificate balance of any
class of Class B Certificates for which the related Class Prepayment
Distribution Trigger was satisfied on such distribution date is reduced to zero,
any amounts distributable to such class under clauses (2), (3) and (5) of the
definition of Subordinated Optimal Principal Amount, to the extent of such
class's remaining Allocable Share, shall be distributed to the remaining classes
of subordinated certificates in reduction of their respective class certificate
balances in order of priority. If the Class Prepayment Distribution Trigger is
not satisfied for any class of Class B Certificates (other than the Class B-1
Certificates, to which it is not applicable) on any distribution date, this may
have the effect of accelerating the amortization of more senior ranking classes
of subordinated certificates because the amount otherwise distributable to such
class under clauses (2), (3) and (5) of the definition of Subordinated Optimal
Principal Amount will be distributable among the outstanding classes of the
Class B Certificates as to which the related Class Prepayment Distribution
Trigger has been satisfied on a pro rata basis subject to the priority of
payments described herein. On any distribution date, any reduction in funds
available for distribution to the classes of subordinated certificates resulting
from a distribution of the Class PO Deferred Amount to the Class PO Certificates
will be allocated to the classes of subordinated certificates, in reduction of
the Allocable Shares thereof, in inverse order of priority.
Allocation of Realized Losses on the Certificates
Losses Allocable to the Class PO Certificates
On each distribution date, the applicable PO Percentage of the
principal portion of any Realized Loss (including any Excess Loss) on a Discount
mortgage loan will be allocated to the Class PO Certificates until the class
certificate balance thereof is reduced to zero.
To the extent funds are available therefor on any distribution date
through the Cross-Over Date, distributions in respect of the Class PO Deferred
Amount will be made on the Class PO Certificates in accordance with priority
fourth of the second paragraph under "-- Distributions on the Certificates --
Allocation of Available Funds" above. Any distribution of Available Funds in
respect of the Class PO Deferred Amount will not reduce the class certificate
balance of the Class PO Certificates. No interest will accrue on the Class PO
Deferred Amount. On each distribution date through the Cross-Over Date, the
class certificate balance of the lowest ranking class of subordinated
certificates then outstanding will be reduced by the amount of any distributions
made to the Class PO Certificates in respect of the Class PO Deferred Amount on
such distribution date, through the operation of the Class PO Deferred Payment
Writedown Amount. After the Cross-Over Date, no distributions will be made in
respect of the Class PO Deferred Amount and Realized Losses allocated to the
Class PO Certificates will be borne by them without a right of reimbursement
from any other class of certificates. Any distribution of Unanticipated
Recoveries on the Class PO Certificates will be adjusted to take into account
the Class PO Deferred Amount previously paid to such class as specified in the
Agreement. See "Servicing of the Mortgage Loans -- Unanticipated Recoveries of
Losses on the Mortgage Loans."
Losses Allocable to Certificates other than the Class PO Certificates
Prior to the Cross-Over Date (and on such date under certain
circumstances), the applicable Non-PO Percentage of the principal portion of any
Non-Excess Loss will be allocated among the outstanding classes of subordinated
certificates, in inverse order of priority, until the class certificate balance
of each such class has been reduced to zero (i.e., Non-Excess Losses will be
allocated first to the Class B-6 Certificates while such certificates are
outstanding, second to
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<PAGE>
the Class B-5 Certificates, and so on). The Non-PO Percentage of the principal
portion of any Fraud Losses, Special Hazard Losses and Bankruptcy Losses
occurring prior to the reduction of the Fraud Loss Coverage Amount, the Special
Hazard Loss Coverage Amount and the Bankruptcy Loss Coverage Amount,
respectively, to zero will also be allocated to the subordinated certificates in
the manner described in the preceding sentence.
Commencing on the Cross-Over Date, the applicable Non-PO Percentage of
the principal portion of any Realized Loss will be allocated among the
outstanding classes of senior certificates entitled to principal distributions
(other than the Class PO Certificates) pro rata based upon their class
certificate balances.
As indicated above, Fraud Losses, Special Hazard Losses and Bankruptcy
Losses occurring after the Fraud Loss Coverage Amount, Special Hazard Loss
Coverage Amount and the Bankruptcy Loss Coverage Amount, respectively, have been
reduced to zero will be Excess Losses. The applicable Non-PO Percentage of the
principal portion of any Excess Loss on a mortgage loan for any distribution
date (whether occurring before, on or after the Cross-Over Date) will be
allocated pro rata among all outstanding classes of certificates entitled to
principal distributions (other than the Class PO Certificates) based on their
class certificate balances.
Upon the initial issuance of the certificates, the Fraud Loss Coverage
Amount will equal approximately $1,861,679 (approximately 1.0% of the aggregate
Stated Principal Balances of the mortgage loans as of the Cut-off Date). As of
any distribution date prior to the third anniversary of the Cut-off Date, the
Fraud Loss Coverage Amount will equal approximately $1,861,679 minus the
aggregate amount of Fraud Losses that would have been allocated to the
subordinated certificates in the absence of the Loss Allocation Limitation since
the Cut-off Date. As of any distribution date from the third to the fifth
anniversaries of the Cut-off Date, the Fraud Loss Coverage Amount will equal (1)
the lesser of (a) the Fraud Loss Coverage Amount as of the most recent
anniversary of the Cut-off Date and (b) 0.5% of the aggregate outstanding
principal balance of all of the mortgage loans as of the most recent anniversary
of the Cut-off Date minus (2) the Fraud Losses that would have been allocated to
the subordinated certificates in the absence of the Loss Allocation Limitation
since the most recent anniversary of the Cut-off Date. As of any distribution
date on or after the earlier of the Cross-Over Date or the fifth anniversary of
the Cut-off Date, the Fraud Loss Coverage Amount shall be zero.
Upon the initial issuance of the certificates, the Special Hazard Loss
Coverage Amount will equal approximately $1,861,679 (approximately 1.0% of the
aggregate Stated Principal Balances of the mortgage loans as of the Cut-off
Date). As of any distribution date, the Special Hazard Loss Coverage Amount will
equal approximately $1,861,679 minus the sum of (1) the aggregate amount of
Special Hazard Losses that would have been previously allocated to the
subordinated certificates in the absence of the Loss Allocation Limitation and
(2) the Adjustment Amount.
As of any distribution date on or after the Cross-Over Date, the
Special Hazard Loss Coverage Amount will be zero.
On each distribution date, the Bankruptcy Loss Coverage Amount will
equal approximately $100,000, subject to reduction as described in the
Agreement, minus the aggregate amount of previous Deficient Valuations and Debt
Service Reductions. As of any distribution date on or after the Cross-Over Date,
the Bankruptcy Loss Coverage Amount will be zero. The Bankruptcy Loss Coverage
Amount and the manner of reduction thereof described in the Agreement may be
reduced or modified upon written confirmation from each of the Rating Agencies
that such reduction or modification will not adversely affect the then current
ratings of the senior certificates. Such reduction may adversely affect the
coverage provided by subordination with respect to Bankruptcy Losses.
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<PAGE>
Method of Allocating Realized Losses
All allocations of Realized Losses to a class of certificates will be
accomplished on a distribution date by reducing the class certificate balance
thereof by the appropriate share of any such losses occurring during the month
preceding the month of such distribution date and, accordingly, will be taken
into account in determining the distributions of principal and interest on such
certificates commencing on the following distribution date. The aggregate amount
of the principal portion of any Non-Excess Losses to be allocated to the Class
PO Certificates on any distribution date through the Cross-Over Date will also
be taken into account in determining distributions in respect of the Class PO
Deferred Amount for such distribution date.
The interest portion of all Realized Losses will be allocated among the
outstanding classes of certificates entitled to distributions of interest to the
extent described under "-- Distributions on the Certificates -- Interest" above.
No reduction of the class certificate balance of any class will be made
on any distribution date on account of any Realized Loss to the extent that such
reduction would have the effect of reducing the aggregate certificate principal
balance of all of the certificates as of such distribution date to an amount
less than the Pool Principal Balance as of the first day of the month of such
distribution date, less any Deficient Valuations occurring before the Bankruptcy
Loss Coverage Amount has been reduced to zero (such limitation being the "Loss
Allocation Limitation").
Debt Service Reductions are not treated as Realized Losses, and the
principal portion thereof will not be allocated in reduction of the certificate
principal balance of any certificate. However, after the Bankruptcy Loss
Coverage Amount has been reduced to zero, the amounts distributable under clause
(1) of the definitions of Senior Optimal Principal Amount, Class PO Principal
Distribution Amount and Subordinated Optimal Principal Amount will be reduced by
the amount of the principal portion of any Debt Service Reductions. Regardless
of when they occur, Debt Service Reductions may reduce the amount of Available
Funds otherwise available for distribution on a distribution date. As a result
of the subordination of the subordinated certificates in right of distribution,
the reduction in Available Funds resulting from any Debt Service Reductions
before the Bankruptcy Loss Coverage Amount has been reduced to zero will be
borne by the subordinated certificates (to the extent then outstanding) in
inverse order of priority.
Additional Rights of the Residual Certificateholders
In addition to distributions of principal and interest the holders of
the Class A-R Certificates will be entitled to receive:
(a) the amount, if any, of Available Funds remaining in the REMIC
on any distribution date after distributions of interest and principal
and in respect of the Class PO Deferred Amount are made on the
certificates on such date; and
(b) the amount of any Unanticipated Recoveries received by the
Master Servicer in the calendar month preceding the month of a
distribution date and not otherwise allocated to other classes of
certificates as described in "Servicing of the Mortgage Loans --
Unanticipated Recoveries of Losses on the Mortgage Loans"; and
(c) the proceeds, if any, of the assets of the trust remaining in
the REMIC after the class certificate balances of all classes of
certificates have each been reduced to zero.
S-37
<PAGE>
It is not anticipated that any material assets will be remaining for
such distributions on the Class A-R Certificates at any such time. See "Federal
Income Tax Consequences -- Residual Certificates" herein.
Subordination
Priority of Senior Certificates
As of the date of the initial issuance of the certificates, the
aggregate Certificate Principal Balance of the subordinated certificates will
equal approximately 4.25% of the aggregate Certificate Principal Balance of all
the classes of certificates. The rights of the holders of the subordinated
certificates to receive distributions with respect to the mortgage loans will be
subordinate to such rights of the holders of the senior certificates, to the
extent described above. The subordination of the subordinated certificates is
intended:
(a) to enhance the likelihood of timely receipt by the holders of the
senior certificates (to the extent of the subordination of the subordinated
certificates) of the full amount of the scheduled monthly distributions of
principal and interest allocable to the senior certificates; and
(b) to afford the holders of the senior certificates (to the extent of
the subordination of the subordinated certificates) protection against Realized
Losses, to the extent described above.
If Realized Losses exceed the credit support provided to the senior
certificates through subordination, or if Excess Losses occur, all or a portion
of such losses will be borne by the senior certificates.
The protection afforded to the holders of senior certificates by means
of the subordination feature will be accomplished by:
(1) the preferential right of such holders to receive, prior to
any distribution being made on a distribution date in respect of the
subordinated certificates, in accordance with the paydown rules
specified above under "-- Distributions on the Certificates --
Allocation of Available Funds," the amounts due to the senior
certificateholders on each distribution date out of the Available Funds
with respect to such date and, if necessary, by the right of such
holders to receive future distributions on the mortgage loans that
would otherwise have been payable to the holders of the subordinated
certificates;
(2) the allocation to the subordinated certificates of the
applicable Non-PO Percentage of the principal portion of any Non-Excess
Loss to the extent set forth herein; and
(3) the allocation to the subordinated certificates of the
applicable PO Percentage of the principal portion of any Non-Excess
Loss to the extent set forth herein through the operation of the Class
PO Deferred Payment Writedown Amount.
The allocation of the principal portion of Realized Losses (as set
forth herein) to the subordinated certificates on any distribution date will
decrease the protection provided to the senior certificates then outstanding on
future distribution dates by reducing the aggregate Certificate Principal
Balance of the subordinated certificates then outstanding.
In addition, in order to extend the period during which the
subordinated certificates remain available as credit enhancement for the senior
certificates, the entire amount of the applicable Non-PO Percentage of any
prepayment or other unscheduled recovery of principal with respect to a mortgage
loan will be allocated to the senior certificates as a whole entitled to
principal distributions (other than the Class PO Certificates) during at least
the first five years after the date of initial issuance of the certificates,
with such allocation being subject to reduction
S-38
<PAGE>
thereafter as described herein. This allocation has the effect of accelerating
the amortization of such senior certificates as a group while, in the absence of
losses in respect of the mortgage loans, increasing the percentage interest in
the principal balance of the mortgage loans evidenced by the subordinated
certificates. Among such senior certificates, such amounts will be allocated to
the outstanding Group I Senior Certificates during the first five years after
the date of initial issuance of the certificates (except as otherwise described
herein on or following the Group I Final Distribution Date) with such allocation
being subject to reduction thereafter as described herein, except that such
amounts will be allocated pro rata among all of the outstanding senior
certificates entitled to principal distributions (other than the Class PO
Certificates) on each distribution date after the Cross-Over Date. In addition,
the Class A-4 Certificates are not entitled to receive scheduled principal
payments during the first five years after the closing date (except as otherwise
described herein on or after the Group I Final Distribution Date).
After the payment of amounts distributable in respect of the senior
certificates on each distribution date, the subordinated certificates will be
entitled on such date to the remaining portion, if any, of the Available Funds
in an aggregate amount equal to the Accrued Certificate Interest on the
subordinated certificates for such date, any remaining undistributed Accrued
Certificate Interest thereon from previous distribution dates and the sum of the
Allocable Shares of the classes of subordinated certificates. Amounts so
distributed to subordinated certificateholders will not be available to cover
any delinquencies or any Realized Losses in respect of subsequent distribution
dates.
Priority Among Subordinated Certificates
As of the date of the initial issuance of the certificates, the
aggregate Certificate Principal Balance of the Class B-4, Class B-5 and Class
B-6 Certificates, all of which are subordinate in right of distribution to the
subordinated certificates offered hereby, will equal approximately 0.70% of the
initial aggregate Certificate Principal Balance of all of the certificates and
approximately 16.48% of the initial aggregate Certificate Principal Balance of
all of the subordinated certificates. On each distribution date, the holders of
any particular class of subordinated certificates, other than the Class B-6
Certificates, will have a preferential right to receive the amounts due them on
such distribution date out of Available Funds, prior to any distribution being
made on such date on each class of certificates ranking subordinated to such
class. In addition, except as described herein, the applicable Non-PO Percentage
of the principal portion of any Non-Excess Loss with respect to a mortgage loan
and any Class PO Deferred Payment Writedown Amount will be allocated, to the
extent set forth herein, in reduction of the class certificate balances of the
subordinated certificates in inverse order of priority of such certificates. The
effect of the allocation of such Realized Losses and of the Class PO Deferred
Payment Writedown Amount to a class of subordinated certificates will be to
reduce future distributions allocable to such class and increase the relative
portion of distributions allocable to more senior classes of certificates.
In order to maintain the relative levels of subordination among the
subordinated certificates, the applicable Non-PO Percentage of prepayments and
certain other unscheduled recoveries of principal in respect of the mortgage
loans (which will not be distributable to such certificates for at least the
first five years after the date of initial issuance of the certificates, except
as otherwise described herein on or following the Senior Final Distribution
Date) will not be distributable to the holders of the Class B-2, Class B-3,
Class B-4 or Class B-5 Certificates on any distribution date for which the
related Class Prepayment Distribution Trigger is not satisfied, except as
described above. See "-- Distributions on the Certificates -- Principal." If the
Class Prepayment Distribution Trigger is not satisfied with respect to any such
class of Class B Certificates, the amortization of more senior ranking classes
of subordinated certificates may occur more rapidly than would otherwise have
been the case and, in the absence of losses in respect of the mortgage loans,
the percentage interest in the principal balance of the mortgage loans evidenced
by such Class B Certificates may increase.
S-39
<PAGE>
As a result of the subordination of any class of certificates, such
class of certificates will be more sensitive than more senior ranking classes of
certificates to the rate of delinquencies and defaults on the mortgage loans,
and under certain circumstances investors in such certificates may not recover
their initial investment.
Structuring Assumptions
Unless otherwise specified, the information in the tables in this
prospectus supplement has been prepared on the basis of the following
Structuring Assumptions:
. the mortgage pool consists of two mortgage loans with the
following characteristics:
<TABLE>
<CAPTION>
Original Term Remaining Term
Principal Net to Maturity to Maturity
---------
Balance Mortgage Rate Mortgage Rate (in Months) (in Months)
------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
$ 73,500,951.78 6.9655153827% 6.7155153827% 359 348
$112,666,980.21 7.4105498145% 7.1605498145% 359 350
</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 of each class of
certificates is as set forth on page S-5,
. the approximate initial class certificate balances of the Class B-
4, Class B-5 and Class B-6 Certificates are $559,000, $372,000 and
$372,705, respectively,
. interest accrues on each interest bearing class of certificates
during each interest accrual period at the applicable pass-through
rate set forth on page S-5,
. distributions in respect of the certificates are received in cash
on the 25th day of each month commencing in the calendar month
following the closing date,
. the closing date of the sale of the certificates is April 28,
2000,
. the seller is not required to repurchase or substitute for any
mortgage loan, and
S-40
<PAGE>
. the master servicer does not exercise the option to repurchase the
mortgage loans described under "-- Optional Purchase of Defaulted
Loans" and "-- Optional Termination."
While it is assumed that each of the mortgage loans prepays at the
specified constant percentages of SPA, this is not likely to be the case.
Moreover, discrepancies may exist between the characteristics of the actual
mortgage loans which will be delivered to the trustee and characteristics of the
mortgage loans used in preparing the tables in this prospectus supplement.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this prospectus supplement is
SPA, which represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans. SPA does not
purport to be either a historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the mortgage loans. 100% SPA assumes
prepayment rates of 0.2% per annum of the then unpaid principal balance of the
pool of mortgage loans in the first month of the life of the mortgage loans and
an additional 0.2% per annum in each month thereafter (e.g., 0.4% per annum in
the second month) until the 30th month. Beginning in the 30th month and in each
month thereafter during the life of the mortgage loans, 100% SPA assumes a
constant prepayment rate of 6% per annum. Multiples may be calculated from this
prepayment rate sequence. For example, 150% SPA assumes prepayment rates will be
0.3% per annum in month one, 0.6% per annum in month two, and increasing by 0.3%
in each succeeding month until reaching a rate of 9.0% per annum in month 30 and
remaining constant at 9.0% 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
subordinated 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.
S-41
<PAGE>
No holder of any certificates will be entitled to any Unanticipated
Recoveries received with respect to any mortgage loan after the termination of
the trust. See "Servicing of the Mortgage Loans -- Unanticipated Recoveries of
Losses on the Mortgage Loans."
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 25th day (or, if that
day is not a business day, the following business day) of the month after the
applicable interest accrual period without any additional distribution of
interest or earnings to compensate for the delay
Delinquencies on the mortgage loans which are not advanced by or on behalf
of the master servicer because such amounts, if advanced, would not be
recoverable, will adversely affect the yield on the certificates. Because of the
priority of distributions, shortfalls resulting from delinquencies not so
advanced will be borne first by the subordinated certificates, in the reverse
order of their numerical class designations, and then by the senior
certificates. If, as a 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 subordinated 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 subordinated 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 on a pro rata basis. Moreover, since the amounts available for
distribution to the subordinated certificates 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 subordinated certificates then entitled to a
distribution of principal will be less than it otherwise would be in the absence
of the Class PO Deferred Amounts. As a result, the yields on the offered
certificates will depend on the rate and timing of Realized Losses, including
Excess Losses. Excess Losses could occur at a time when one or more classes of
subordinated certificates are still outstanding and otherwise available to
absorb other types of Realized Losses.
S-42
<PAGE>
Prepayment Considerations and Risks
The rate of principal payments on the offered certificates, the aggregate
amount of distributions on the offered certificates and the yield to maturity of
the offered certificates will be related to the rate and timing of payments of
principal on the mortgage loans. The rate of principal payments on the mortgage
loans will in turn be affected by the amortization schedules of the mortgage
loans and by the rate of principal prepayments, including for this purpose,
prepayments resulting from refinancing, liquidations of the mortgage loans due
to defaults, casualties, condemnations and repurchases by the seller or master
servicer. The mortgage loans may be prepaid by the mortgagors at any time
without a prepayment penalty. The mortgage loans may also be subject to "due-on-
sale" provisions. See "The Mortgage Pool".
Prepayments, liquidations and purchases of the mortgage loans will result
in distributions on the offered certificates of principal amounts which would
otherwise be distributed over the remaining terms of the mortgage loans. Since
the rate of payment of principal of the mortgage loans will depend on future
events and a variety of factors, no assurance can be given as to the rate of
payment of principal on the mortgage loans or the rate of principal prepayments.
The extent to which the yield to maturity of a class of offered certificates may
vary from the anticipated yield will depend upon the degree to which the class
of offered certificates is purchased at a discount or premium, and the degree to
which the timing of payments on the offered certificates is sensitive to
prepayments, liquidations and purchases of the mortgage loans. Further, an
investor should consider the risk that, in the case of the principal only
certificates and any other offered certificate purchased at a discount, a slower
than anticipated rate of principal payments (including prepayments) on the
mortgage loans could result in an actual yield to the investor that is lower
than the anticipated yield.
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, refinancing programs, including First Horizon'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 25% of
the mortgage loans, the depositor may deliver all or a portion of each related
mortgage file to the trustee not later than thirty days after the closing date,
a delayed delivery. If the seller fails to deliver all or a portion of any
mortgage file to the depositor or other designee of the depositor or, at the
depositor's direction, to the trustee within the 30-day period, the seller will
be required to use its best efforts to deliver a substitute mortgage loan for
the related delayed delivery mortgage loan or repurchase the related delayed
delivery mortgage loan. Any repurchases pursuant to this provision would also
have the effect of accelerating the rate of prepayments on the mortgage loans.
As described under "Description of the Certificates -- Distributions on the
Certificates -- Principal," the entire amount of the applicable Non-PO
Percentage of any prepayments and other unscheduled recoveries of principal with
respect to a mortgage loan will be allocated solely to the outstanding senior
certificates entitled to principal distributions (other than the Class PO
Certificates) during at least the first five years after the closing date, with
such allocation being subject to reduction thereafter as described herein. The
portion of such amounts otherwise allocable to the Class A-4 Certificates will
be allocated solely to the outstanding Group I Senior
S-43
<PAGE>
Certificates during the first five years after the closing date (except as
otherwise described herein on or following the Group I Final Distribution Date),
with such allocation being subject to reduction thereafter as described herein,
provided that such amounts will be allocated pro rata among all the outstanding
senior certificates entitled to principal distributions (other than the Class PO
Certificates) on each distribution date after the Cross-Over Date. The resulting
allocation between the Group I Senior Certificates and the Class A-4
Certificates is designed to accelerate the allocation of principal prepayments
and certain other unscheduled recoveries of principal on the mortgage loans to
holders of the Group I Senior Certificates relative to the Class A-4
Certificates through the earlier of the Group I Final Distribution Date and the
Cross-Over Date. Notwithstanding the foregoing, all distributions of principal
on the outstanding senior certificates entitled to principal distributions
(other than the Class PO Certificates) will be made pro rata among such
certificates on each distribution date after the Cross-over Date. In addition,
the Class A-4 Certificates are not entitled to receive scheduled principal
payments during the first five years after the closing date (except as otherwise
described herein on or following the Group I Final Distribution Date).
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.
Yield Sensitivity of Class PO Certificates
The table below indicates the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of the Class PO 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 Class PO Certificates, would cause the
discounted present value of the assumed streams of cash flows to equal the
assumed aggregate purchase price of the Class PO Certificates 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 Class PO
Certificates and consequently do not purport to reflect the return on any
investment in the Class PO Certificates when the reinvestment rates are
considered.
The Class PO Certificates will be principal only certificates and will not
bear interest. As indicated in the table below, a lower than anticipated rate of
principal payments, including prepayments, on the Discount mortgage loans will
have a negative effect on the yield to investors in the Class PO Certificates.
As described under "Description of the Certificates -- Principal," the
Class PO Principal Distribution Amount is calculated by reference to the
principal payments, including prepayments, on the Discount mortgage loans. The
Discount mortgage loans will have lower Net Mortgage Rates, and lower mortgage
rates, than the other mortgage loans. In general, mortgage loans with higher
mortgage rates tend to prepay at higher rates than mortgage loans with
relatively lower mortgage rates in response to a given change in market interest
rates. As a result, the Discount mortgage loans may prepay at lower rates,
thereby reducing the rate of payment of principal and the resulting yield of the
Class PO Certificates.
S-44
<PAGE>
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............................... $1,792,276.30
SENSITIVITY OF THE CLASS PO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
PERCENTAGE OF SPA
--------------------------------------------
CLASS 0% 75% 150% 300% 500%
- ------------------------- -- --- ---- ---- ----
Class PO.................... 2.82% 4.74% 7.16% 12.62% 20.22%
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 Lehman Brothers Inc. at the request of one or more prospective
investors, based on assumptions provided by, and satisfying the special
requirements of, the prospective investors. The tables and assumptions may be
based on assumptions that differ from the Structuring Assumptions. Accordingly,
the tables and other materials may not be relevant to or appropriate for
investors other than those specifically requesting them.
Weighted Average Lives of the Offered Certificates
The weighted average life of an offered certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the class certificate
balance of the certificate on each distribution date by the number of years from
the date of issuance to the distribution date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the net reductions in class
certificate balance of the certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of payments,
including prepayments, of the mortgage loans, see "--Prepayment Considerations
and Risks" in this prospectus supplement and "Yield and Prepayment
Considerations" in the prospectus.
S-45
<PAGE>
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 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.
S-46
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-1 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF SPA
Class A-1 Certificates
Distribution Date 0% 75% 150% 300% 500%
- ----------------- --- --- ---- ---- ----
Initial............................... 100 100 100 100 100
April 2001............................ 98 94 90 81 69
April 2002............................ 96 85 74 53 27
April 2003............................ 94 76 58 28 0
April 2004............................ 92 67 44 7 0
April 2005............................ 90 58 32 0 0
April 2006............................ 87 51 21 0 0
April 2007............................ 85 44 12 0 0
April 2008............................ 82 37 5 0 0
April 2009............................ 79 31 0 0 0
April 2010............................ 76 26 0 0 0
April 2011............................ 73 20 0 0 0
April 2012............................ 70 15 0 0 0
April 2013............................ 66 10 0 0 0
April 2014............................ 62 5 0 0 0
April 2015............................ 58 1 0 0 0
April 2016............................ 53 0 0 0 0
April 2017............................ 48 0 0 0 0
April 2018............................ 43 0 0 0 0
April 2019............................ 37 0 0 0 0
April 2020............................ 31 0 0 0 0
April 2021............................ 24 0 0 0 0
April 2022............................ 17 0 0 0 0
April 2023............................ 9 0 0 0 0
April 2024............................ 1 0 0 0 0
April 2025............................ 0 0 0 0 0
April 2026............................ 0 0 0 0 0
April 2027............................ 0 0 0 0 0
April 2028............................ 0 0 0 0 0
April 2029............................ 0 0 0 0 0
April 2030............................ 0 0 0 0 0
Weighted Average Life (in years)*..... 15.26 6.74 3.89 2.21 1.48
* For purposes of the above tables, 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".
S-47
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-2 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF SPA
Class A-2 Certificates
Distribution Date 0% 75% 150% 300% 500%
- ----------------- --- --- ---- ---- ---
Initial............................... 100 100 100 100 100
April 2001............................ 100 100 100 100 100
April 2002............................ 100 100 100 100 100
April 2003............................ 100 100 100 100 76
April 2004............................ 100 100 100 100 0
April 2005............................ 100 100 100 62 0
April 2006............................ 100 100 100 12 0
April 2007............................ 100 100 100 0 0
April 2008............................ 100 100 100 0 0
April 2009............................ 100 100 92 0 0
April 2010............................ 100 100 68 0 0
April 2011............................ 100 100 47 0 0
April 2012............................ 100 100 28 0 0
April 2013............................ 100 100 10 0 0
April 2014............................ 100 100 0 0 0
April 2015............................ 100 100 0 0 0
April 2016............................ 100 84 0 0 0
April 2017............................ 100 66 0 0 0
April 2018............................ 100 48 0 0 0
April 2019............................ 100 31 0 0 0
April 2020............................ 100 14 0 0 0
April 2021............................ 100 0 0 0 0
April 2022............................ 100 0 0 0 0
April 2023............................ 100 0 0 0 0
April 2024............................ 100 0 0 0 0
April 2025............................ 67 0 0 0 0
April 2026............................ 26 0 0 0 0
April 2027............................ 0 0 0 0 0
April 2028............................ 0 0 0 0 0
April 2029............................ 0 0 0 0 0
April 2030............................ 0 0 0 0 0
Weighted Average Life (in years)*..... 25.43 17.95 10.98 5.30 3.28
* For purposes of the above tables, 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".
S-48
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-3 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF SPA
Class A-3 Certificates
Distribution Date 0% 75% 150% 300% 500%
- ----------------- --- --- ---- ---- ----
Initial................................ 100 100 100 100 100
April 2001............................. 100 100 100 100 100
April 2002............................. 100 100 100 100 100
April 2003............................. 100 100 100 100 100
April 2004............................. 100 100 100 100 83
April 2005............................. 100 100 100 100 28
April 2006............................. 100 100 100 100 0
April 2007............................. 100 100 100 80 0
April 2008............................. 100 100 100 59 0
April 2009............................. 100 100 100 45 0
April 2010............................. 100 100 100 36 0
April 2011............................. 100 100 100 29 0
April 2012............................. 100 100 100 23 0
April 2013............................. 100 100 100 18 0
April 2014............................. 100 100 95 14 0
April 2015............................. 100 100 83 11 0
April 2016............................. 100 100 73 9 0
April 2017............................. 100 100 63 7 0
April 2018............................. 100 100 54 5 0
April 2019............................. 100 100 46 4 0
April 2020............................. 100 100 39 3 0
April 2021............................. 100 98 33 2 0
April 2022............................. 100 85 27 2 0
April 2023............................. 100 72 22 1 0
April 2024............................. 100 59 17 1 0
April 2025............................. 100 47 13 1 0
April 2026............................. 100 35 9 0 0
April 2027............................. 85 24 6 0 0
April 2028............................. 46 12 3 0 0
April 2029............................. 5 1 0 0 0
April 2030............................. 0 0 0 0 0
Weighted Average Life (in years)*...... 27.93 24.86 19.39 10.06 4.67
* For purposes of the above tables, 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".
S-49
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS A-4 CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF SPA
Class A-4 Certificates
Distribution Date 0% 75% 150% 300% 500%
- ----------------- --- --- ---- ---- ----
Initial................................ 100 100 100 100 100
April 2001............................. 100 100 100 100 100
April 2002............................. 100 100 100 100 100
April 2003............................. 100 100 100 100 100
April 2004............................. 100 100 100 100 100
April 2005............................. 100 100 100 100 100
April 2006............................. 98 97 96 93 89
April 2007............................. 97 94 91 84 56
April 2008............................. 95 89 84 73 35
April 2009............................. 93 84 76 61 23
April 2010............................. 91 79 68 49 16
April 2011............................. 88 73 60 39 11
April 2012............................. 86 68 53 31 7
April 2013............................. 83 63 47 25 5
April 2014............................. 81 58 41 20 3
April 2015............................. 77 53 36 16 2
April 2016............................. 74 49 31 12 2
April 2017............................. 71 44 27 10 1
April 2018............................. 67 40 23 7 1
April 2019............................. 63 36 20 6 0
April 2020............................. 58 32 17 4 0
April 2021............................. 54 28 14 3 0
April 2022............................. 49 24 12 2 0
April 2023............................. 43 21 9 2 0
April 2024............................. 37 17 7 1 0
April 2025............................. 31 14 6 1 0
April 2026............................. 24 10 4 1 0
April 2027............................. 17 7 3 0 0
April 2028............................. 9 4 1 0 0
April 2029............................. 1 0 0 0 0
April 2030............................. 0 0 0 0 0
Weighted Average Life (in years)*...... 20.41 16.37 13.80 10.93 8.02
* For purposes of the above tables, 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".
S-50
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS PO CERTIFICATES AT THE FOLLOWING
CONSTANT PERCENTAGES OF SPA
Class PO Certificates
Distribution Date 0% 75% 150% 300% 500%
- ----------------- -- --- ---- ---- ----
Initial............................... 100 100 100 100 100
April 2001............................ 99 96 94 88 82
April 2002............................ 98 91 85 73 58
April 2003............................ 96 86 76 59 40
April 2004............................ 95 81 68 47 28
April 2005............................ 94 76 61 38 19
April 2006............................ 92 71 55 31 13
April 2007............................ 90 67 49 25 9
April 2008............................ 89 63 44 20 6
April 2009............................ 87 59 39 16 4
April 2010............................ 85 55 34 13 3
April 2011............................ 82 51 31 10 2
April 2012............................ 80 47 27 8 1
April 2013............................ 77 44 24 6 1
April 2014............................ 75 40 21 5 1
April 2015............................ 72 37 18 4 0
April 2016............................ 69 34 16 3 0
April 2017............................ 65 30 14 2 0
April 2018............................ 62 28 12 2 0
April 2019............................ 58 25 10 1 0
April 2020............................ 54 22 9 1 0
April 2021............................ 49 19 7 1 0
April 2022............................ 44 16 6 1 0
April 2023............................ 39 14 5 0 0
April 2024............................ 34 11 4 0 0
April 2025............................ 28 9 3 0 0
April 2026............................ 22 7 2 0 0
April 2027............................ 15 4 1 0 0
April 2028............................ 8 2 1 0 0
April 2029............................ 0 0 0 0 0
April 2030............................ 0 0 0 0 0
Weighted Average Life (in years)*..... 19.10 12.37 8.66 5.10 3.19
* For purposes of the above tables, 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".
S-51
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
OF THE CLASS B-1, CLASS B-2 AND CLASS B-3 CERTIFICATES
AT THE FOLLOWING CONSTANT PERCENTAGES OF SPA
Class B-1, Class B-2 and Class B-3
Certificates
Distribution Date 0% 75% 150% 300% 500%
- ----------------- -- --- ---- ---- ----
Initial............................... 100 100 100 100 100
April 2001............................ 99 99 99 99 99
April 2002............................ 98 98 98 98 98
April 2003............................ 97 97 97 97 97
April 2004............................ 95 95 95 95 95
April 2005............................ 94 94 94 94 94
April 2006............................ 92 91 90 87 83
April 2007............................ 91 88 85 79 71
April 2008............................ 89 84 79 69 56
April 2009............................ 87 79 72 58 41
April 2010............................ 85 74 64 46 28
April 2011............................ 83 69 56 37 19
April 2012............................ 81 64 50 29 13
April 2013............................ 78 59 44 23 9
April 2014............................ 76 55 39 19 6
April 2015............................ 73 50 34 15 4
April 2016............................ 70 46 30 11 3
April 2017............................ 66 42 26 9 2
April 2018............................ 63 38 22 7 1
April 2019............................ 59 34 19 5 1
April 2020............................ 55 30 16 4 1
April 2021............................ 50 26 13 3 0
April 2022............................ 46 23 11 2 0
April 2023............................ 41 19 9 2 0
April 2024............................ 35 16 7 1 0
April 2025............................ 29 13 5 1 0
April 2026............................ 23 9 4 1 0
April 2027............................ 16 6 2 0 0
April 2028............................ 9 3 1 0 0
April 2029............................ 1 0 0 0 0
April 2030............................ 0 0 0 0 0
Weighted Average Life (in years)*..... 19.34 15.54 13.12 10.43 8.73
* For purposes of the above tables, 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".
S-52
<PAGE>
Last Scheduled Distribution Date
The last scheduled distribution date for each class of offered certificates
is the distribution date in March 2030, 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 Class B Certificates
The rate of payment of principal, the aggregate amount of distributions and
the yield to maturity of the Class B Certificates will be affected by the rate
of prepayments on the mortgage loans, as well as the rate of mortgagor defaults
resulting in Realized Losses, by the severity of those losses and by the timing
thereof. See "Description of the Certificates -- Allocation of Realized Losses
on the Certificates" herein for a description of the manner in which such losses
are borne by the holders of the certificates. If the purchaser of a Class B
Certificate calculates its anticipated yield based on an assumed rate of default
and amount of Realized Losses that is lower than the default rate and the amount
of losses actually incurred, its actual yield to maturity may be lower than that
so calculated and could be negative. The timing of defaults and losses will also
affect an investor's actual yield to maturity, even if the average rate of
defaults and severity of losses are consistent with an investor's expectations.
In general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity.
The yields to maturity on the classes of Class B Certificates with higher
numerical designations will be more sensitive to losses due to liquidations of
defaulted mortgage loans than will the yields on such classes with lower
numerical designations, and the yields to maturity on all of the Class B
Certificates will be more sensitive to such losses than will the yields on the
other classes of certificates. The Class B Certificates will be more sensitive
to losses due to liquidations of defaulted mortgage loans because the entire
amount of such losses will be allocable to such certificates in inverse order of
priority, either directly or through the allocation of the Class PO Deferred
Payment Writedown Amount, except as provided herein. To the extent not covered
by the master servicer's advances of delinquent monthly payments of principal
and interest, delinquencies on the mortgage loans may also have a relatively
greater effect:
(1) on the yields to investors in the Class B Certificates with
higher numerical designations than on the yields to investors in those
Class B Certificates with lower numerical designations; and
(2) on the yields to investors in the Class B Certificates than on
the yields to investors in the senior certificates.
As described above under "Description of the Certificates --Distributions
on the Certificates -- Interest" and "-- Principal," "--Allocation of Realized
Losses on the Certificates" and "-- Subordination," amounts otherwise
distributable to holders of any class of Class B Certificates will be made
available to protect the holders of the more senior ranking classes of the
certificates against interruptions in distributions due to certain mortgagor
delinquencies. Such delinquencies, even if subsequently cured, may affect the
timing of the receipt of distributions by the holders of the Class B
Certificates.
S-53
<PAGE>
To the extent that the Class B Certificates are being purchased at
discounts from their initial class certificate principal balances, if the
purchaser of such a certificate calculates its yield to maturity based on an
assumed rate of payment of principal faster than that actually received on such
certificate, its actual yield to maturity may be lower than that so calculated.
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 Class A-R Certificates will constitute the sole class
of residual interests in the REMIC.
The Regular Certificates will be treated as debt instruments issued by the
REMIC for federal income tax purposes. Income on the Regular Certificates must
be reported under an accrual method of accounting. Under the accrual method of
accounting, interest income may be required to be included in a holder's gross
income in advance of the holder's actual receipt of that interest income.
The principal only certificates will be treated for federal income tax
purposes as having been issued with an amount of OID equal to the difference
between their principal balance and their issue price. 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 150% SPA. No representation is made as to
whether the mortgage loans will prepay at the foregoing rate or any other rate.
See "Yield, Prepayment and Maturity Considerations" in this prospectus
supplement and "Material Federal Income Tax Consequences" in the prospectus.
Computing accruals of OID in the manner described in the prospectus may,
depending on the actual rate of prepayments during the accrual period, result in
the accrual of negative amounts of OID on the certificates issued with OID in an
accrual period. Holders will be entitled to offset negative accruals of OID only
against future OID accrual on their certificates.
If the holders of any Regular Certificates are treated as holding their
certificates at a premium, they are encouraged to consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
See "Material Federal Income Tax Consequences -- REMIC Certificates -- Regular
Certificates" in the prospectus.
As is described more fully under "Material Federal Income Tax Consequences"
in the prospectus, the offered certificates will represent qualifying assets
under Sections 856(c)(4)(A) and 7701(a)(19)(C) of the Code, and net interest
income attributable to the offered certificates will be "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, to the extent the assets of the trust fund are assets
described in those sections.
The Regular Certificates will represent qualifying assets under Section
860G(a)(3) if acquired by a REMIC within the prescribed time periods of the
Code.
S-54
<PAGE>
The holders of the Class A-R Certificates must include the taxable income
of the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to them during certain periods. All or a
portion of the taxable income from a Residual Certificate recognized by a holder
may be treated as "excess inclusion" income, which with limited exceptions, is
subject to U.S. federal income tax.
In computing alternative minimum taxable income, the special rule providing
that taxable income cannot be less than the sum of the taxpayer's excess
inclusions for the year does not apply. However, a taxpayer's alternative
minimum taxable income cannot be less than the sum of the taxpayer's excess
inclusions for the year. In addition, the amount of any alternative minimum tax
net operating loss is determined without regard to any excess inclusions.
Purchasers of a Class A-R Certificate are encouraged to consider carefully
the tax consequences of an investment in residual certificates discussed in the
prospectus and consult their own tax advisors with respect to those
consequences. See "Material Federal Income Tax Consequences -- REMIC
Certificates -- Residual Certificates" in the prospectus. Specifically,
prospective holders of Class A-R Certificates should consult their tax advisors
regarding whether, at the time of acquisition, a Class A-R Certificate will be
treated as a "noneconomic" residual interest, a "non-significant value" residual
interest and a "tax avoidance potential" residual interest. See "Material
Federal Income Tax Consequences -- Tax-Related Restrictions on Transfer of
Residual Certificates -- Noneconomic Residual Certificates," "Material Federal
Income Tax Consequences -- Residual Certificates -- Mark to Market Rules," "--
Excess Inclusions" and "Material Federal Income Tax Consequences -- Tax Related
Restrictions on Transfers of Residual Certificates -- Foreign Investors" in the
prospectus. Additionally, for information regarding Prohibited Transactions and
Treatment of Realized Losses, see "Material Federal Income Tax Consequences --
Prohibited Transactions and Other Taxes" and "-- REMIC Certificates -- Regular
Certificates -- Treatment of Realized Losses" in the prospectus.
The Internal Revenue Service has issued proposed Treasury regulations that
would add to the conditions necessary to ensure that a transfer of a noneconomic
residual interest would be respected for federal income tax purposes. The
proposed additional condition provides that a transfer of a noneconomic residual
interest will not qualify under this safe harbor unless the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of (i) any consideration given to the
transferee to acquire the interest (the inducement payment), (ii) future
distributions on the interest, and (iii) any anticipated tax savings associated
with holding the interest as the REMIC generates losses. For purposes of this
calculation, the present value is calculated using a discount rate equal to the
lesser of the applicable federal rate and the transferee's cost of borrowing.
The proposed effective date for the changes is February 4, 2000.
ERISA CONSIDERATIONS
Any fiduciary of a Plan that proposes to cause the Plan to acquire any of
the offered certificates is encouraged to consult with its counsel with respect
to the potential consequences of the Plan's acquisition and ownership of the
certificates under ERISA and Section 4975 of the Code. See "ERISA
Considerations" in the prospectus. Section 406 of ERISA prohibits "parties in
interest" with respect to an employee benefit plan subject to ERISA from
engaging in various different types of transactions involving the plan and its
assets unless a statutory, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes excise taxes on prohibited
transactions involving "disqualified persons" and Plans described under that
Section. ERISA authorizes the imposition of civil penalties for prohibited
transactions involving Plans not subject to the requirements of Section 4975 of
the Code.
Some employee benefit plans, including governmental plans and some church
plans, are not subject to ERISA's requirements. Accordingly, assets of those
plans may be invested in the
S-55
<PAGE>
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 to Lehman Brothers, Inc. an
individual administrative exemption, PTE 91-14 (56 Fed. Reg. 7413, February 22,
1991) from some of the prohibited transaction rules of ERISA and the related
excise tax provisions of Section 4975 of the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates in
pass-through trusts that consist of specified receivables, loans and other
obligations that meet the conditions and requirements of the exemption. PTE 91-
14 applies to mortgage loans such as the mortgage loans in the trust fund.
For a general description of PTE 91-14 and the conditions that must be
satisfied for it to apply, see "ERISA Considerations" in the prospectus.
It is expected that PTE 91-14 will apply to the acquisition and holding by
Plans of the Class A Certificates, excluding the Class A-R Certificates, and
that all conditions of PTE 91-14 other than those within the control of the
investors will be met. In addition, as of the date hereof, no single mortgagor
is the obligor on five percent (5%) of the mortgage loans included in the trust
fund by aggregate unamortized principal balance of the assets of the trust fund.
Because the Class PO Certificates are not being purchased by any
underwriter to whom an exemption similar to PTE 91-14 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 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 B-1, Class B-2, Class B-3 and
Class A-R Certificates may not meet the requirements of PTE 91-14 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 B-1, Class B-2, Class B-3 and Class A-R Certificates. Consequently,
transfers of the Class B-1, Class B-2, Class B-3 and Class A-R Certificates will
not be registered by the trustee unless the trustee receives:
. 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
S-56
<PAGE>
V(e) of PTE 95-60) and that the purchase and holding of the
certificates are covered under Sections I and III of PTE 95-60, or
. 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 B-1, Class B-2 or Class B-3 Certificate. In the event that
a representation is violated, or any attempt to transfer a Class B-1, Class B-2
or Class B-3 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, the depositor has agreed to sell the Underwritten Certificates to
Lehman Brothers Inc. Distribution of the Underwritten Certificates will be made
by Lehman Brothers Inc. and First Tennessee Securities Corporation 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, Lehman Brothers Inc. may be deemed to have received compensation
from the depositor in the form of underwriting discounts.
Each of Lehman Brothers Inc. and First Tennessee Securities Corporation
intends to make a secondary market in the Underwritten Certificates, but neither
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 and the master servicer have agreed to indemnify Lehman
Brothers Inc. and First Tennessee Securities Corporation against, or make
contributions to Lehman Brothers Inc. and First Tennessee Securities Corporation
with respect to, liabilities customarily indemnified against, including
liabilities under the Securities Act of 1933, as amended.
The Class PO Certificates will initially be retained by the seller and may
be offered by the seller in the future.
After the initial distribution of the certificates offered hereby, this
prospectus and prospectus supplement may be used by First Tennessee Securities
Corporation, an affiliate of the depositor, the seller and the master servicer,
in connection with market making transactions in such certificates. First
Tennessee Securities Corporation may act as principal or agent in these
transactions. These transactions will be at market prices at the time of sale
and not at the prices of the initial offering.
S-57
<PAGE>
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 Lehman Brothers Inc. and First Tennessee Securities
Corporation.
RATINGS
It is a condition to the issuance of the senior certificates, other than
the Class PO Certificates, that they be rated "AAA" by each of Fitch and S&P. It
is a condition to the issuance of the Class PO Certificates that they be rated
"AAA" by Fitch and "AAAr" by S&P. It is a condition to the issuance of the Class
B-1, Class B-2 and Class B-3 Certificates that they be rated at least "AA," "A"
and "BBB" by Fitch.
The ratings assigned by Fitch to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which certificateholders are entitled. Fitch's ratings address the structural
and legal aspects associated with the certificates, including the nature of the
underlying mortgage loans. Fitch's ratings on mortgage pass-through certificates
do not represent any assessment of the likelihood or rate of principal
prepayments. The ratings do not address the possibility that certificateholders
might suffer a lower than anticipated yield.
S&P's ratings on mortgage pass-through certificates address the likelihood
of receipt by certificateholders of payments required under the operative
agreements. S&P's ratings take into consideration the credit quality of the
mortgage pool including any credit support providers, structural and legal
aspects associated with the certificates, and the extent to which the payment
stream of the mortgage pool is adequate to make payment required under the
certificates. S&P's ratings on the certificates do not, however, constitute a
statement regarding the frequency of prepayments on the mortgage loans. S&P's
rating does not address the possibility that investors may suffer a lower than
anticipated yield. The "r" symbol is appended to the rating by S&P of those
certificates that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. The absence of an "r"
symbol in S&P's 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 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 Fitch and S&P; 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 either, or both, of Fitch and S&P.
S-58
<PAGE>
GLOSSARY OF TERMS
Accrued Certificate Interest -- For any certificate entitled to
distributions of interest for any distribution date will equal the interest
accrued during the related interest accrual period at the applicable pass-
through rate on the certificate principal balance of such certificate
immediately prior to such distribution date, less such certificate's share of
any Net Interest Shortfall, the interest portion of any Excess Losses through
the Cross-Over Date and, after the Cross-Over Date, the interest portion of
Realized Losses, including Excess Losses.
Adjustment Amount -- For each anniversary of the Cut-off Date, the amount,
if any, by which the Special Hazard Loss Coverage Amount (without giving effect
to the deduction of the Adjustment Amount for such anniversary) exceeds the
lesser of:
(a) an amount calculated by the master servicer and approved by each
Rating Agency, which amount shall not be less than $500,000; and
(b) the greater of (x) 1% (or if greater than 1%, the highest
percentage of mortgage loans by principal balance secured by mortgaged
properties in any California zip code) of the outstanding principal balance
of all the mortgage loans on the distribution date immediately preceding
such anniversary and (y) twice the outstanding principal balance of the
mortgage loan which has the largest outstanding principal balance on the
distribution date immediately preceding such anniversary.
Allocable Share -- With respect to any class of subordinated certificates
on any distribution date, such class's pro rata share (based on the class
certificate balance of each class entitled thereto) of each of the components of
the Subordinated Optimal Principal Amount described herein; provided, that,
except as provided in the pooling and servicing agreement, no Class B
Certificates (other than the Class B-1 Certificates) shall be entitled on any
distribution date to receive distributions pursuant to clauses (2), (3) and (5)
of the definition of Subordinated Optimal Principal Amount unless the Class
Prepayment Distribution Trigger for the related class is satisfied for such
distribution date.
Available Funds -- With respect to any distribution date, an amount equal
to the sum of:
. all scheduled installments of interest, net of the master servicing
fee and the trustee fee, 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 Insurance Proceeds and all Liquidation Proceeds during the
calendar month before the distribution date, which in each case is
the net of unreimbursed expenses incurred in connection with a
liquidation or foreclosure and unreimbursed advances, if any;
. 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.
S-59
<PAGE>
Available Funds Allocation -- The allocation of Available Funds as
described under "Distributions on the Certificates -- Allocation of Available
Funds" in the prospectus supplement.
Bankruptcy Loss Coverage Amount -- The aggregate amount of Realized Losses
which may be allocated in connection with Deficient Valuations.
Bankruptcy Losses -- Deficient Valuations or Debt Service Reductions.
Certificate Account -- An account established and maintained by the master
servicer, in the name of the trustee for the benefit of the holders of each
series of certificates, for the disbursement of payments on the mortgage loans
evidenced by each series of certificates.
Certificate Principal Balance -- With respect to any certificate and as of
any distribution date, the Certificate Principal Balance on the date of the
initial issuance of such certificate as reduced by:
. all amounts distributed on previous distribution dates on such
certificate on account of principal;
. the principal portion of all Realized Losses previously allocated to
such certificate; and
. in the case of a subordinated certificate, such certificate's pro
rata share, if any, of the Subordinated Certificate Writedown Amount
and the Class PO Deferred Payment Writedown Amount for previous
distribution dates.
Class A-4 Percentage -- For any distribution date, the percentage (carried
to six places rounded up) obtained by dividing (1) the aggregate Certificate
Principal Balance of the Class A-4 Certificates immediately preceding such
distribution date by (2) the aggregate Certificate Principal Balance of all the
certificates other than the Class PO Certificates immediately preceding such
distribution date. The initial Class A-4 Percentage is expected to be
approximately 11.14%.
Class A-4 Prepayment Distribution Percentage -- 0% through the distribution
date in April 2005; 30% thereafter through the distribution date in April 2006;
40% thereafter through the distribution date in April 2007; 60% thereafter
through the distribution date in April 2008; 80% thereafter through the
distribution date in April 2009; and 100% thereafter.
Class A-4 Principal Distribution Amount -- For any distribution date, the
lesser of (i) the sum of:
(a) the total of the amounts described in clauses (1) and (4) of the
definition of Senior Optimal Principal Amount (determined without
application of the Senior Percentage or the Senior Prepayment Percentage)
for such date multiplied by the Class A- 4 Scheduled Distribution
Percentage for such date; and
(b) the total of the amounts described in clauses (2), (3) and (5) of
the definition of Senior Optimal Principal Amount (determined without
application of the Senior Prepayment Percentage) for such date multiplied
by the product of (x) the Class A-4 Prepayment Distribution Percentage for
such date and (y) the Class A-4 Percentage for such date.
and (ii) 98.6% of the Senior Optimal Principal Amount.
S-60
<PAGE>
Notwithstanding the foregoing, (1) on the Group I Final Distribution Date,
the Class A-4 Principal Distribution Amount will be increased by any Senior
Optimal Principal Amount remaining after distributions of principal have been
made on the Group I Senior Certificates, and (2) following the Group I Final
Distribution Date, the Class A-4 Principal Distribution Amount will equal the
Senior Optimal Principal Amount.
Class A-4 Scheduled Distribution Percentage -- As to any distribution date,
0% through the distribution date in April 2005 and thereafter, the Class A-4
Percentage for such date.
Class B Certificates -- The Class B-1, Class B-2, Class B-3, Class B-4,
Class B-5 and Class B-6 Certificates, collectively.
"Class PO Deferred Amount" -- With respect to any distribution date through
the Cross- Over Date, the sum of (1) the applicable PO Percentage of the
principal portion of Non-Excess Losses on a Discount mortgage loan allocated to
the Class PO Certificates on such date, and (2) all amounts previously allocated
to the Class PO Certificates in respect of such losses and not distributed to
the Class PO Certificates on prior distribution dates.
Class PO Deferred Payment Writedown Amount -- For any distribution date,
the amount, if any, distributed on such date in respect of the Class PO Deferred
Amount pursuant to priority fourth of the second paragraph under "Distributions
on the Certificates -- Allocation of Available Funds" in the prospectus
supplement. The Subordinated Certificate Writedown Amount and the Class PO
Deferred Payment Writedown Amount will be allocated to the classes of
subordinated certificates in inverse order of priority, until the class
certificate balance of each such class has been reduced to zero.
Class PO Principal Distribution Amount -- With respect to each distribution
date, an amount equal to the sum of:
(1) the applicable PO Percentage of all scheduled payments of
principal due on each mortgage loan on the first day of the month in which
the distribution date occurs, as specified in the amortization schedule at
the time applicable thereto, after adjustment for previous principal
prepayments and the principal portion of Debt Service Reductions after the
Bankruptcy Loss Coverage Amount has been reduced to zero, but before any
adjustment to such amortization schedule by reason of any other bankruptcy
or similar proceeding or any moratorium or similar waiver or grace period;
(2) the applicable PO Percentage of the Stated Principal Balance of
each mortgage loan which was the subject of a prepayment in full received
by the master servicer during the related Prepayment Period;
(3) the applicable PO Percentage of all partial prepayments of
principal received by the master servicer during the related Prepayment
Period;
(4) the applicable PO Percentage of the sum of (a) the net liquidation
proceeds allocable to principal on each mortgage loan which became a
Liquidated Mortgage Loan during the related Prepayment Period, other than
mortgage loans described in clause (b), and (b) the principal balance of
each mortgage loan that was purchased by a private mortgage insurer during
the related Prepayment Period as an alternative to paying a claim under the
related insurance policy; and
(5) the applicable PO Percentage of the sum of (a) the Stated
Principal Balance of each mortgage loan which was repurchased by the seller
in connection with such distribution date and (b) the difference, if any,
between the Stated Principal Balance of a mortgage loan that has been
replaced by the seller with a substitute mortgage loan
S-61
<PAGE>
pursuant to the Agreement in connection with such distribution date and the
Stated Principal Balance of such substitute mortgage loan.
For purposes of clauses (2) and (5) above, the Stated Principal Balance of
a mortgage loan will be reduced by the amount of any Deficient Valuation that
occurred prior to the reduction of the Bankruptcy Loss Coverage Amount to zero.
Class Prepayment Distribution Trigger -- For a class of Class B
Certificates (other than the Class B-1 Certificates), any distribution date on
which a fraction (expressed as a percentage), the numerator of which is the
aggregate class certificate balance of such class and each class subordinate
thereto, if any, and the denominator of which is the Pool Principal Balance with
respect to such distribution date, equals or exceeds such percentage calculated
as of the closing date.
Code -- The Internal Revenue Code of 1986, as amended.
Compensating Interest -- As to any mortgage loan that prepaid in full
during the related Prepayment Period an additional payment made by the master
servicer, to the extent funds are available from the master servicing fee, equal
to the amount of interest at the Net Mortgage Rate, for that mortgage loan from
the date of the prepayment to the related due date; provided that such payment
shall not exceed .083% of the Pool Principal Balance as of the related
determination date.
Cross-over Date -- The distribution date on which the respective class
certificate balances of the subordinated certificates have been reduced to zero.
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.
Deficient Valuation -- With respect to any mortgage loan, a valuation by a
court of competent jurisdiction of the related 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.
Discount mortgage loan -- Any mortgage loan with a Net Mortgage Rate that
is less than 7.00% per annum.
Distribution Account -- An account established and maintained with the
trustee on behalf of the certificateholders, into which the master servicer will
deposit the Available Funds withdrawn from the Certificate Account.
Excess Losses -- Any Deficient Valuation, Fraud Loss or Special Hazard
Losses (each a type of Realized Loss), or any part thereof, occurring after the
Bankruptcy Loss Coverage Amount, Fraud Loss Coverage Amount or Special Hazard
Loss Coverage Amount, respectively, has been reduced to zero.
Fraud Loss Coverage Amount -- The aggregate amount of Realized Losses which
may be allocated in connection with Fraud Losses.
Fraud Losses -- Realized Losses incurred on defaulted mortgage loans as to
which there was fraud, dishonesty or misrepresentation in the origination of the
mortgage loans.
S-62
<PAGE>
First Horizon-- First Horizon Home Loan Corporation, a Kansas corporation
and an indirect wholly owned subsidiary of First Tennessee National Corporation,
a Tennessee corporation.
Fitch -- Fitch IBCA, Inc. and its successors and/or assigns.
Group I Final Distribution Date -- The distribution date on which the class
certificate balance of each of the Group I Senior Certificates has been reduced
to zero.
Group I Senior Certificates -- The Class A-R, Class A-1, Class A-2 and
Class A-3 Certificates, collectively.
Insurance Proceeds -- All proceeds of any primary mortgage guaranty
insurance policies and any other insurance policies with respect to the mortgage
loans, to the extent the proceeds are not applied to the restoration of the
related mortgaged property or released to the mortgagor in accordance with the
master servicer's normal servicing procedures.
Liquidated mortgage loan -- A defaulted mortgage loan as to which the
master servicer has determined that all recoverable liquidation and insurance
proceeds have been received.
Liquidation Proceeds -- All cash amounts, other than Insurance Proceeds,
received and retained in connection with the liquidation of defaulted mortgage
loans, by foreclosure or otherwise during the calendar month before the
distribution date.
Net Interest Shortfall -- For any distribution date, the sum of:
. the amount of interest which would otherwise have been received for
any mortgage loan that was the subject of (x) a Relief Act Reduction
or (y) a Special Hazard Loss, Fraud Loss, or Bankruptcy Loss, after
the exhaustion of the respective amounts of coverage provided by the
Subordinate Certificates for those types of losses; and
. any Net Prepayment Interest Shortfalls.
Net Interest Shortfalls on any distribution date will be allocated pro rata
among all classes of certificates entitled to receive distributions of interest
on that distribution date, based on the amount of interest each of those classes
of certificates would otherwise be entitled to receive on that distribution date
before taking into account any reduction in that amounts resulting from that Net
Interest Shortfalls.
Net Mortgage Rate" or "NMR" -- With respect to a mortgage loan, the
mortgage rate thereof, less the master servicing fee rate and the trustee fee
rate with respect to the mortgage loan, expressed as a per annum percentage of
its Stated Principal Balance.
Net Prepayment Interest Shortfall -- For any distribution date, the amount
by which the aggregate of Prepayment Interest Shortfalls during the applicable
prepayment period applicable to that distribution date exceeds the available
Compensating Interest, if any, for that period.
Non-Discount mortgage loan -- Any mortgage loan with a Net Mortgage Rate
that is equal to or greater than 7.00%.
Non-Excess Loss -- Any Realized Loss other than an Excess Loss.
Non PO Percentage -- (a) With respect to a Discount mortgage loan, the
fraction, expressed as a percentage, equal to the NMR divided by 7.00%, and (b)
with respect to any Non- Discount mortgage loan, 100%.
S-63
<PAGE>
OID -- Original issue discount.
Original Subordinated Principal Balance -- The aggregate class certificate
balance of the subordinated certificates as of the date of issuance of the
certificates.
Plan -- An employee benefit plan or arrangement (such as an individual
retirement plan or Keogh plan) that is subject to ERISA or Section 4975 of the
Code.
Pool Principal Balance -- With respect to any distribution date, the
aggregate of the Stated Principal Balances of the mortgage loans outstanding on
the due date in the month before the distribution date.
PO Percentage -- (a) With respect to any Discount mortgage loan, the
fraction, expressed as a percentage, equal to (7.00% - NMR) divided by 7.00%,
and (b) with respect to any Non- Discount mortgage loan, 0%.
Prepayment Interest Shortfall -- The amount by which interest paid by a
borrower in connection with a prepayment of principal on a mortgage loan is less
than one month's interest at the related Net Mortgage Rate, on the Stated
Principal Balance of that mortgage loan.
Prepayment Period -- (a) With respect to any mortgage loan that was the
subject of a voluntary prepayment in full and any distribution date, the period
from the sixteenth day of the month preceding the month of such distribution
date (or, in the case of the first distribution date, from the Cut-off Date)
through the last day of such month, and (b) with respect to any other
unscheduled prepayment of principal of any mortgage loan and any distribution
date, the calendar month preceding the month of such distribution date.
PTE -- A prohibited transaction exemption issued by the U.S. Department of
Labor.
Realized Loss -- (a) for a Liquidated mortgage loan, the unpaid principal
balance thereof plus accrued and unpaid interest thereon at the Net Mortgage
Rate through the last day of the month of liquidation, less the net proceeds
from the liquidation of, and any insurance proceeds from, such mortgage loan and
the related mortgaged property; and (b) for any mortgage loan, a Deficient
Valuation.
Regular Certificates -- All classes of certificates, other than the Class
A-R Certificates.
Relief Act Reduction -- A reduction in the amount of monthly interest
payment on a mortgage loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940.
S&P -- Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. and its successors and/or assigns.
Senior Final Distribution Date -- For any class of senior certificates, the
distribution date on which the class certificate balance of such class of senior
certificates (other than the Class PO Certificates) has been reduced to zero.
Senior Optimal Principal Amount -- With respect to each distribution date,
an amount equal to the sum of:
(1) the Senior Percentage of the applicable Non-PO Percentage of all
scheduled payments of principal due on each mortgage loan on the first day
of the month in which the distribution date occurs, as specified in the
amortization schedule at the time applicable thereto after adjustment for
previous principal prepayments and the principal
S-64
<PAGE>
portion of Debt Service Reductions after the Bankruptcy Loss Coverage
Amount has been reduced to zero, but before any adjustment to such
amortization schedule by reason of any other bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period;
(2) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the Stated Principal Balance of each mortgage loan which was
the subject of a prepayment in full received by the master servicer during
the applicable Prepayment Period;
(3) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received during the
applicable Prepayment Period;
(4) the lesser of:
(a) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (x) the net liquidation proceeds allocable to
principal on each mortgage loan which became a Liquidated Mortgage
Loan during the related Prepayment Period, other than mortgage loans
described in clause (y), and (y) the principal balance of each
mortgage loan that was purchased by a private mortgage insurer during
the related Prepayment Period as an alternative to paying a claim
under the related insurance policy; and
(b) (i) the Senior Percentage of the applicable Non-PO Percentage
of the sum of (x) the Stated Principal Balance of each mortgage loan
which became a Liquidated Mortgage Loan during the related Prepayment
Period, other than mortgage loans described in clause (y), and (y) the
Stated Principal Balance of each mortgage loan that was purchased by a
private mortgage insurer during the related Prepayment Period as an
alternative to paying a claim under the related insurance policy minus
(ii) the Senior Percentage of the applicable Non-PO Percentage of the
principal portion of Excess Losses (other than Debt Service
Reductions) during the related Prepayment Period; and
(5) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (a) the Stated Principal Balance of each mortgage
loan which was repurchased by the seller in connection with such
distribution date and (b) the difference, if any, between the Stated
Principal Balance of a mortgage loan that has been replaced by the seller
with a substitute mortgage loan pursuant to the Agreement in connection
with such distribution date and the Stated Principal Balance of such
substitute mortgage loan.
Senior Percentage -- On any distribution date, the lesser of 100% and the
percentage (carried to six places rounded up) obtained by dividing the aggregate
Certificate Principal Balances of all the senior certificates (other than the
Class PO Certificates) immediately preceding such distribution date by the
aggregate Certificate Principal Balances of all the certificates (other than the
Class PO Certificates) immediately preceding such distribution date. The initial
Senior Percentage is expected to be approximately 95.68%.
S-65
<PAGE>
Senior Prepayment Percentage -- On any distribution date occurring during
the periods set forth below, the Senior Prepayment Percentages described below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Period (Dates Inclusive) Senior Prepayment Percentage
<S> <C>
- --------------------------------------------------------------------------------------------------
May 2000 - April 2005 100%
- --------------------------------------------------------------------------------------------------
May 2005 - April 2006 Senior Percentage plus 70% of the Subordinated Percentage
- --------------------------------------------------------------------------------------------------
May 2006 - April 2007 Senior Percentage plus 60% of the Subordinated Percentage
- --------------------------------------------------------------------------------------------------
May 2007 - April 2008 Senior Percentage plus 40% of the Subordinated Percentage
- --------------------------------------------------------------------------------------------------
May 2008 - April 2009 Senior Percentage plus 20% of the Subordinated Percentage
- --------------------------------------------------------------------------------------------------
May 2009 and thereafter Senior Percentage
- --------------------------------------------------------------------------------------------------
</TABLE>
Notwithstanding the foregoing, if the Senior Percentage on any distribution
date exceeds the initial Senior Percentage, the Senior Prepayment Percentage for
such distribution date will equal 100%.
In addition, no reduction of the Senior Prepayment Percentage below the
level in effect for the most recent prior period specified in the table above
shall be effective on any distribution date unless, as of the last day of the
month preceding such distribution date, either:
(A)(1) the aggregate Stated Principal Balance of mortgage loans
delinquent 60 days or more (including for this purpose any mortgage loans
in foreclosure and mortgage loans with respect to which the related
mortgaged property has been acquired by the trust) does not exceed 50% of
the aggregate class certificate balance of the subordinated certificates as
of such date; and
(2) cumulative Realized Losses do not exceed:
(a) 30% of the Original Subordinated Principal Balance if such
distribution date occurs between and including May 2005 and April
2006;
(b) 35% of the Original Subordinated Principal Balance if such
distribution date occurs between and including May 2006 and April
2007;
(c) 40% of the Original Subordinated Principal Balance if such
distribution date occurs between and including May 2007 and April
2008;
(d) 45% of the Original Subordinated Principal Balance if such
distribution date occurs between and including May 2008 and April
2009; and
(e) 50% of the Original Subordinated Principal Balance if such
distribution date occurs during or after May 2009; or
(B)(1) the aggregate Stated Principal Balance of mortgage loans
delinquent 60 days or more (including for this purpose any mortgage
loans in foreclosure and mortgage loans with respect to which the
related mortgaged property has been acquired by the trust), averaged
over the last three months, as a percentage of the aggregate Stated
Principal Balance of all mortgage loans averaged over the last three
months, does not exceed 4%; and
S-66
<PAGE>
(2) cumulative Realized Losses do not exceed:
(a) 10% of the Original Subordinated Principal Balance if such
distribution date occurs between and including May 2005 and April
2006;
(b) 15% of the Original Subordinated Principal Balance if such
distribution date occurs between and including May 2006 and April
2007;
(c) 20% of the Original Subordinated Principal Balance if such
distribution date occurs between and including May 2007 and April
2008;
(d) 25% of the Original Subordinated Principal Balance if such
distribution date occurs between and including May 2008 and April
2009; and
(e) 30% of the Original Subordinated Principal Balance if such
distribution date occurs during or after May 2009.
SPA -- The Standard Prepayment assumption, a prepayment standard or model
which represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans.
Special Hazard Loss Coverage Amount -- The aggregate amount of Realized
Losses which may be allocated in connection with Special Hazard Losses.
Special Hazard Losses -- A Realized Loss incurred, to the extent that the
loss was attributable to direct physical damage to a mortgaged property other
than any loss of a type covered by a hazard insurance policy or a flood
insurance policy, if applicable; and any shortfall in insurance proceeds for
partial damage due to the application of the co-insurance clauses contained in
hazard insurance policies. The amount of the Special Hazard Loss is limited to
the lesser of the cost of repair or replacement of the mortgaged property; any
loss above that amount would be a Defaulted Mortgage Loss or other applicable
type of loss. Special Hazard Losses do not include losses occasioned by war,
civil insurrection, various governmental actions, errors in design, faulty
workmanship or materials, except under some circumstances, nuclear reaction,
chemical contamination or waste by the mortgagor.
Stated Principal Balance -- For any mortgage loan and due date, the unpaid
principal balance of the mortgage loan as of the due date, as specified in its
amortization schedule at the time, before any adjustment to the amortization
schedule for any moratorium or similar waiver or grace period, after giving
effect to any previous partial prepayments and liquidation proceeds received and
to the payment of principal due on the due date and irrespective of any
delinquency in payment by the related mortgagor.
Structuring Assumptions -- The assumed characteristics of the mortgage
loans used for purposes of estimating the weighted average lives of the
certificates, as listed on pages S-40 and S-41.
Subordinated Certificate Writedown Amount -- As of any distribution date,
the amount by which (a) the sum of the class certificate balances of all of the
certificates, after giving effect to the distribution of principal and the
allocation of Realized Losses in reduction of the Certificate Principal Balances
of the certificates on such distribution date, exceeds (b) the Pool Principal
Balance on the first day of the month of such distribution date less any
Deficient Valuations occurring before the Bankruptcy Loss Coverage Amount has
been reduced to zero.
S-67
<PAGE>
Subordinated Optimal Principal Amount -- With respect to each distribution
date, an amount equal to the sum of the following (but in no event greater than
the aggregate class certificate balances of the subordinated certificates
immediately prior to such distribution date):
(1) the Subordinated Percentage of the applicable Non-PO Percentage of
all scheduled payments of principal due on each outstanding mortgage loan
on the first day of the month in which the distribution date occurs, as
specified in the amortization schedule at the time applicable thereto,
after adjustment for previous principal prepayments and the principal
portion of Debt Service Reductions after the Bankruptcy Loss Coverage
Amount has been reduced to zero, but before any adjustment to such
amortization schedule by reason of any other bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period;
(2) the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of the Stated Principal Balance of each mortgage loan which was
the subject of a prepayment in full received by the master servicer during
the related Prepayment Period;
(3) the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received during the
related Prepayment Period, plus, on the Senior Final Distribution Date,
100% of any Senior Optimal Principal Amount remaining undistributed on such
date;
(4) the amount, if any, by which the sum of (a) the applicable Non-PO
Percentage of the net liquidation proceeds allocable to principal received
during the related Prepayment Period in respect of each Liquidated Mortgage
Loan, other than mortgage loans described in clause (b) and (b) the
applicable Non-PO Percentage of the principal balance of each mortgage loan
that was purchased by a private mortgage insurer during the related
Prepayment Period as an alternative to paying a claim under the related
insurance policy exceeds (c) the sum of the amounts distributable to the
senior certificateholders (other than the holders of the Class PO
Certificates) under clause (4) of the definition of Senior Optimal
Principal Amount on such distribution date; and
(5) the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of the sum of (a) the Stated Principal Balance of each mortgage
loan which was repurchased by the seller in connection with such
distribution date and (b) the difference, if any, between the Stated
Principal Balance of a mortgage loan that has been replaced by the seller
with a substitute mortgage loan pursuant to the Agreement in connection
with such distribution date and the Stated Principal Balance of such
substitute mortgage loan.
Subordinated Percentage -- For any distribution date, 100% minus the Senior
Percentage. The initial Subordinated Percentage is expected to be approximately
4.32%.
Subordinated Prepayment Percentage -- For any distribution date, 100% minus
the Senior Prepayment Percentage.
Substitution Adjustment Amount -- The amount by which the principal balance
of a substituted mortgage loan exceeds the principal balance of a replacement
mortgage loan.
Unanticipated Recovery -- Any amount recovered by the Master Servicer in
respect of principal of a mortgage loan which had previously been allocated as a
Realized Loss to one or more classes of certificates.
Underwriting Agreement -- The underwriting agreement by and among Lehman
Brothers Inc., First Horizon Asset Securities Inc. and First Horizon Home Loan
Corporation.
S-68
<PAGE>
Underwritten Certificates -- The senior certificates, other than the Class
PO Certificates, and the Class B-1, Class B-2 and Class B-3 Certificates.
S-69
<PAGE>
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 establish trusts
beginning on page 6 of to issue certificates representing interests in the
this prospectus. 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.
April 26, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Important notice about information in this prospectus and each accompanying prospectus
supplement.......................................................................... 5
RISK FACTORS.............................................................................. 6
THE TRUST FUND............................................................................ 16
The Mortgage Loans-- General........................................................ 18
Agency Securities................................................................... 22
Private Mortgage-Backed Securities.................................................. 24
Substitution of Mortgage Assets..................................................... 26
Pre-Funding Arrangements............................................................ 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............................................. 33
DESCRIPTION OF THE CERTIFICATES........................................................... 35
General............................................................................. 37
Distributions on Certificates....................................................... 39
Advances............................................................................ 41
Reports to Certificateholders....................................................... 42
Categories of Classes of Certificates............................................... 43
Indices Applicable to Floating Rate and Inverse Floating Rate Classes .............. 47
Book-Entry Certificates............................................................. 51
CREDIT ENHANCEMENT........................................................................ 53
General............................................................................. 53
</TABLE>
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<TABLE>
<S> <C>
Subordination....................................................................... 54
Mortgage Pool Insurance Policies.................................................... 55
Special Hazard Insurance Policies................................................... 57
Bankruptcy Bonds.................................................................... 58
Reserve Fund........................................................................ 58
Cross Support....................................................................... 59
Insurance Policies, Surety Bonds and Guaranties..................................... 60
Over-Collateralization.............................................................. 60
YIELD AND PREPAYMENT CONSIDERATIONS....................................................... 60
THE POOLING AND SERVICING AGREEMENT....................................................... 62
Assignment of Mortgage Assets....................................................... 62
Payments on Mortgage Assets; Deposits to Certificate Account ....................... 65
Collection Procedures............................................................... 68
Hazard Insurance.................................................................... 70
Realization Upon Defaulted Mortgage Loans........................................... 71
Servicing and Other Compensation and Payment of Expenses............................ 76
Evidence as to Compliance........................................................... 77
List of Certificateholders.......................................................... 78
Matters Regarding the Master Servicer and the Depositor ............................ 78
Events of Default................................................................... 79
Rights Upon Event of Default........................................................ 80
Amendment........................................................................... 80
Termination; Optional Termination................................................... 82
The Trustee......................................................................... 82
LEGAL ASPECTS OF THE MORTGAGE LOANS ...................................................... 83
General............................................................................. 83
Foreclosure/Repossession............................................................ 84
Rights of Redemption................................................................ 87
Anti-Deficiency Legislation and Other Limitations on Lenders ....................... 87
Environmental Risks................................................................. 88
Due-on-Sale Clauses................................................................. 90
Prepayment Charges.................................................................. 90
Applicability of Usury Laws......................................................... 91
Soldiers' and Sailors' Civil Relief Act............................................. 91
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ................................................. 91
General............................................................................. 92
Non-REMIC Certificates.............................................................. 92
REMIC Certificates.................................................................. 102
Prohibited Transactions and Other Taxes............................................. 117
</TABLE>
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<TABLE>
<S> <C>
Liquidation and Termination......................................................... 118
Administrative Matters.............................................................. 118
Tax-Exempt Investors................................................................ 119
Non-U.S. Persons.................................................................... 119
Tax-Related Restrictions on Transfers of Residual Certificates...................... 119
STATE TAX CONSIDERATIONS.................................................................. 122
ERISA CONSIDERATIONS...................................................................... 122
PTE 83-1............................................................................ 123
Underwriter Exemptions.............................................................. 125
Insurance Company General Accounts.................................................. 127
Other Exemptions.................................................................... 128
Consultation with Counsel........................................................... 128
LEGAL INVESTMENT.......................................................................... 128
METHOD OF DISTRIBUTION.................................................................... 130
LEGAL MATTERS............................................................................. 131
FINANCIAL INFORMATION..................................................................... 131
RATING.................................................................................... 131
GLOSSARY OF TERMS......................................................................... 133
</TABLE>
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Important notice about information in this prospectus and each accompanying
prospectus supplement
Information about each series of certificates is contained in two separate
documents:
. this prospectus, which provides general information, some of which may
not apply to a particular series; and
. the accompanying prospectus supplement for a particular series, which
describes the specific terms of the certificates of that series.
The prospectus supplement will contain information about a particular
series that supplements the information contained in this prospectus, and you
should rely on that supplementary information in the prospectus supplement.
You should rely only on the information in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus.
_________________________
If you require additional information, the mailing address of our principal
executive offices is First Horizon Asset Securities Inc., 4000 Horizon Way,
Irving, Texas 75063 and the telephone number is (214) 441-4000. For other means
of acquiring additional information about us or a series of securities, see "The
Trust Fund -- Incorporation of Certain Documents by Reference" beginning on page
28.
_________________________
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<PAGE>
RISK FACTORS
You should carefully consider the following information since it identifies
significant risks associated with an investment in the offered certificates.
Credit enhancement may not
be sufficient to protect you
from losses.......................... With respect to each series of
certificates, credit enhancement may
be provided in limited amounts to
cover losses on the underlying
mortgage loans. The types of losses to
be covered by credit enhancement may
include special hazard, bankruptcy and
fraud losses and will be described in
the related prospectus supplement.
Regardless of the form of credit
enhancement provided:
. the amount of coverage will be
limited in amount and in most cases
will be subject to periodic
reduction in accordance with a
schedule or formula established or
approved by the rating agencies;
. all or a portion of the credit
enhancement for any series of
certificates will generally be
permitted to be reduced, terminated
or substituted for if each
applicable rating agency indicates
that the then- current ratings will
not be adversely affected.
If losses exceed the amount of
coverage provided by any credit
enhancement or losses of a type not
covered by any credit enhancement
occur, losses will be borne by the
holders of one or more classes of
certificates, as described in the
related prospectus supplement.
Neither the depositor, the seller, the
master servicer, the trustee nor any
of their affiliates will have any
obligation to replace or supplement
any credit enhancement.
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<PAGE>
See "Credit Enhancement."
A reduction of the ratings on
your certificates may adversely
affect their value and
marketability ...................... A rating agency may lower or withdraw
the rating of any class of
certificates following its initial
issuance as a result of the
downgrading of the obligations of any
applicable credit support provider or
as a result of losses on the related
mortgage loans in excess of the levels
contemplated by the rating agency at
the time of its initial rating
analysis.
Neither the depositor, any seller, the
master servicer, the trustee nor any
of their affiliates will have any
obligation to maintain any rating of
any class of certificates. If a rating
on any class of certificates,
including your certificates, is
lowered or withdrawn, the value and
marketability of your certificates may
decline.
See "Rating."
Limited assets are available
for payment of the certificates...... The applicable prospectus supplement
may provide that certificates will be
payable from other trust funds in
addition to their associated trust
fund, but if it does not, they will be
payable solely from their associated
trust fund. If the trust fund does not
have sufficient assets to distribute
the full amount due to you as a
certificateholder, your yield will be
impaired, and perhaps even the return
of your principal may be impaired,
without your having recourse to anyone
else. Furthermore, at the times
specified in the applicable prospectus
supplement, some assets of the trust
fund may be released and paid out to
other persons, such as the depositor,
a servicer, a credit enhancement
provider, or any other person entitled
to payments from the trust fund. Those
assets will no longer be available to
make payments to you. Those payments
are generally made after other
specified payments that may be set
forth in the applicable prospectus
supplement have been made.
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<PAGE>
You will not have any recourse
against the depositor or any
servicer if you do not receive a
required distribution on the
certificates. You will only have
recourse against the assets of the
trust fund for another series of
certificates if the applicable
prospectus supplement so provides.
The certificates will not
represent an interest in the
depositor, any servicer, any
seller to the depositor, or any
one else except the trust fund.
The obligations of the depositor,
the master servicer and a seller to
a trust fund are limited................. The only obligation of the
depositor to a trust fund comes
from representations and
warranties made by it about assets
transferred to the trust fund. If
one or more of these
representations and warranties
turn out to be untrue, the
depositor may be required to
repurchase some of the transferred
assets. The depositor does not
have significant assets and is
unlikely to have significant
assets in the future. So if the
depositor were required to
repurchase a loan because of a
breach of a representation, its
only sources of funds for the
repurchase would be: funds
obtained from enforcing a
corresponding obligation of a
seller or originator of the loan,
or funds from a reserve fund or
similar credit enhancement
established to pay for loan
repurchases.
The only obligation of the master
servicer to a trust fund, other
than its master servicing
obligations, comes from
representations and warranties
made by it in connection with its
loan servicing activities. If one
or more of these representations
and warranties turn out to be
untrue, the master servicer may be
required to repurchase some of the
loans. However, the master
servicer may not have the
financial ability to make the
required repurchase.
The only obligations that a seller
will have to a trust fund come
from representations and
warranties made by it in
connection with its sale of the
loans to the depositor and its
obligation to deliver the related
loan documents to the depositor.
If one or more of these
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<PAGE>
representations and warranties
turn out to be untrue, or the
seller fails to deliver required
documents, it may be required to
repurchase some of the loans.
However, the seller may not have
the financial ability to make the
required repurchase.
You may have difficulty reselling your
certificates due to a lack of a
secondary market, fluctuating
market values or periods of
illiquidity............................. No market for any of the
certificates will exist before
they are issued. We cannot assure
you that a secondary market will
develop or, if it develops, that
it will continue. Consequently,
you may not be able to sell your
certificates readily or at prices
that will enable you to realize
your desired return or yield to
maturity. The market values of the
certificates are likely to
fluctuate; these fluctuations may
be significant and could result in
significant losses to you. The
secondary markets for mortgage
backed securities have experienced
periods of illiquidity and can be
expected to do so in the future.
Illiquidity can have a severely
adverse effect on the prices of
securities that are especially
sensitive to prepayment, credit,
or interest rate risk. Illiquidity
can also have an adverse effect on
the price of securities that have
been structured to support other
classes of certificates or that
have been structured to meet the
investment requirements of limited
categories of investors. For
example, a particular investor may
require a security with a
specified maturity date, a call
protection feature, or a specific
type of amortization feature. The
unique nature of the security may
inhibit its marketability to other
investors.
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:
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<PAGE>
. your ability to pledge book-
entry certificates to someone
who does not participate in the
DTC system, or to otherwise act
with respect to the book-entry
certificates, may be limited
due to the lack of a physical
certificate;
. you may experience delays in
your receipt of payments on
book-entry certificates because
distributions will be made by
the master servicer, or a
paying agent on behalf of the
master servicer, to the DTC;
and
. the liquidity of book-entry
certificates in any secondary
trading market that may develop
may be limited because
investors may be unwilling to
purchase securities for which
they cannot obtain delivery of
physical certificates.
See "Description of the
Certificates--Book-Entry
Certificates."
The yield to maturity on your
certificates may be affected by
various factors......................... The yield to maturity on your
certificates will depend on a
variety of factors, including:
. the rate and timing of
principal payments on the
mortgage loans, including
prepayments, defaults and
liquidations, and repurchases
due to breaches of
representations or warranties;
. the pass-through rate for that
class;
. interest shortfalls due to
mortgagor prepayments; and
. 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
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<PAGE>
your certificates will be
lower than anticipated.
Conversely, if you purchase
a class of certificates at
a price lower than its
outstanding principal
balance and principal is
distributed on the class
more slowly than you
assumed at the time of your
purchase, the yield on your
certificates will be lower
than anticipated.
See "Yield and Prepayment
Considerations."
Geographic concentration of
mortgaged properties may affect
the yield on your certificates................. The yield to maturity on
your certificates may be
affected by the geographic
concentration of the
mortgaged properties
securing the mortgage
loans.
Various geographic regions
of the United States from
time to time will
experience weaker regional
economic conditions and
housing markets and,
consequently, will
experience higher rates of
loss and delinquency on
mortgage loans generally.
Any concentration of the
mortgage loans in such a
region may present risk
considerations in addition
to those generally present
for similar mortgage-backed
securities without such
concentration.
In addition, California,
Florida, Texas and several
other regions have
experienced natural
disasters, including
earthquakes, fires, floods
and hurricanes, which may
adversely affect property
values.
Any deterioration in
housing prices in the
states in which there is a
significant concentration
of mortgaged properties, as
well as the other states in
which the mortgaged
properties are located, and
any deterioration of
economic conditions in
those states which
adversely affects the
ability of borrowers to
make payments on the
mortgage loans may increase
the likelihood of losses on
the mortgage loans. Losses,
if they occur, may have an
adverse effect on the yield
to maturity of your
certificates, especially if
they are subordinated
certificates. The states
and geographic areas where
there are significant
concentrations of mortgaged
properties will be
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<PAGE>
identified in the
prospectus supplement under
"The Mortgage Pool."
Declines in property values may
adversely affect your certificates............. The value of the properties
underlying the loans held
in the trust fund may
decline over time. Among
the factors that could
adversely affect the value
of the properties are:
. an overall decline in
the residential real
estate market in the
areas in which they are
located,
. a decline in their
general condition from
the failure of borrowers
to maintain their
property adequately, and
. natural disasters that
are not covered by
insurance, such as
earthquakes and floods.
If property values decline,
the actual rates of
delinquencies,
foreclosures, and losses on
all underlying loans could
be higher than those
currently experienced in
the mortgage lending
industry in general. The
holders of one or more
classes of certificates
will bear all or a portion
of these losses if they are
not otherwise covered by a
credit enhancement.
Delays in liquidation of mortgaged
property and the effect of
anti-deficiency legislation may
adversely affect the distributions
on your certificates........................... Even if the properties
underlying the loans held
in the trust fund provide
adequate security for the
loans, substantial delays
could occur before
defaulted loans are
liquidated and their
proceeds are 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
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<PAGE>
deficit. Thus, if a
borrower defaults, these
restrictions may impede our
ability to dispose of the
property and obtain
sufficient proceeds to
repay the loan in full. In
addition, the master
servicer will be entitled
to deduct from liquidation
proceeds all expenses
reasonably incurred in
attempting to recover on
the defaulted loan,
including legal fees and
costs, real estate taxes,
and property maintenance
and preservation expenses.
See "Legal Aspects of the
Mortgage Loans --
Foreclosure/Repossession"
and "-- Anti-Deficiency
Legislation and Other
Limitations on Lenders."
Losses on balloon payment
mortgages are borne by your
certificates................................... Some of the mortgage loans
may not be fully amortizing
over their terms to
maturity and, thus, will
require balloon payments at
their stated maturity.
Mortgage loans with balloon
payments involve a greater
degree of risk than fully
amortizing loans because
typically the borrower must
be able to refinance the
loan or sell the property
to make the balloon payment
at maturity. The ability of
a borrower to do this will
depend on factors such as
mortgage rates at the time
of sale or refinancing, the
borrower's equity in the
property, the condition of
the property, the relative
strength of the local
housing market, the
financial condition of the
borrower, and tax laws. The
holders of one or more
classes of certificates
will bear any losses on
these loans that are not
otherwise covered by a form
of credit enhancement.
Violations of consumer protection laws
may adversely affect your
certificates................................... Violations of state or
federal consumer protection
laws may limit the ability
of the master servicer to
collect the principal or
interest on the loans held
in the trust, and in
addition could subject the
trust to damages and
administrative enforcement.
Losses on loans from the
application of those laws
that are not otherwise
covered by a credit
enhancement will be
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<PAGE>
borne by the holders of one
or more classes of
certificates.
See "Legal Aspects of the
Mortgage Loans".
Violations of environmental laws
may adversely affect your
certificates................................... The trust, as owner of
mortgaged property, may be
subjected to fines and
penalties as a result of a
failure to comply with
federal, state, and local
environmental laws and
regulations.
In some states, a lien on
the property due to
contamination has priority
over the lien of an
existing mortgage. Also, a
mortgage lender may be held
liable as an owner or
operator for costs
associated with the release
of petroleum from an
underground storage tank
under some circumstances.
If the trust were to be
considered the owner or
operator of a property by
virtue of its ownership of
the related mortgage loan,
it will suffer losses as a
result of any liability
imposed for environmental
hazards on the property.
The holders of one or more
classes of certificates
will bear all or a portion
of any losses in respect of
mortgage loans that result
from the application of
environmental laws, to the
extent those losses are not
otherwise covered by a
credit enhancement.
See "Legal Aspects of the
Mortgage Loans--
Environmental Risks".
Bankruptcy of the depositor or a seller
may affect the timing and amount
of distributions on your certificates.......... Neither the United States
Bankruptcy Code nor similar
applicable state insolvency
laws prohibit the depositor
from filing a voluntary
application for relief.
However, the transactions
contemplated by this
prospectus and the related
prospectus supplement will
be structured so that the
voluntary or involuntary
application for relief
under the United States
Bankruptcy Code or state
insolvency laws by the
depositor is unlikely and
any bankruptcy filing by a
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<PAGE>
seller which is an
affiliate of the depositor
from whom the depositor
acquires the mortgage loans
should not result in
consolidation of the assets
and liabilities of the
depositor with those of the
seller. These steps include
the creation of the
depositor as a separate,
limited purpose finance
corporation, the
certificate of
incorporation of which
contains limitations on the
nature of the depositor's
business and restrictions
on the ability of the
depositor to commence
voluntary or involuntary
cases or proceedings under
the United States
Bankruptcy Code or state
insolvency laws without the
prior unanimous affirmative
vote of all its directors.
However, there can be no
assurance that the
activities of the depositor
would not result in a court
concluding that the assets
and liabilities of the
depositor should be
consolidated with those of
its parent, First Horizon
Home Loan Corporation.
Each seller will transfer
its related mortgage loans
to the depositor and the
depositor will transfer the
mortgage loans to the
related bankruptcy remote
trust. If a seller were to
become a debtor in a
bankruptcy case, a
creditor, a trustee or the
debtor itself may take the
position that the
contribution or transfer of
the mortgage loans by the
seller to the depositor
should be characterized as
a pledge of the mortgage
loans to secure the
debtor's borrowing, with
the result that the
depositor is deemed to be a
creditor of the seller,
secured by a pledge of the
applicable mortgage loans.
If such an attempt were
successful, delays in
payments of collections on
the 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
-15-
<PAGE>
transaction and thus the
mortgage assets would not
be included in the
depositor's bankruptcy
estate.
THE TRUST FUND
Whenever the terms mortgage pool and certificates are used in this
prospectus, those terms will be considered to apply, unless the context
indicates otherwise, to one specific mortgage pool and the certificates
representing certain undivided interests in a single trust fund. Similarly, the
term pass-through rate will refer to the pass- through rate borne by a class of
certificates of one specific series and the term trust fund will refer to one
specific trust fund. In addition, certain capitalized terms are used in this
prospectus to assist you in understanding the terms of the certificates. The
capitalized terms used in this prospectus are defined under "Glossary of Terms"
beginning on page 133.
This prospectus relates to mortgage pass-through certificates which may be
sold from time to time in one or more series by the depositor, First Horizon
Asset Securities Inc., on terms determined at the time of sale and described in
this prospectus and the related prospectus supplement. Each series will be
issued under a separate pooling and servicing agreement. The certificates of a
series will evidence beneficial ownership of a trust fund. The trust fund for a
series of certificates will consist of any one or more of the following types of
assets:
. the Mortgage Assets;
. amounts held from time to time in the Certificate Account or any other
account established for that series;
. mortgaged property related to the Mortgage Assets;
. any reserve fund for that series, if specified in the related
prospectus supplement;
. the depositor's rights under the pooling and servicing agreement and
any subservicing agreements relating to mortgage loans in the trust;
. any primary mortgage insurance policies relating to mortgage loans in
the trust;
. any pool insurance policy, any special hazard insurance policy, any
bankruptcy bond or other credit support relating to the series;
. permitted investments held in the Certificate Account or any other
account established for that series, or any guaranteed investment
contract for the investment of those funds; and
-16-
<PAGE>
. any other instrument or agreement relating to the trust and described
in the related prospectus supplement, which may include an interest
rate swap agreement or an interest rate cap agreement or similar
agreement issued by a bank, insurance company or savings and loan
association.
Some of the items listed above may be held outside of the trust. The value
of any guaranteed investment contract held by a trust will not exceed 10% of the
total assets of the trust.
Any Retained Interests which are received on a private mortgage-backed
security or mortgage loan comprising the Mortgage Assets for a series will not
be included in the trust for that series. Instead, that Retained Interest will
be retained by or payable to the originator, servicer or seller of that private
mortgage-backed security or loan, free and clear of the interest of
securityholders under the related agreement.
The Mortgage Assets will be acquired by the depositor, either directly or
indirectly, from one or more institutions, which may be affiliates of the
depositor, and conveyed by the depositor to the related trust fund. The trustee
for each series of certificates will be specified in the related prospectus
supplement. See "The Pooling and Servicing Agreement" for a description of the
trustee's rights and obligations.
The mortgage loans will be secured by first mortgage liens on one- to
four-family residential properties and, if so specified in the related
prospectus supplement, may include cooperative apartment loans secured by
security interests in shares issued by private, nonprofit, cooperative housing
corporations and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. In addition, the Mortgage Assets of the related trust fund may
include mortgage participation certificates evidencing interests in mortgage
loans. The mortgage loans may be conventional loans that are not insured or
guaranteed by any governmental agency. The mortgage loans may also be insured by
the FHA or partially guaranteed by the VA, as specified in the related
prospectus supplement. All or a portion of the mortgage loans in a mortgage pool
may be insured by FHA insurance and may be partially guaranteed by the VA.
The certificates will be entitled to payment from the assets of the related
trust fund or from other assets pledged for the benefit of the
certificateholders but held outside of the related trust as specified in the
related prospectus supplement. The certificates will not be entitled to payments
in respect of the assets of any other trust fund established by the depositor.
Mortgage loans acquired by the depositor will have been originated in
accordance with the underwriting criteria specified below under "Mortgage Loan
Program -- Underwriting Standards" or as otherwise described in a related
prospectus supplement.
The following is a brief description of the Mortgage Assets expected to
be included in the trust funds. If specific information about the Mortgage
Assets is not known at the time the related
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<PAGE>
series of certificates initially is offered, more general information of the
nature described below will be provided in the related prospectus supplement,
and specific information will be set forth in a report on Form 8-K to be filed
with the SEC within fifteen days after the initial issuance of the certificates.
A maximum of 5% of the Mortgage Assets as they will be constituted at the time
that the applicable detailed description of Mortgage Assets is filed will
deviate in any material respect from the Mortgage Asset pool characteristics
described in the related prospectus supplement, other than the aggregate number
or amount of mortgage loans. A schedule of the Mortgage Assets relating to the
series will be attached to the pooling and servicing agreement that is delivered
to the trustee upon delivery of the certificates.
The Mortgage Loans -- General
The real property that secures repayment of the mortgage loans is referred
to collectively as mortgaged properties. The mortgaged properties will be
located in any one of the fifty states, the District of Columbia, Guam, Puerto
Rico or any other territory of the United States. Mortgage loans with loan-to-
value ratios greater than 80% may be covered wholly or partially by primary
mortgage guaranty insurance policies. The existence, extent and duration of
coverage will be described in the applicable prospectus supplement. The loan-to-
value ratio of a mortgage loan will generally not exceed 95%.
The applicable prospectus supplement may specify the day on which monthly
payments on the mortgage loans in a mortgage pool will be due, but if it does
not, all of the mortgage loans in a mortgage pool will have monthly payments due
on the first day of each month. The payment terms of the mortgage loans to be
included in a trust fund will be described in the related prospectus supplement
and may include any of the following features or combination thereof or other
features described in the related prospectus supplement:
. Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index which will be specified in the related
prospectus supplement, a rate that is fixed for a period of time or
under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to 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
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maturity, called balloon payments. Principal may include interest that
has been deferred and added to the principal balance of the mortgage
loan.
. Monthly payments of principal and interest may be fixed for the life
of the mortgage loan, may increase over a specified period of time or
may change from period to period. The terms of a mortgage loan may
include limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of monthly
payments.
. The mortgage loans generally may be prepaid at any time without the
payment of any prepayment fee. If so specified in the related
prospectus supplement, some prepayments of principal may be subject to
a prepayment fee, which may be fixed for the life of the mortgage loan
or may decline over time, and may be prohibited for the life of the
mortgage loan or for a specified period, which is called a lockout
period. Some mortgage loans may permit prepayments after expiration of
the applicable lockout period and may require the payment of a
prepayment fee in connection with any subsequent prepayment. Other
mortgage loans may permit prepayments without payment of a fee unless
the prepayment occurs during specified time periods. The loans may
include "due-on-sale" clauses that permit the mortgagee to demand
payment of the entire mortgage loan in connection with the sale or a
transfer of the related mortgaged property. Other mortgage loans may
be assumable by persons meeting the then applicable underwriting
standards of the seller.
A trust fund may contain buydown loans that include provisions whereby a
third party partially subsidizes the monthly payments of the obligors on the
mortgage loans during the early years of the mortgage loans, the difference to
be made up from a buydown fund contributed by the third party at the time of
origination of the mortgage loan. A buydown fund will be in an amount equal
either to the discounted value or full aggregate amount of future payment
subsidies. Thereafter, buydown funds are applied to the applicable mortgage loan
upon receipt by the master servicer of the mortgagor's portion of the monthly
payment on the mortgage loan. The 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.
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Each prospectus supplement will contain information, as of the date of the
prospectus supplement and to the extent then specifically known to the
depositor, with respect to the mortgage loans contained in the related mortgage
pool, including
. the aggregate outstanding principal balance and the average
outstanding principal balance of the mortgage loans as of the first
day of the month of issuance of the related series of certificates or
another date specified in the related prospectus supplement called a
cut-off date,
. the type of property securing the mortgage loans, including separate
residential properties, individual units in condominium apartment
buildings or in buildings owned by cooperatives, vacation and second
homes,
. the original terms to maturity of the mortgage loans,
. the largest principal balance and the smallest principal balance of
any of the mortgage loans,
. the earliest origination date and latest maturity date of any of the
mortgage loans,
. the aggregate principal balance of mortgage loans having loan-to-value
ratios at origination exceeding 80%,
. the maximum and minimum per annum mortgage rates, and
. the geographical distribution of the mortgage loans. If specific
information respecting the mortgage loans is not known to the
depositor at the time the related certificates are initially offered,
more general information of the nature described above will be
provided in the detailed description of Mortgage Assets.
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-
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servicers, pursuant to the pooling and servicing agreement, and will receive a
fee for its services. See "Mortgage Loan Program" and "The Pooling and Servicing
Agreement." With respect to mortgage loans serviced by the master servicer
through a sub-servicer, the master servicer will remain liable for its servicing
obligations under the related pooling and servicing agreement as if the master
servicer alone were servicing the mortgage loans.
The applicable prospectus supplement may provide for additional
obligations of the depositor, but if it does not, the only obligations of the
depositor with respect to a series of certificates will be to obtain
representations and warranties from the sellers and to assign the depositor's
rights with respect to the representations and warranties to the trustee for the
series of certificates. See "The Pooling and Servicing Agreement -- Assignment
of Mortgage Assets." The obligations of the master servicer with respect to the
mortgage loans will consist primarily of its contractual servicing obligations
under the related pooling and servicing agreement. Those obligations include the
master servicer's obligation to enforce the obligations of the sub-servicers or
sellers, or both, as more fully described under "Mortgage Loan Program --
Representations by Sellers; Repurchases" and its obligation to make cash
advances upon delinquencies in payments on or with respect to the mortgage loans
in the amounts described under "Description of the Certificates -- Advances."
The obligations of the master servicer to make advances may be subject to
limitations, to the extent provided in this prospectus and in the related
prospectus supplement. The master servicer may also be a seller in which case a
breach of its obligations in one capacity will not constitute a breach of its
obligations in the other capacity.
The mortgage loans may consist of deeds of trust or participations or
other beneficial interests in mortgage loans, deeds of trust or participations,
secured by first liens on one- to four-family residential properties. The
mortgaged properties relating to mortgage loans will consist of detached or
semi-detached one-family dwelling units, two- to four-family dwelling units,
townhouses, rowhouses, individual condominium units, individual units in planned
unit developments and other types of dwelling units that may be specified in the
related prospectus supplement. The mortgaged properties may include vacation and
second homes, investment 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
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Securities Act or have been held for at least the holding period required to be
eligible for sale under Rule 144(k) under the Securities Act.
Agency Securities
Agency securities are mortgage pass-through securities issued or
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. All of the agency
securities will be registered in the name of the trustee or its nominee or, in
the case of agency securities issued only in book-entry form, a financial
intermediary that is a member of the Federal Reserve System or of a clearing
corporation on the books of which the security is held. The financial
intermediary may be the same entity as the trustee for a series of certificates.
Each agency security will evidence an interest in a pool of mortgage loans or
cooperative loans and in principal distributions and interest distributions on
those loans.
The descriptions of Ginnie Mae, Freddie Mac and Fannie Mae Certificates
that are set forth below are descriptions of certificates representing
proportionate interests in a pool of mortgage loans and in the payments of
principal and interest thereon. Ginnie Mae, Freddie Mac or Fannie Mae may also
issue mortgage-backed securities representing a right to receive distributions
of interest only or principal only or disproportionate distributions of
principal or interest or to receive distributions of principal or interest prior
or subsequent to distributions on other certificates representing interests in
the same pool of mortgage loans.
In addition, any of such issuers may issue certificates representing
interests in mortgage loans having characteristics that are different from the
types of mortgage loans described below. The terms of any such certificates to
be included in a trust fund and of the underlying mortgage loans will be
described in the related prospectus supplement, and the descriptions that follow
are subject to modification as appropriate to reflect the terms of any such
certificates that are actually included in a trust fund.
Ginnie Mae. Ginnie Mae is a wholly-owned corporate instrumentality of
the United States within HUD. Section 306(g) of the Housing Act authorizes
Ginnie Mae to guarantee the timely payment of the principal of and interest on
certificates representing interests in a pool of mortgages insured by the FHA,
under the Housing Act or under Title V of the Housing Act of 1949, or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or under Chapter 37 of Title 38, United States Code.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, Ginnie Mae may, under Section
306(d) of the Housing Act, borrow from the United States Treasury an amount that
is at any time sufficient to enable Ginnie Mae to perform its obligations under
its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae Certificate relating to a
series, which may be a "Ginnie Mae I Certificate" or a "Ginnie Mae II
Certificate" as referred to by Ginnie Mae, will be a
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"fully modified pass-through" mortgage-backed certificate issued and serviced by
a mortgage banking company or other financial concern approved by Ginnie Mae,
except with respect to any stripped mortgage-backed securities guaranteed by
Ginnie Mae or any REMIC securities issued by Ginnie Mae. The characteristics of
any Ginnie Mae Certificates included in the trust fund for a series of
certificates will be set forth in the related prospectus supplement.
Freddie Mac. Freddie Mac is a corporate instrumentality of the United
States created pursuant to the Freddie Mac Act. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of needed housing. The principal activity of Freddie Mac currently
consists of purchasing first-lien, conventional, residential mortgage loans or
participation interests in such mortgage loans and reselling the mortgage loans
so purchased in the form of guaranteed mortgage securities, primarily Freddie
Mac Certificates. In 1981, Freddie Mac initiated its Home Mortgage Guaranty
Program under which it purchases mortgage loans from sellers with Freddie Mac
Certificates representing interests in the mortgage loans so purchased. All
mortgage loans purchased by Freddie Mac must meet certain standards set forth in
the Freddie Mac Act. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality and type as to
meet generally the purchase standards imposed by private institutional mortgage
investors. Neither the United States nor any agency thereof is obligated to
finance Freddie Mac's operations or to assist Freddie Mac in any other manner.
Freddie Mac Certificates. Each Freddie Mac Certificate relating to a
series will represent an undivided interest in a pool of mortgage loans that
typically consists of conventional loans, FHA Loans or VA Loans purchased by
Freddie Mac, except with respect to any stripped mortgage-backed securities
issued by Freddie Mac. Each such pool will consist of mortgage loans,
substantially all of which are secured by one- to four-family residential
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. ss.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
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Mae Certificates will consist of fixed, variable or adjustable rate conventional
mortgage loans or fixed-rate FHA Loans or VA Loans. Such mortgage loans may be
secured by either one- to four-family or multi-family residential properties.
The characteristics of any Fannie Mae Certificates included in the trust fund
for a series of certificates will be set forth in the related prospectus
supplement.
Private Mortgage-Backed Securities
Private mortgage-backed securities may consist of mortgage pass-through
certificates or participation certificates evidencing an undivided interest in a
pool of mortgage loans or collateralized mortgage obligations secured by
mortgage loans. Private mortgage-backed securities may include stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all the
distributions) on some mortgage loans. Private mortgage-backed securities will
have been issued pursuant to a pooling and servicing agreement, an indenture or
similar agreement. The applicable prospectus supplement may provide that the
seller/servicer of the underlying mortgage loans will not have entered into a
pooling and servicing agreement with a private trustee, but if it does not, the
seller/servicer of the underlying mortgage loans will have entered into the
pooling and servicing agreement with a private trustee. The private trustee or
its agent, or a custodian, will possess the mortgage loans underlying the
private mortgage-backed security. Mortgage loans underlying a private
mortgage-backed security will be serviced by a private servicer directly or by
one or more subservicers who may be subject to the supervision of the private
servicer.
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
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securities or the private servicer may have the right to repurchase assets
underlying the private mortgage-backed securities after a certain date or under
other circumstances specified in the related prospectus supplement.
The mortgage loans underlying the private mortgage-backed securities
may consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buydown loans, adjustable rate mortgage loans or loans
having balloon or other special payment features. The mortgage loans may be
secured by single family property or multifamily property or by an assignment of
the proprietary lease or occupancy agreement relating to a specific dwelling
within a cooperative and the related shares issued by the cooperative.
The prospectus supplement for a series for which the trust fund
includes private mortgage- backed securities will specify the aggregate
approximate principal amount and type of the private mortgage-backed securities
to be included in the trust fund and certain characteristics of the mortgage
loans that comprise the underlying assets for the private mortgage-backed
securities, including:
. the payment features of the mortgage loans,
. the approximate aggregate principal balance, if known, of
underlying mortgage loans insured or guaranteed by a governmental
entity,
. the servicing fee or range of servicing fees with respect to
the mortgage loans and
. the minimum and maximum stated maturities of the underlying
mortgage loans at origination;
. the maximum original term-to-stated maturity of the private
mortgage-backed securities;
. the weighted average term-to stated maturity of the private
mortgage-backed securities;
. the pass-through or certificate rate of the private mortgage-
backed securities;
. the weighted average pass-through or certificate rate of the
private mortgage-backed securities;
. the issuer, the servicer and the trustee of the private mortgage-
backed securities;
. certain characteristics of credit support, if any, such as reserve
funds, insurance policies, surety bonds, letters of credit or
guaranties relating to the mortgage loans underlying the private
mortgage-backed securities or to the private mortgage-backed
securities themselves;
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. the terms on which the underlying mortgage loans for the private
mortgage-backed securities may, or are required to, be purchased
before their stated maturity or the stated maturity of the private
mortgage-backed securities; and
. the terms on which mortgage loans may be substituted for those
originally underlying the private mortgage-backed securities.
Private mortgage-backed securities included in the trust fund for a
series of certificates that were issued by an issuer of private mortgage-backed
securities that is not affiliated with the depositor must be acquired in bona
fide secondary market transactions or either have been previously registered
under the Securities Act or have been held for at least the holding period
required to be eligible for sale under Rule 144(k) under the Securities Act.
Substitution of Mortgage Assets
Substitution of Mortgage Assets will be permitted upon breaches of
representations and warranties with respect to any original Mortgage Asset or if
the documentation with respect to any Mortgage Asset is determined by the
trustee to be incomplete. The period during which the substitution will be
permitted will be indicated in the related prospectus supplement. The related
prospectus supplement will describe any other conditions upon which Mortgage
Assets may be substituted for Mortgage Assets initially included in the trust
fund.
Pre-Funding Arrangements
If specified in the prospectus supplement for a series, the related
pooling and servicing agreement will provide for a Pre-Funding Arrangement. With
respect to a series, the Pre-Funding Arrangement will require that any
Subsequent mortgage loans to be included in the related trust fund generally
conform to the underwriting requirements of the mortgage loans already included
in the trust fund and satisfy any additional requirements and conditions that
may be described in the applicable prospectus supplement. If a Pre-Funding
Arrangement is utilized in connection with the issuance of a series of
certificates, on the closing date the trustee will be required to deposit all or
a portion of the proceeds received by the trustee in connection with the sale of
one or more classes of certificates of the series into a Prefunding Account;
and, subsequently, the depositor will acquire Subsequent mortgage loans from the
seller in exchange for the release of money from the Pre- Funding Account for
the series. In addition, the Pre-Funding Arrangement will be limited to a
specified funding period, not to exceed 90 days from the closing date, during
which time any transfers of Subsequent mortgage loans must occur and to a
maximum deposit to the related Pre- Funding Account of no more than twenty-five
percent (25%) of the aggregate proceeds received from the sale of all classes of
certificates of the series.
If all of the funds originally deposited in the Pre-Funding Account are
not used by the end of the funding period, then any remaining amount will be
applied as a mandatory prepayment of a class or classes of certificates as
specified in the related prospectus supplement. Although it is
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intended that the principal amount of Subsequent mortgage loans to be included
in the related trust fund after the closing date for the issuance of any
particular series will require application of substantially all of the funds in
the Pre-Funding Account, and it is not anticipated that there will be any
material amount of principal distributions from amounts remaining on deposit in
the Pre- Funding Account in reduction of the principal balances of any
certificates, no assurance can be given that a distribution with respect to the
certificates will not occur on the first distribution date after the end of the
funding period. In any event, it is unlikely that the depositor will be able to
deliver Subsequent mortgage loans with aggregate principal balances that exactly
equal the amount on deposit in the Pre-Funding Account, and the remaining
amounts in the Pre-Funding Account at the end of the related funding period, if
any, will be distributed in reduction of the principal balance of the
certificates of the related series, as set forth in related prospectus
supplement.
As may be further specified in the related prospectus supplement,
amounts on deposit in the Pre-Funding Account will be invested in short term
investments that convert into cash or mature within a short period of time, have
minimal or no exposure to fluctuations in value as a result of market changes in
prevailing interest rates and are acceptable to each rating agency rating the
applicable series of certificates. To the extent that permitted investments
consist of debt obligations, they will be either registered or exempt from
registration under the Securities Act.
The utilization of a Pre-Funding Arrangement is intended to improve the
efficiency of the issuance of a series of certificates and the sale and
assignment of the mortgage loans to the trust by allowing the depositor to
deliver to the trust some of the mortgage loans on the closing date and the
Subsequent mortgage loans from time to time during the related funding period.
These incremental deliveries allow for the issuance of a larger principal amount
of certificates for a series than would otherwise be the case without a
Pre-Funding Arrangement.
A Pre-Funding Arrangement can affect the application of the
requirements under ERISA. See "ERISA Considerations."
Available Information
The depositor has filed with the SEC a Registration Statement with
respect to the certificates under the Securities Act. This prospectus, which
forms a part of the Registration Statement, and the prospectus supplement
relating to each series of certificates contain summaries of the material terms
of the documents referred to in this prospectus and in the prospectus
supplement, but do not contain all of the information in the Registration
Statement pursuant to the rules and regulations of the SEC. For further
information, reference is made to the Registration Statement and its exhibits.
The Registration Statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at its
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices located as follows: Chicago Regional Office, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, Seven
World Trade Center, New York, New York 10048. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet Web
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site that contains reports, information statements and other information
regarding the registrants that file electronically with the SEC, including the
depositor. The address of that Internet Web site is http://www.sec.gov.
This prospectus and any applicable prospectus supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the certificates offered by this prospectus and the prospectus
supplement nor an offer of the certificates to any person in any state or other
jurisdiction in which the offer would be unlawful.
Incorporation of Certain Documents by Reference
All documents filed for the trust fund referred to in the accompanying
prospectus supplement after the date of this prospectus and before the end of
the related offering with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act are incorporated by reference in this prospectus and are a
part of this prospectus from the date of their filing. Any statement contained
in a document incorporated by reference in this prospectus is modified or
superseded for all purposes of this prospectus to the extent that a statement
contained in this prospectus or in the accompanying prospectus supplement or in
any other subsequently filed 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
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by Mortgage Assets. The depositor is a wholly owned subsidiary of First Horizon
Home Loan Corporation ("First Horizon"). The depositor maintains its principal
office at 4000 Horizon Way, Irving, Texas 75063. Its telephone number is (214)
441-4000.
Neither the depositor nor any of the depositor's affiliates will ensure
or guarantee distributions on the certificates of any series.
THE MASTER SERVICER
First Horizon, an affiliate of the depositor, will be the master
servicer of the mortgage loans under the applicable pooling and servicing
agreement. First Horizon may have other business relationships with the
depositor or the depositor's affiliates. First Horizon 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. First Horizon 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.
First Horizon maintains its principal office at 4000 Horizon Way,
Dallas, Texas 75063. Its telephone number is (214) 441-4000. For more specific
information regarding First Horizon, 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 First
Horizon'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. First Horizon's underwriting standards with respect
to certain mortgage loans will generally conform to those published in the
Guide. The underwriting standards as set forth in the Guide are continuously
revised based on opportunities and prevailing conditions in the residential
mortgage market and the market for the depositor's mortgage pass-through
certificates. The mortgage loans may be underwritten by First Horizon or by a
designated third party. See " -- Qualifications of Sellers." First Horizon 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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First Horizon'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 First Horizon, 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 First
Horizon).
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.
First Horizon'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 First Horizon.
Moreover, there can be no assurance that every mortgage loan was originated in
conformity with the applicable underwriting standards in all material respects,
or that the quality or performance of mortgage loans underwritten pursuant to
varying standards as described above will be equivalent under all circumstances.
Guide Standards. The following is a brief description of the
underwriting standards set forth in the Guide for First Horizon's alternative
documentation loan programs. Initially, a
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prospective borrower is required to fill out a detailed application providing
pertinent credit information. As part of the application, the borrower is
required to provide a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report which summarizes the borrower's credit history with merchants
and lenders and any record of bankruptcy. Salaried prospective borrowers
generally are required to submit pay stubs covering a consecutive 30-day period
and their W-2 form for the most recent year. In addition, First Horizon
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 First Horizon after the
origination of a mortgage loan if the seller does not provide a credit score to
First Horizon. Credit scores are obtained from credit reports provided by
various credit reporting organizations, each of which may employ differing
computer models and methodologies.
The credit score is designed to assess a borrower's credit history at a
single point in time, using objective information currently on file for the
borrower at a particular credit reporting organization. Information utilized to
create a credit score may include, among other things, payment history,
delinquencies on accounts, levels of outstanding indebtedness, length of credit
history, types of credit, and bankruptcy experience. Credit scores range from
approximately 350 to approximately 840, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a credit score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender. For example, a
borrower with a higher credit score is statistically expected to be less likely
to default in payment than a borrower with a lower credit score. In addition, it
should be noted that credit scores were developed to indicate a level of default
probability over a two-year period, which does not correspond to the life of a
mortgage loan. Furthermore, credit scores were not developed specifically for
use in connection with mortgage loans, but for consumer loans in general, and
assess only the borrower's past credit history. Therefore, a credit score does
not take into consideration the differences between mortgage loans and consumer
loans generally, or the specific characteristics of the related mortgage loan,
such as the loan-to-value ratio, the collateral for the mortgage loan, or the
debt to income ratio. There can be no assurance that the credit scores of the
mortgagors will be
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an accurate predictor of the likelihood of repayment of the related mortgage
loans or that any mortgagor's credit score would not be lower if obtained as of
the date of the related prospectus supplement.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet its monthly obligations on the
proposed mortgage loan and other expenses related to the home, including
property taxes and hazard insurance, and its other financial obligations and
monthly living expenses. First Horizon will generally underwrite adjustable rate
mortgage loans, buy-down mortgage loans, graduated payment mortgage loans and
certain other mortgage loans on the basis of the borrower's ability to make
monthly payments as determined by reference to the mortgage rates in effect at
origination or the reduced initial monthly payments, as the case may be, and on
the basis of an assumption that the borrowers will likely be able to pay the
higher monthly payments that may result from later increases in the mortgage
rates or from later increases in the monthly payments, as the case may be, at
the time of the increase, even though the borrowers may not be able to make the
higher payments at the time of origination. The mortgage rate in effect from the
origination date of an ARM Loan or certain other types of loans to the first
adjustment date generally will be lower, and may be significantly lower, than
the sum of the then applicable index and note margin. Similarly, the amount of
the monthly payment on buy-down mortgage loans and graduated payment mortgage
loans will increase periodically. If the borrowers' incomes do not increase in
an amount commensurate with the increases in monthly payments, the likelihood of
default will increase. In addition, in the case of either adjustable rate
mortgage loans or graduated payment mortgage loans that are subject to negative
amortization, due to the addition of deferred interest the principal balances of
the mortgage loans are more likely to equal or exceed the value of the
underlying mortgaged properties, thereby increasing the likelihood of defaults
and losses. With respect to balloon loans, payment of the balloon amount will
generally depend on the borrower's ability to obtain refinancing or to sell the
mortgaged property before the maturity of the balloon loan, and there can be no
assurance that the borrower will be able to refinance or sell the mortgaged
property before the balloon loan matures.
If so specified in the related prospectus supplement, a mortgage pool
may include mortgage loans that have been underwritten pursuant to a streamlined
documentation refinancing program, as set forth in the Guide. These programs
permit certain mortgage loans to be refinanced with only limited verification or
updating of the underwriting information that was obtained at the time that the
original mortgage loan was originated. For example, a new appraisal of the
mortgaged property may not be required if the refinanced mortgage loan was
originated up to approximately 24 months before the refinancing. In addition,
the mortgagor's income may not be verified, although continued employment is
required to be verified. In certain circumstances, the mortgagor may be
permitted to borrow up to 105% of the outstanding principal amount of the
original mortgage loan. Each mortgage loan underwritten pursuant to this program
will be treated as having been underwritten pursuant to the same underwriting
documentation program as the mortgage loan that it refinanced, including for
purposes of the disclosure in the related prospectus supplement.
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The underwriting standards set forth in the Guide will be varied in
appropriate cases, including limited or reduced documentation programs. Certain
limited documentation programs, for example, do not require income, employment
or asset verifications. Generally, in order to be eligible for a limited
documentation program, the loan-to-value ratio must meet applicable guidelines,
the borrower must have a good credit history and the borrower's eligibility for
this type of program may be determined by use of a credit scoring model.
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,
First Horizon 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, First Horizon 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 First Horizon 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."
First Horizon's underwriting standards applicable to all states, including
anti-deficiency states, require that the value of the property being financed,
as indicated by the appraisal, currently supports and is anticipated to support
in the future the outstanding loan balance, although there can be no assurance
that the value of the property will continue to support the loan balance in the
future.
Qualifications of Sellers
Each seller must be an institution experienced in originating and
servicing mortgage loans of the type contained in the related mortgage pool and
must maintain satisfactory facilities to originate and service those mortgage
loans.
Representations by Sellers; Repurchases
Each seller will have made representations and warranties in respect of
the mortgage loans sold by it and evidenced by a series of certificates. The
applicable prospectus supplement may specify additional representations and
warranties, but if it does not, the material representations and warranties made
by a seller will, at a minimum, consist of the following:
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. 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.
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
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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 Code, the
master servicer or a holder of the related residual certificate will be
obligated to pay any prohibited transaction tax that may arise in connection
with the repurchase. The applicable prospectus supplement may contain different
reimbursement options, but if it does not, the master servicer will be entitled
to reimbursement for payment of any prohibited transaction taxes from the assets
of the related trust fund or from any holder of the related residual
certificate. See "Description of the Certificates -- General" and in the related
prospectus supplement. Except in those cases in which the master servicer is the
seller, the master servicer will be required under the applicable pooling and
servicing agreement to enforce this obligation for the benefit of the trustee
and the certificateholders, following the practices it would employ in its good
faith business judgment were it the owner of the mortgage loan. This repurchase
obligation will constitute the sole remedy available to certificateholders or
the trustee for a breach of representation by a seller.
Neither the depositor nor the master servicer will be obligated to
purchase a mortgage loan if a seller defaults on its obligation to do so, and no
assurance can be given that sellers will carry out their respective repurchase
obligations with respect to mortgage loans. However, to the extent that a breach
of a representation and warranty of a seller may also constitute a breach of a
representation made by the master servicer, the master servicer may have a
repurchase obligation as described under "The Pooling and Servicing Agreement --
Assignment of Mortgage Assets."
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DESCRIPTION OF THE CERTIFICATES
The prospectus supplement relating to the certificates of each series
to be offered under this prospectus will, among other things, set forth for the
certificates, as appropriate:
. a description of the class or classes of certificates and the rate
at which interest will be passed through to holders of each class
of certificates entitled to interest or the method of determining
the amount of interest, if any, to be passed through to each
class;
. the initial aggregate certificate balance of each class of
certificates included in the series, the dates on which
distributions on the certificates will be made and, if applicable,
the initial and final scheduled distribution dates for each class;
. information as to the assets comprising the trust fund, including
the general characteristics of the Mortgage Assets included in the
trust fund and, if applicable, the insurance, surety bonds,
guaranties, letters of credit or other instruments or agreements
included in the trust fund, and the amount and source of any
reserve fund;
. the circumstances, if any, under which the trust fund may be
subject to early termination;
. the method used to calculate the amount of principal to be
distributed with respect to each class of certificates;
. the order of application of distributions to each of the classes
within the series, whether sequential, pro rata, or otherwise;
. the distribution dates with respect to the series;
. additional information with respect to the plan of distribution of
the certificates;
. whether one or more REMIC elections will be made and designation
of the regular interests and residual interests;
. the aggregate original percentage ownership interest in the trust
fund to be evidenced by each class of certificates;
. 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.
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Each series of certificates will be issued pursuant to a pooling and
servicing agreement, dated as of the related cut-off date, among the depositor,
the master servicer and the trustee for the benefit of the holders of the
certificates of the series. The provisions of each pooling and servicing
agreement will vary depending upon the nature of the certificates and the
related trust fund. A form of pooling and servicing agreement is an exhibit to
the Registration Statement of which this prospectus is a part.
The prospectus supplement for a series of certificates will describe
any provision of the pooling and servicing agreement relating to the series that
materially differs from its description contained in this prospectus. The
depositor will provide a copy of the pooling and servicing agreement, without
exhibits, relating to any series without charge upon written request of a holder
of record of a certificate of the series addressed to First Horizon Asset
Securities Inc., 4000 Horizon Way, Irving, Texas 75063, Attention: Secretary.
The following summaries describe material provisions that may appear in the
pooling and servicing agreement.
General
The certificates of each series will be issued in either fully
registered or book-entry form in the authorized denominations specified in the
related prospectus supplement, will evidence specified beneficial ownership
interests in the related trust fund created pursuant to the related pooling and
servicing agreement and will not be entitled to payments in respect of the
assets included in any other trust fund established by the depositor. The
applicable prospectus supplement may provide for guarantees by a governmental
entity or other person, but if it does not, the Mortgage Assets will not be
insured or guaranteed by any governmental entity or other person. Each trust
fund will consist of, to the extent provided in the related pooling and
servicing agreement,
. the Mortgage Assets that from time to time are subject to the
related pooling and servicing agreement, excluding any amounts
specified in the related prospectus supplement as a retained
interest;
. the assets required to be deposited in the related Certificate
Account from time to time;
. property that secured a mortgage loan and that is acquired on
behalf of the certificateholders by foreclosure or deed in lieu of
foreclosure; and
. 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
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fund, a mortgage pool insurance policy, a special hazard insurance policy, a
bankruptcy bond, one or more letters of credit, a surety bond, guaranties or
similar instruments or other agreements.
Each series of certificates will be issued in one or more classes. Each
class of certificates of a series will evidence beneficial ownership of a
specified percentage or portion of future interest payments and a specified
percentage or portion of future principal payments on the Mortgage Assets in the
related trust fund. These specified percentages may be 0%. A series of
certificates may include one or more classes that are senior in right to payment
to one or more other classes of certificates of the series. Certain series or
classes of certificates may be covered by insurance policies, surety bonds or
other forms of credit enhancement, in each case as described in this prospectus
and in the related prospectus supplement. One or more classes of certificates of
a series may be entitled to receive distributions of principal, interest or any
combination of principal and interest. Distributions on one or more classes of a
series of certificates may be made before one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related trust fund, or on a different basis, in each case as specified in the
related prospectus supplement. The timing and amounts of the distributions may
vary among classes or over time as specified in the related prospectus
supplement.
Distributions of either or both of principal and interest on the
related certificates will be made by the trustee on each distribution date in
proportion to the percentages specified in the related prospectus supplement.
Distributions will be made monthly, quarterly, semi-annually or at other
intervals and on the dates specified in the prospectus supplement to the persons
in whose names the certificates are registered at the close of business on the
dates specified in the related prospectus supplement. Distributions will be made
by check or money order mailed to the persons entitled to them at the address
appearing in the certificates register maintained for holders of certificates
or, if specified in the related prospectus supplement, in the case of
certificates that are of a certain minimum denomination, upon written request by
the certificateholder, by wire transfer or by another means described in the
prospectus supplement; provided, however, that the final distribution in
retirement of the certificates will be made only upon presentation and surrender
of the certificates at the office or agency of the trustee or other person
specified in the notice to certificateholders of the final distribution.
The certificates will be freely transferable and exchangeable at the
corporate trust office of the trustee as set forth in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of certificates of any series, but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding by or on behalf of any
employee benefit plan or other retirement arrangement subject to provisions of
ERISA or the Code of certain classes of certificates may result in "prohibited
transactions" within the meaning of ERISA and the Code. See "ERlSA
Considerations." Retirement arrangements subject to these provisions include
individual retirement accounts and annuities, Keogh plans and collective
investment funds in which the plans, accounts or arrangements are invested. The
applicable prospectus supplement may specify other
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conditions under which transfers of this type would be permitted, but if it does
not, transfer of the certificates will not be registered unless the transferee
represents that it is not, and is not purchasing on behalf of, a plan, account
or other retirement arrangement or provides an opinion of counsel satisfactory
to the trustee and the depositor that the purchase of the certificates by or on
behalf of a plan, account or other retirement arrangement is permissible under
applicable law and will not subject the trustee, the master servicer or the
depositor to any obligation or liability in addition to those undertaken in the
pooling and servicing agreement.
As to each series, an election may be made to treat the related trust
fund or designated portions of it as a REMIC. The related prospectus supplement
will specify whether a REMIC election is to be made. Alternatively, the pooling
and servicing agreement for a series may provide that a REMIC election may be
made at the discretion of the depositor or the master servicer and may be made
only if certain conditions are satisfied. The terms applicable to the making of
a REMIC election, as well as any material federal income tax consequences to
certificateholders not described in this prospectus, will be set forth in the
related prospectus supplement. If a REMIC an election is made with respect to a
series, one of the classes will be designated as evidencing the sole class of
"residual interests" in the related REMIC, as defined in the Code. All other
classes of certificates in the series will constitute "regular interests" in the
related REMIC, as defined in the Code. As to each series with respect to which a
REMIC election is to be made, the master servicer or a holder of the related
residual certificate will be obligated to take all actions required to comply
with applicable laws and regulations and will be obligated to pay any prohibited
transaction taxes. See "Material Federal Income Tax Consequences." The
applicable prospectus supplement may restrict the master servicer's
reimbursement rights, but if it does not, the master servicer will be entitled
to reimbursement for payment of any prohibited transaction taxes from the assets
of the trust fund or from any holder of the related residual certificate.
Distributions on Certificates
General. In general, the method of determining the amount of
distributions on a particular series of certificates will depend on the type of
credit support, if any, that is used with respect to the series. See "Credit
Enhancement" in this prospectus. 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. Distributions of principal and interest made in respect of a
class of certificates on any distribution date will be applied in the manner
specified in the related prospectus supplement. The applicable prospectus
supplement may provide for payment distinctions within classes, but if it does
not, distributions to any class of certificates will be made pro rata to all
certificateholders of that class.
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Available Funds. All distributions on the certificates of each series
on each distribution date will be made from the Available Funds, in accordance
with the terms described in the related prospectus supplement and specified in
the pooling and servicing agreement. The applicable prospectus supplement may
define Available Funds with reference to different accounts or different
amounts, but if it does not, "Available Funds" for each distribution date will
generally equal the amount on deposit in the related Certificate Account on the
distribution date, net of related fees and expenses payable by the related trust
fund, other than amounts to be held in the Certificate Account for distribution
on future distribution dates.
Distributions of Interest. Interest will accrue on the class
certificate balance or in the case of certificates entitled only to
distributions allocable to interest, the aggregate notional amount, of each
class of certificates entitled to interest at the pass-through rate from the
date and for the periods specified in the prospectus supplement. The pass-
through rate for a class of certificates may be a fixed rate or an adjustable
rate, as specified in the related prospectus supplement. To the extent funds are
available therefor, interest accrued during each specified period on each class
of certificates entitled to interest, other than a class of accrual certificates
that provide for interest that accrues but is not currently payable, will be
distributable on the distribution dates specified in the related prospectus
supplement until the class certificate balance of the class has been distributed
in full. In the case of certificates entitled only to distributions allocable to
interest, interest accrued during each specified period will be distributable on
the distribution dates specified in the related prospectus supplement until the
aggregate notional amount of the certificates is reduced to zero or for the
period of time designated in the related prospectus supplement. The original
certificate balance of each certificate will equal the aggregate distributions
allocable to principal to which the certificate is entitled. The applicable
prospectus supplement may specify some other basis for these distributions, but
if it does not, distributions allocable to interest on each interest only
certificate will be calculated based on the notional amount of the certificate.
The notional amount of an interest only certificate will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
With respect to any class of accrual certificates, any interest that
has accrued but is not paid on a given distribution date will be added to the
class certificate balance of that class on that 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
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entitled to distributions of principal. The class certificate balance of any
class of certificates entitled to distributions of principal will be the
original class certificate balance of that class as specified in the prospectus
supplement, reduced by all distributions reported to the holders of the
certificates as allocable to principal and in the case of accrual certificates,
unless otherwise specified in the related prospectus supplement, increased by
all interest accrued but not then distributable on the accrual certificates and
in the case of adjustable rate certificates, unless otherwise specified in the
related prospectus supplement, subject to the effect of negative amortization.
The related prospectus supplement will specify the method by which the amount of
principal to be distributed on the certificates on each distribution date will
be calculated and the manner in which that amount will be allocated among the
classes of certificates entitled to distributions of principal.
A series of certificates may include one or more classes of senior
certificates and one or more classes of subordinated certificates. If so
provided in the related prospectus supplement, one or more classes of senior
certificates will be entitled to receive all or a disproportionate percentage of
the payments of principal that are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of the payments in the percentages and under the
circumstances or for the periods specified in the prospectus supplement. Any
disproportionate allocation of these principal prepayments to senior
certificates will have the effect of accelerating the amortization of the senior
certificates while increasing the interests evidenced by the subordinated
certificates in the trust fund. Increasing the interests of the subordinated
certificates relative to that of the senior certificates is intended to preserve
the availability of the subordination provided by the subordinated certificates.
See "Credit Enhancement -- Subordination" in this prospectus and "Description of
the Certificates -- Subordination" 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.
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Advances
To the extent provided in the related prospectus supplement, the master
servicer will be required to advance on or before each distribution date, an
amount equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date, subject to the master servicer's
determination that the advances will be recoverable out of late payments by
obligors on the Mortgage Assets, liquidation proceeds, insurance proceeds not
used to restore the property or otherwise. The master servicer will make
advances from its own funds, or from funds advanced by sub-servicers or held in
the Certificate Account for future distributions to certificateholders. In the
case of cooperative loans, the master servicer also will be required to advance
any unpaid maintenance fees and other charges under the related proprietary
leases as specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to certificateholders,
rather than to guarantee or insure against losses. If advances are made by the
master servicer from cash being held for future distribution to
certificateholders, the master servicer will replace the funds on or before any
future distribution date to the extent that funds in the applicable Certificate
Account on the distribution date would be less than the amount required to be
available for distributions to certificateholders on the distribution date. Any
advances will be reimbursable to the master servicer out of recoveries on the
specific Mortgage Assets with respect to which the advances were made. These
recoveries may include late payments made by the related obligors, any related
insurance proceeds, liquidation proceeds or proceeds of any mortgage loan
repurchased by the depositor, a sub-servicer or a seller pursuant to the related
pooling and servicing agreement. In addition, advances by the master servicer or
sub-servicer also will be reimbursable to the master servicer or a sub-servicer
from cash otherwise distributable to certificateholders to the extent that the
master servicer determines that the advances previously made are not ultimately
recoverable as described in the preceding sentence. The master servicer also
will be obligated to make advances, to the extent recoverable out of insurance
proceeds not used to restore the property, liquidation proceeds or otherwise,
for certain taxes and insurance premiums 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;
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. the amount of the distribution allocable to interest and the
amount, if any, of any shortfall in the amount of interest and
principal;
. the amount of any advance;
. the aggregate amount withdrawn from the reserve fund, if any,
that is included in the amounts distributed to the certificateholders;
. the class certificate balance or notional amount of each class
of the related series after giving effect to the distribution of
principal on the distribution date;
. the aggregate unpaid principal balance of the mortgage loans
after giving effect to the distribution of principal on the
distribution date;
. the number and aggregate principal balances of mortgage loans
in the related mortgage pool that are delinquent (a) one month, (b) two
months and (c) three months, and that are in foreclosure;
. the book value of any real estate acquired by the trust
through foreclosure or grant of a deed in lieu of foreclosure;
. if applicable, the amount remaining in the reserve fund at the
close of business on the distribution date;
. any amounts remaining under letters of credit, pool policies
or other forms of credit enhancement; and
. the servicing fee payable to the master servicer and any
subservicer, if applicable.
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.
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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.
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
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 primary planned
principal classes, secondary planned principal
classes and so forth, and may have different
effective structuring ranges and different principal
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
payment priorities. The structuring range for the
secondary planned principal class of a series of
certificates will be narrower than that for the
primary planned principal class of the series.
Scheduled Principal Class......................... A class that is designed to receive principal
payments using a predetermined principal balance
schedule but is not designated as a planned principal
class or targeted principal class. In many
cases, the schedule is derived by assuming two
constant prepayment rates for the underlying
Mortgage Assets. These two rates are the
endpoints for the structuring range for the
scheduled principal class.
Sequential Pay................................... Classes that receive principal payments in a
prescribed sequence, that do not have predetermined
principal balance schedules and that under all
circumstances receive payments of principal
continuously from the first distribution date on
which they receive principal until they are retired. A
single class that receives principal payments before
or after all other classes in the same series of
certificates may be identified as a sequential pay
class.
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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
Interest Types
Fixed Rate....................................... A class with an interest rate that is fixed throughout
the life of the class.
Floating Rate.................................... A class with an interest rate that resets periodically
based upon a designated index and that varies
inversely with changes in the index.
Inverse Floating Rate............................ A class with an interest rate that resets periodically
based upon a designated index and that varies
directly with changes in the index.
Variable Rate.................................... A class with an interest rate that resets periodically
and is calculated by reference to the rate or rates of
interest applicable to specified assets or instruments,
including the mortgage rates borne by the
underlying mortgage loans.
Interest Only.................................... A class that receives some or all of the interest
payments made on the underlying Mortgage Assets
or other assets of the trust fund and little or no
principal. Interest only classes have either a nominal
principal balance or a notional amount. A 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
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
interest on the class. The accretion may continue
until a specified event has occurred or until the
partial accrual class is retired.
Accrual.......................................... A class that accretes the amount of accrued interest
otherwise distributable on the class, which amount
will be added as principal to the principal balance of
the class on each applicable distribution
date. The accretion may continue until some
specified event has occurred or until the
accrual class is retired.
</TABLE>
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
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rate per annum which the calculation agent determines to be
either the arithmetic mean, rounded upwards if necessary to
the nearest whole multiple of 1/32%, of the one-month United
States dollar lending rates that New York City banks selected
by the calculation agent are quoting, on the relevant LIBOR
determination date, to the principal London offices of at
least two of the reference banks to which the quotations are,
in the opinion of the calculation agent being so made, or if
the calculation agent cannot determine the arithmetic mean,
the lowest one-month United States dollar lending rate which
New York City banks selected by the calculation agent are
quoting on the LIBOR determination date to leading European
banks.
. If on any LIBOR determination date for a class specified in
the related prospectus supplement, the calculation agent is
required but is unable to determine the reserve interest rate
in the manner provided in the previous paragraph, LIBOR for
the next interest accrual period shall be LIBOR as determined
on the preceding LIBOR determination date, or, in the case of
the first LIBOR determination date, LIBOR shall be considered
to be the per annum rate specified in the related prospectus
supplement.
Each reference bank shall be a leading bank engaged in
transactions in Eurodollar deposits in the international Eurocurrency
market; shall not control, be controlled by, or be under common control
with the calculation agent; and shall have an established place of
business in London. If reference bank should be unwilling or unable to
so act, or if appointment of a reference bank is terminated, another
leading bank meeting the criteria specified above will be appointed.
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."
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The establishment of LIBOR on each LIBOR determination date by the
calculation agent and its calculation of the rate of interest for the applicable
classes for the related interest accrual period shall, in the absence of
manifest error, be final and binding.
COFI. The Eleventh District Cost of Funds Index is designed to
represent the monthly weighted average cost of funds for savings institutions in
Arizona, California and Nevada that are member institutions of the Eleventh
District. The Eleventh District Cost of Funds Index for a particular month
reflects the interest costs paid on all types of funds held by Eleventh District
member institutions and is calculated by dividing the cost of funds by the
average of the total amount of those funds outstanding at the end of that month
and of the prior month and annualizing and adjusting the result to reflect the
actual number of days in the particular month. If necessary, before these
calculations are made, the component figures are adjusted by the FHLBSF to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: savings deposits, time
deposits, FHLBSF advances, repurchase agreements and all other borrowings.
Because the component funds represent a variety of maturities whose costs may
react in different ways to changing conditions, the Eleventh District Cost of
Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District
Cost of Funds Index, which may cause it to move in a manner different from
indices tied to specific interest rates, such as United States Treasury Bills or
LIBOR. Because the liabilities upon which the Eleventh District Cost of Funds
Index is based were issued at various times under various market conditions and
with various maturities, the Eleventh District Cost of Funds Index may not
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.
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The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month will be announced on or near the last
working day of the following month and also has stated that it cannot guarantee
the announcement of the index on an exact date. So long as the index for a month
is announced on or before the tenth day of the second following month, the
interest rate for each class of certificates of a series for which the
applicable interest rate is determined by reference to an index denominated as
COFI for the interest accrual period commencing in the second following month
will be based on the Eleventh District Cost of Funds Index for the second
preceding month. If publication is delayed beyond the tenth day, the interest
rate will be based on the Eleventh District Cost of Funds Index for the third
preceding month.
The applicable prospectus supplement may specify some other basis for
determining COFI, but if it does not, then if on the tenth day of the month in
which any interest accrual period commences for a class of COFI certificates the
most recently published Eleventh District Cost of Funds Index relates to a month
before the third preceding month, the index for the current interest accrual
period and for each succeeding interest accrual period will, except as described
in the next to last sentence of this paragraph, be based on the National Cost of
Funds Index published by the OTS for the third preceding month, or the fourth
preceding month, if the National Cost of Funds Index for the third preceding
month has not been published on the tenth day of an interest accrual period.
Information on the National Cost of Funds Index may be obtained by writing the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677,
and the current National Cost of Funds Index may be obtained by calling (202)
906-6988. If on the tenth day of the month in which an interest accrual period
commences the most recently published National Cost of Funds Index relates to a
month before the fourth preceding month, the applicable index for the interest
accrual period and each succeeding interest accrual period will be based on
LIBOR, as determined by the calculation agent in accordance with the pooling and
servicing agreement relating to the series of certificates. A change of index
from the Eleventh District Cost of Funds Index to an alternative index will
result in a change in the index level and could increase its volatility,
particularly if LIBOR is the alternative index.
The establishment of COFI by the calculation agent and its calculation
of the rates of interest for the applicable classes for the related interest
accrual period shall, in the absence of manifest error, be final and binding.
Treasury Index. The applicable prospectus supplement may specify some
other basis for determining and defining the Treasury index, but if it does not,
on the Treasury index determination date for each class of certificates of a
series for which the applicable interest rate is determined by reference to an
index denominated as a Treasury index, the calculation agent will ascertain the
Treasury index for Treasury securities of the maturity and for the period or, if
applicable, the date specified in the related prospectus supplement. The
Treasury index for any period means the average of the yield for each business
day during the specified period and for any date, the yield for the date,
expressed as a per annum percentage rate, on U.S. Treasury securities adjusted
to the "constant maturity" specified in the prospectus supplement or if no
"constant maturity" is so specified, U.S. Treasury securities trading on the
secondary market having the maturity specified in the prospectus
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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 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.
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Beneficial interests in the book-entry certificates of a series will be
held indirectly by investors through the book-entry facilities of the
depository, as described in this prospectus. Accordingly, the depository or its
nominee is expected to be the holder of record of the book-entry certificates.
Except as described below, no person acquiring a beneficial interest in a book-
entry certificate will be entitled to receive a physical certificate
representing the certificate.
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for that
purpose. In turn, the financial intermediary's ownership of a book-entry
certificate will be recorded on the records of the depository or of a
participating firm that acts as agent for the financial intermediary whose
interest will be recorded on the records of the depository, if the beneficial
owner's financial intermediary is not a depository participant. Therefore, the
beneficial owner must rely on the foregoing procedures to evidence its
beneficial ownership of a book-entry certificate. Beneficial ownership of a
book-entry certificate may only be transferred by compliance with the procedures
of the financial intermediaries and depository participants.
In accordance with its normal procedures, the depository is expected to
record the positions held by each depository participant in the book-entry
certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of book-entry certificates will be
subject to the rules, regulations and procedures governing the depository and
depository participants as in effect from time to time.
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to the depository. The depository will be
responsible for crediting the amount of the payments to the accounts of the
applicable depository participants in accordance with the depository's normal
procedures. Each depository participant will be responsible for disbursing the
payments to the beneficial owners of the book-entry certificates that it
represents and to each financial intermediary for which it acts as agent. Each
financial intermediary will be responsible for disbursing funds to the
beneficial owners of the book-entry certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry
certificates may experience some delay in their receipt of payments, since
payments will be forwarded by the trustee to the depository or its nominee, as
the case may be, as holder of record of the book-entry certificates. Because the
depository can act only on behalf of financial intermediaries, the ability of a
beneficial owner to pledge book-entry certificates to persons or entities that
do not participate in the depository system, or otherwise take actions in
respect of the book-entry certificates, may be limited due to the lack of
physical certificates for the book-entry certificates. In addition, issuance of
the book-entry certificates in book-entry form may reduce the liquidity of the
certificates in the secondary market since some potential investors may be
unwilling to purchase certificates for which they cannot obtain physical
certificates.
Until definitive certificates are issued, it is anticipated that the
only "certificateholder" of the book-entry certificates will be the depository
or its nominee. Beneficial owners of the book-entry
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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
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.
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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; o 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 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
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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
. 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;
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. if there has been physical loss or damage to the mortgaged
property, it has been restored to its physical condition, with
reasonable wear and tear excepted, at the time of issuance of the
policy; and
. the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens except certain
permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the
option to either
. purchase the mortgaged property at a price equal to the principal
balance of the related mortgage loan plus accrued and unpaid
interest at the mortgage rate to the date of the purchase and
certain expenses incurred by the master servicer on behalf of the
trustee and certificateholders, or
. pay the amount by which the sum of the principal balance of the
defaulted mortgage loan plus accrued and unpaid interest at the
mortgage rate to the date of payment of the claim and the master
servicer's expenses exceeds the proceeds received from an approved
sale of the mortgaged property,
in either case net of certain amounts paid or assumed to have been paid under
the related primary mortgage insurance policy. If any mortgaged property is
damaged, and proceeds, if any, from the related hazard insurance policy or a
special hazard insurance policy or policies maintained for a series are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the mortgage pool insurance policy, the master servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that the restoration will increase the proceeds to certificateholders
on liquidation of the mortgage loan after reimbursement of the master servicer
for its expenses and the expenses will be recoverable by it through proceeds of
the sale of the mortgaged property or proceeds of the related mortgage pool
insurance policy or any related primary mortgage insurance policy.
The applicable prospectus supplement may specify that mortgage pool
insurance will cover various origination and servicing defaults, but if it does
not, then no mortgage pool insurance policy will insure against loss sustained
from a default arising from, among other things, fraud or negligence in the
origination or servicing of a mortgage loan, including misrepresentation by the
mortgagor, the originator or persons involved in its origination, or failure to
construct a mortgaged property in accordance with plans and specifications. Many
primary mortgage insurance policies also do not insure against these types of
losses. A failure of coverage for one of these reasons might result in a breach
of the related seller's representations and, in that case, might result in an
obligation on the part of the seller to repurchase the defaulted mortgage loan
if the breach cannot be cured by the seller. In addition, no mortgage pool
insurance policy will cover, and many primary mortgage insurance policies do not
cover a claim with respect to a defaulted mortgage loan occurring when the
servicer of the mortgage loan, at the time of default or thereafter, was not
approved by the applicable insurer.
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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, each special hazard policy will insure against
damage to mortgaged properties caused by special hazard losses in an amount
equal to the lesser of:
. the cost of repair to or replacement of the damaged property, or
. upon transfer of the property to the special hazard insurer, the
unpaid principal balance of the mortgage loan at the time of
acquisition of the property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement
and certain expenses incurred by the master servicer with respect
to the property.
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If the unpaid principal balance of a mortgage loan, plus accrued interest and
expenses, is paid by the special hazard insurer, the amount of further coverage
under the related special hazard insurance policy will be reduced by that amount
less any net proceeds from the sale of the property. In adddition, any amount
paid to repair or replace the property will further reduce special hazard
coverage by that amount.
No special hazard policy will insure against damage that is covered by
a hazard insurance policy or flood insurance policy, if any, maintained by the
mortgagor or the master servicer.
So long as a mortgage pool insurance policy remains in effect, the
payment by the special hazard insurer of the cost of repair or of the unpaid
principal balance of the related mortgage loan plus accrued interest and certain
expenses will not affect the total insurance proceeds paid to
certificateholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy.
To the extent specified in the prospectus supplement, the master
servicer may deposit cash, an irrevocable letter of credit, or any other
instrument acceptable to each rating agency rating the certificates of the
related series at the request of the depositor in a special trust account to
provide protection in lieu of or in addition to that provided by a special
hazard insurance policy. The amount of any special hazard insurance policy or of
the deposit to the special trust account relating to the certificates may be
reduced so long as the reduction will not result in a downgrading of the rating
of the certificates by a rating agency rating certificates at the request of the
depositor.
Bankruptcy Bonds
If specified in the related prospectus supplement, a bankruptcy bond to
cover losses resulting from proceedings under the federal Bankruptcy Code with
respect to a mortgage loan will be issued by an insurer named in the prospectus
supplement. Each bankruptcy bond will cover, to the extent specified in the
related prospectus supplement, certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a mortgage
loan or a reduction by the court of the principal amount of a mortgage loan and
will cover certain unpaid interest on the amount of a principal reduction from
the date of the filing of a bankruptcy petition. The required amount of coverage
under each bankruptcy bond will be set forth in the related prospectus
supplement. Coverage under a bankruptcy bond may be canceled or reduced by the
master servicer if the cancellation or reduction would not adversely affect the
then current rating or ratings of the related certificates. See "Legal Aspects
of the Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on
Lenders."
To the extent specified in the prospectus supplement, the master
servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
certificates of the related series at the request of the depositor in a special
trust account to provide protection in lieu of or in addition to that provided
by a bankruptcy bond. The amount of any bankruptcy bond or of the deposit to the
special trust account relating to the
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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. To the extent that permitted investments
consist of debt obligations, they will be either registered or exempt from
registration under the Securities Act. If a letter of credit is deposited with
the trustee, the letter of credit will be irrevocable. Generally, any deposited
instrument will name the trustee, in its capacity as trustee for the
certificateholders, as beneficiary and will be issued by an entity acceptable to
each rating agency that rates the certificates at the request of the depositor.
Additional information about the instruments deposited in the reserve funds will
be set forth in the related prospectus supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the reserve fund for distribution to the
certificateholders for the purposes, in the manner and at the times specified in
the related prospectus supplement.
Cross Support
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust fund may be evidenced
by separate classes of the related series of certificates. In that case, credit
support may be provided by a cross support feature that requires that
distributions be made on certificates evidencing a beneficial ownership interest
in other asset groups within the same trust fund. The related prospectus
supplement for a series that includes a cross support feature will describe the
material terms of any cross support feature, the impact of the cross support
feature on the interests of the certificateholders and all material applicable
risks.
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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 Mortgage Assets included in the related trust
fund. The original terms to maturity of the underlying mortgage loans of the
Mortgage Assets in a given mortgage pool will vary depending upon the type of
mortgage loans included in it, and each prospectus supplement will contain
information about the type and maturities of the mortgage loans. The applicable
prospectus supplement may indicate that some mortgage loans provide for
prepayment penalties, but if it does not, then the mortgage loans may be prepaid
without penalty in full or in part at any time. The prepayment experience on the
underlying mortgage loans of the Mortgage Assets will affect the life of the
related series of certificates.
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A number of factors may affect the prepayment experience of mortgage loans,
including homeowner mobility, economic conditions, the presence and
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds.
The applicable prospectus supplement may indicate that some conventional
mortgage loans do not have due-on-sale provisions, but if it does not, then all
conventional mortgage loans will contain due-on-sale provisions permitting the
mortgagee to accelerate the maturity of the loan upon sale or specified
transfers by the mortgagor of the underlying mortgaged property. Mortgage loans
insured by the FHA and mortgage loans partially guaranteed by the VA are
assumable with the consent of the FHA and the VA, respectively. Thus, the rate
of prepayments on those mortgage loans may be lower than that on conventional
mortgage loans bearing comparable interest rates. The master servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it has
knowledge of the conveyance or further encumbrance or the proposed conveyance or
proposed further encumbrance of the mortgaged property and reasonably believes
that it is entitled to do so under applicable law. However, the master servicer
will not take any enforcement action that would impair or threaten to impair any
recovery under any related insurance policy. See "The Pooling and Servicing
Agreement --Collection Procedures" and "Legal Aspects of the Mortgage Loans" for
a description of certain provisions of each pooling and servicing agreement and
certain legal developments that may affect the prepayment experience on the
mortgage loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall
significantly below the mortgage rates borne by the mortgage loans, the mortgage
loans are likely to be subject to higher prepayment rates than if prevailing
interest rates remain at or above those mortgage rates. Conversely, if
prevailing interest rates rise appreciably above the mortgage rates borne by the
mortgage loans, the mortgage loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below those mortgage rates. However,
there can be no assurance that this will be the case.
When a full prepayment is made on a mortgage loan, the mortgagor is charged
interest on the principal amount of the mortgage loan prepaid only for the
number of days in the month actually elapsed up to the date of the prepayment
rather than for a full month. Thus, in most instances, the effect of prepayments
in full will be to reduce the amount of interest passed through in the following
month to certificateholders. Partial prepayments in a given month may be applied
to the outstanding principal balances of the mortgage loans so prepaid in the
month of receipt or the month following receipt. In the latter case, partial
prepayments will not reduce the amount of interest passed through in the month.
Interest payable on the certificates on any given distribution date will
include all interest accrued during their related interest accrual period. The
interest accrual period for the certificates of each series will be specified in
the applicable prospectus supplement. If the interest accrual period ends two or
more days before the related distribution date, your effective yield will be
less 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.
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Under specified circumstances, the master servicer or the holders of the
residual interests in a REMIC may have the option to purchase the assets of a
trust fund thereby effecting earlier retirement of the related series of
certificates. See "The Pooling and Servicing Agreement -- Termination; Optional
Termination."
Factors other than those identified in this prospectus and in the related
prospectus supplement could significantly affect principal prepayments at any
time and over the lives of the certificates. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of the Mortgage Assets at
any time or over the lives of the certificates.
The prospectus supplement relating to a series of certificates will discuss
in greater detail the effect of the rate and timing of principal payments and
principal prepayments, delinquencies and losses on the yield, weighted average
lives and maturities of the certificates.
THE POOLING AND SERVICING AGREEMENT
The following is a summary of the material provisions of the pooling and
servicing agreement which are not described elsewhere in this prospectus. Where
particular provisions or terms used in the pooling and servicing agreement are
referred to, the provisions or terms are as specified in the related pooling and
servicing agreement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
certificates of a series, the depositor will cause the mortgage loans comprising
the related trust fund to be assigned to the trustee, together with all
principal and interest received by or on behalf of the depositor on or with
respect to the mortgage loans after the cut-off date, other than principal and
interest due on or before the cut-off date and other than any retained interest
specified in the related prospectus supplement. The trustee will, concurrently
with the assignment, deliver the certificates to the depositor in exchange for
the mortgage loans. Each mortgage loan will be identified in a schedule
appearing as an exhibit to the related pooling and servicing agreement. The
schedule will include information as to the outstanding principal balance of
each mortgage loan after application of payments due on the cut-off date, as
well as information regarding the mortgage rate, the current scheduled monthly
payment of principal and interest, the maturity of the loan, the loan-to-value
ratio at origination and other specified information.
In addition, the depositor will deliver or cause to be delivered to the
trustee, or to the custodian, for each mortgage loan
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. the mortgage note endorsed without recourse in blank or to the
order of the trustee, except that the depositor may deliver or
cause to be delivered a lost note affidavit in lieu of any
original mortgage note that has been lost,
. the mortgage, deed of trust or similar instrument with evidence of
recording indicated on it, except for any mortgage not returned
from the public recording office, in which case the depositor will
deliver or cause to be delivered a copy of the mortgage together
with a certificate that the original of the mortgage was delivered
to the recording office or some other arrangement will be provided
for,
. an assignment of the mortgage to the trustee in recordable form
and
. any other security documents specified in the related prospectus
supplement or the related pooling and servicing agreement.
The applicable prospectus supplement may provide other arrangements for
assuring the priority of the assignments, but if it does not, then the depositor
will promptly cause the assignments of the related loans to be recorded in the
appropriate public office for real property records, except in states in which
in the opinion of counsel recording is not required to protect the trustee's
interest in the loans against the claim of any subsequent transferee or any
successor to or creditor of the depositor or the originator of the loans.
With respect to any mortgage loans that are cooperative loans, the
depositor will cause to be delivered to the trustee
. the related original cooperative note endorsed without recourse in
blank or to the order of the trustee, or to the extent the related
pooling and servicing agreement so provides, a lost note
affidavit,
. the original security agreement,
. the proprietary lease or occupancy agreement,
. the recognition agreement,
. an executed financing agreement and
. the relevant stock certificate, related blank stock powers and any
other document specified in the related prospectus supplement.
The depositor will cause to be filed in the appropriate office an
assignment and a financing statement evidencing the trustee's security interest
in each cooperative loan.
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The trustee or the custodian will review the mortgage loan documents
within the time period specified in the related prospectus supplement after
receipt of them, and the trustee will hold the documents in trust for the
benefit of the certificateholders. Generally, if the document is found to be
missing or defective in any material respect, the trustee or the custodian will
notify the master servicer and the depositor, and the master servicer will
notify the related seller. If the seller cannot cure the omission or defect
within the time period specified in the related prospectus supplement after
receipt of the notice, the seller will be obligated to purchase the related
mortgage loan from the trustee at the purchase price or, if so specified in the
related prospectus supplement, replace the mortgage loan with another mortgage
loan that meets specified requirements. There can be no assurance that a seller
will fulfill this purchase obligation. Although the master servicer may be
obligated to enforce the obligation to the extent described under "Mortgage Loan
Program -- Representations by Sellers; Repurchases," neither the master servicer
nor the depositor will be obligated to purchase the mortgage loan if the seller
defaults on its purchase obligation, unless the breach also constitutes a breach
of the representations or warranties of the master servicer or the depositor.
The applicable prospectus supplement may provide other remedies but if it does
not, then this purchase obligation constitutes the sole remedy available to the
certificateholders or the trustee for omission of, or a material defect in, a
constituent document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the mortgage loans as agent of the trustee.
Notwithstanding these provisions, unless the related prospectus
supplement otherwise provides, no mortgage loan will be purchased from a trust
fund for which a REMIC election is to be made if the purchase would result in a
prohibited transaction tax under the Code.
Assignment of Agency Securities. The depositor will cause the agency
securities to be registered in the name of the trustee or its nominee, and the
trustee concurrently will execute, countersign and deliver the certificates.
Each agency security will be identified in a schedule appearing as an exhibit to
the pooling and servicing agreement, which will specify as to each agency
security the original principal amount and outstanding principal balance as of
the cut-off date, the annual pass-through rate and the maturity date.
Assignment of Private Mortgage-Backed Securities. The depositor will
cause the private mortgage-backed securities to be registered in the name of the
trustee. The trustee or the custodian will have possession of any certificated
private mortgage-backed securities. Generally, the trustee will not be in
possession of or be assignee of record of any underlying assets for a private
mortgage- backed security. See "The Trust Fund -- Private Mortgage-Backed
Securities." Each private mortgage-backed security will be identified in a
schedule appearing as an exhibit to the related pooling and servicing agreement
which will specify the original principal amount, outstanding principal balance
as of the cut-off date, annual pass-through rate or interest rate and maturity
date and other specified pertinent information for each private mortgage-backed
security conveyed to the trustee.
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Conveyance of Subsequent Mortgage Loans. With respect to a series of
certificates for which a Pre-Funding Arrangement is provided, in connection with
any conveyance of Subsequent mortgage loans to the trust fund after the issuance
of the related certificates, the related pooling and servicing agreement will
require the seller and the depositor to satisfy the following conditions, among
others:
. each Subsequent mortgage loan purchased after the applicable
closing date must satisfy the representations and warranties
contained in the subsequent transfer agreement to be entered into
by the depositor, the seller and the trustee and in the related
pooling and servicing agreement;
. the seller will not select the Subsequent mortgage loans in a
manner that it believes is adverse to the interests of the
certificateholders;
. as of the related cut-off date, all of the mortgage loans in the
mortgage pool at that time, including the Subsequent mortgage
loans purchased after the closing date, will satisfy the criteria
set forth in the related pooling and servicing agreement;
. the Subsequent mortgage loans will have been approved by any third
party provider of credit enhancement, if applicable; and
. before the purchase of each Subsequent mortgage loan the trustee
will perform an initial review of certain related loan file
documentation for the mortgage loan and issue an initial
certification for which the required documentation in the loan
file has been received with respect to each Subsequent mortgage
loan.
The Subsequent mortgage loans, on an aggregate basis, will have
characteristics similar to the characteristics of the initial pool of mortgage
loans as described in the related prospectus supplement. Each acquisition of any
Subsequent mortgage loans will be subject to the review by any third party
provider of credit enhancement, if applicable, the rating agencies and the
seller's accountants of the aggregate statistical characteristics of the related
mortgage pool for compliance with the applicable statistical criteria set forth
in the related pooling and servicing agreement.
Payments on Mortgage Assets; Deposits to Certificate Account
The master servicer will establish and maintain or cause to be
established and maintained a Certificate Account for the related trust fund. The
applicable prospectus supplement may provide for other requirements for the
Certificate Account, but if it does not, then the Certificate Account must be
either
. 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
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certificates at the request of the depositor, or in the case of
a depository institution that is the principal subsidiary of a
holding company, the short-term debt obligations of the holding
company are so rated,
. an account or accounts, the deposits in which are insured by the
FDIC or SAIF to the limits established by the FDIC or the SAIF,
and the uninsured deposits in which are otherwise secured such
that, as evidenced by an opinion of counsel, the
certificateholders have a claim with respect to the funds in the
Certificate Account or a perfected first priority security
interest against any collateral securing the funds that is
superior to the claims of any other depositors or general
creditors of the depository institution with which the Certificate
Account is maintained,
. a trust account or accounts maintained with the trust department
of a federal or a state chartered depository institution or trust
company, acting in a fiduciary capacity or
. an account or accounts otherwise acceptable to each rating agency
that rated one or more classes of the related series of
certificates at the request of the depositor.
The collateral eligible to secure amounts in the Certificate Account is
limited to permitted investments which will generally consist of short term
investments that convert into cash or mature within a short period of time, have
minimal or no exposure to fluctuations in value as a result of market changes in
prevailing interest rates and are acceptable to each rating agency rating the
applicable series of certificates. To the extent that permitted investments
consist of debt obligations, they will be either registered or exempt from
registration under the Securities Act. A Certificate Account may be maintained
as an interest bearing account or the funds held in it may be invested pending
each succeeding distribution date in permitted investments. To the extent
provided in the related prospectus supplement, the master servicer or its
designee will be entitled to receive the interest or other income earned on
funds in the Certificate Account as additional compensation and will be
obligated to deposit in the Certificate Account the amount of any loss
immediately as realized. The Certificate Account may be maintained with the
master servicer or with a depository institution that is an affiliate of the
master servicer, provided it meets the standards set forth above.
The master servicer will deposit or cause to be deposited in the
Certificate Account for each trust fund on a daily basis, to the extent
applicable and unless the related pooling and servicing agreement provides for a
different deposit arrangement, the following payments and collections received
or advances made by or on behalf of it after the cut-off date, other than
payments due on or before the cut-off date and exclusive of any amounts
representing any retained interest specified in the related prospectus
supplement:
. all payments on account of principal, including principal
prepayments and, if specified in the related prospectus
supplement, prepayment penalties, on the mortgage loans;
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. all payments on account of interest on the mortgage loans, net of
applicable servicing compensation;
. all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items incurred, and unreimbursed
advances made, by the master servicer) of the hazard insurance
policies and any primary mortgage insurance policies, to the
extent the proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the
master servicer's normal servicing procedures and all other cash
amounts, net of unreimbursed expenses incurred in connection with
liquidation or foreclosure and any unreimbursed advances, received
and retained in connection with the liquidation of defaulted
mortgage loans, by foreclosure or otherwise, together with any net
proceeds received on a monthly basis with respect to any
properties acquired on behalf of the certificateholders by
foreclosure or deed in lieu of foreclosure;
. all proceeds of any mortgage loan or property in respect thereof
purchased by the master servicer, the depositor or any seller as
described under "Mortgage Loan Program -- Representations by
Sellers; Repurchases" or "The Pooling and Servicing Agreement --
Assignment of Mortgage Assets" above and all proceeds of any
mortgage loan repurchased as described under "The Pooling and
Servicing Agreement -- Termination; Optional Termination";
. all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance
policy described under " -- Hazard Insurance";
. any amount required to be deposited by the master servicer in
connection with losses realized on investments for the benefit of
the master servicer of funds held in the Certificate Account and,
to the extent specified in the related prospectus supplement, any
payments required to be made by the master servicer in connection
with prepayment interest shortfalls; and
. all other amounts required to be deposited in the Certificate
Account pursuant to the pooling and servicing agreement.
The master servicer or the depositor, as applicable, may from time to
time direct the institution that maintains the Certificate Account to withdraw
funds from the Certificate Account for the following purposes:
. to pay to the master servicer the servicing fees described in the
related prospectus supplement, the master servicing fees and, as
additional servicing compensation, earnings on or investment
income with respect to funds in the amounts in the Certificate
Account;
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. to reimburse the master servicer for advances, the right of
reimbursement with respect to any mortgage loan being limited to
amounts received that represent late recoveries of payments of
principal and interest on the mortgage loan, or insurance proceeds
or liquidation proceeds from the mortgage loan, with respect to
which the advance was made;
. to reimburse the master servicer for any advances previously made
that the master servicer has determined to be nonrecoverable;
. to reimburse the master servicer from insurance proceeds not used
to restore the property for expenses incurred by the master
servicer and covered by the related insurance policies;
. to reimburse the master servicer for unpaid master servicing fees
and unreimbursed out- of-pocket costs and expenses incurred by the
master servicer in the performance of its servicing obligations,
the right of reimbursement being limited to amounts received
representing late recoveries of the payments for which the
advances were made;
. to pay to the master servicer, with respect to each mortgage loan
or property acquired in respect thereof that has been purchased by
the master servicer pursuant to the pooling and servicing
agreement, all amounts received on them and not taken into account
in determining the principal balance of the repurchased mortgage
loan;
. to reimburse the master servicer or the depositor for expenses
incurred and reimbursable pursuant to the pooling and servicing
agreement;
. to withdraw any amount deposited in the Certificate Account that
was not required to be deposited in it; and
. to clear and terminate the Certificate Account upon termination of
the pooling and servicing agreement.
In addition, the pooling and servicing agreement will generally provide
that on or before the business day before each distribution date, the master
servicer shall withdraw from the Certificate Account the amount of Available
Funds, to the extent on deposit, for deposit in an account maintained by the
trustee for the related series of certificates.
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,
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follow the collection procedures it customarily follows for mortgage loans that
are comparable to the mortgage loans. Consistent with the above, the master
servicer may, in its discretion, waive any assumption fee, late payment or
prepayment charge or penalty fee in connection with a mortgage loan and arrange
with a mortgagor a schedule for the liquidation of delinquencies running for no
more than 180 days after the applicable due date for each payment to the extent
not inconsistent with the coverage of the mortgage loan by a mortgage pool
insurance policy, primary mortgage insurance policy, FHA insurance, VA guaranty
or bankruptcy bond or alternative arrangements, if applicable. To the extent the
master servicer is obligated to make or to cause to be made advances, this
obligation will continue during any period in which the arrangement is in
effect.
The applicable prospectus supplement may provide for other alternatives
regarding due-on- sale clauses, but if it does not, then in any case in which
property securing a conventional mortgage loan has been, or is about to be,
conveyed by the mortgagor, the master servicer will, to the extent it has
knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the mortgage loan under any
due-on-sale clause applicable to it, but only if permitted by applicable law and
the exercise will not impair or threaten to impair any recovery under any
related primary mortgage insurance policy. If these conditions are not met or if
the master servicer reasonably believes it is unable under applicable law to
enforce the due-on-sale clause or if the mortgage loan is insured by the FHA or
partially guaranteed by the VA, the master servicer will enter into or cause to
be entered into an assumption and modification agreement with the person to whom
the property has been or is about to be conveyed, pursuant to which that person
becomes liable for repayment of the mortgage loan and, to the extent permitted
by applicable law, the mortgagor also remains liable on it. Any fee collected by
or on behalf of the master servicer for entering into an assumption agreement
will be retained by or on behalf of the master servicer as additional servicing
compensation. See "Legal Aspects of the Mortgage Loans -- Due-on-Sale Clauses."
The terms of the related mortgage loan may not be changed in connection with an
assumption.
Any prospective purchaser of a cooperative apartment will generally
have to obtain the approval of the board of directors of the relevant
cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Legal Aspects of the Mortgage
Loans." This approval is usually based on the purchaser's income and net worth
and numerous other factors. Although the cooperative's approval is unlikely to
be unreasonably withheld or delayed, the necessity of acquiring the approval
could limit the number of potential purchasers for those shares and otherwise
limit the trust fund's ability to sell and realize the value of shares securing
a cooperative loan.
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
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the items are allowable as a deduction to the corporation, the Section requires,
among other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders (as defined in Code Section 216(b)(2)). By
virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that cooperatives relating to the cooperative loans
will qualify under Section 216(b)(1) for any particular year. If a cooperative
fails to qualify for one or more years, the value of the collateral securing any
related cooperative loans could be significantly impaired because no deduction
would be allowable to tenant-stockholders under Code Section 216(a) with respect
to those years. In view of the significance of the tax benefits accorded tenant-
stockholders of a corporation that qualifies under Code Section 216(b)(1), the
likelihood that a failure to qualify would be permitted to continue over a
period of years appears remote.
Hazard Insurance
The master servicer will require the mortgagor on each mortgage loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary for
the type of mortgaged property in the state in which the mortgaged property is
located. The coverage will be in an amount that is at least equal to the lesser
of
. the maximum insurable value of the improvements securing the
mortgage loan or the greater of
. the outstanding principal balance of the mortgage loan, and
. an amount that assures that the proceeds of the policy shall be
sufficient to prevent the mortgagor or the mortgagee from
becoming a co-insurer.
All amounts collected by the master servicer under any hazard policy,
except for amounts to be applied to the restoration or repair of the mortgaged
property or released to the mortgagor in accordance with the master servicer's
normal servicing procedures, will be deposited in the related Certificate
Account. If the master servicer maintains a blanket policy insuring against
hazard losses on all the mortgage loans comprising part of a trust fund, it will
have satisfied its obligation relating to the maintenance of hazard insurance.
The blanket policy may contain a deductible clause, in which case the master
servicer will be required to deposit from its own 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
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forms and therefore may not contain identical terms, their basic terms are
dictated by the respective state laws, and most policies typically do not cover
any physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mud flows), nuclear reactions, wet or dry rot, vermin, rodents,
insects or domestic animals, theft and, in certain cases, vandalism. This list
is merely indicative of certain kinds of uninsured risks and is not all
inclusive. If the mortgaged property securing a mortgage loan is located in a
federally designated special flood area at the time of origination, the master
servicer will require the mortgagor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the mortgage
loans typically contain a clause that in effect requires the insured at all
times to carry insurance of generally 80% to 90% of the full replacement value
of the insured property in order to recover the full amount of any partial loss.
If the insured's coverage falls below this specified percentage, then the
insurer's liability upon partial loss will not exceed the larger of the actual
cash value of the improvements damaged or destroyed and the proportion of the
loss that the amount of insurance carried bears to the specified percentage of
the full replacement cost of the improvements. The hazard insurance policies
generally define the actual cash value of improvements as their replacement cost
at the time and place of loss, less physical depreciation. Since the amount of
hazard insurance the master servicer may cause to be maintained on the
improvements securing the mortgage loans declines as the principal balances
owing on them decrease, and since improved real estate generally has appreciated
in value over time in the past, the effect of this requirement upon partial loss
may be that hazard insurance proceeds will be insufficient to fully restore the
damaged property. If specified in the related prospectus supplement, a special
hazard insurance policy will be obtained to insure against certain of the
uninsured risks described above.
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
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primary mortgage insurance policy for the canceled or nonrenewed policy is
maintained with an insurer whose claims-paying ability is sufficient to maintain
the current rating of the classes of certificates of the series that have been
rated.
Although the terms of primary mortgage insurance vary, the amount of a
claim for benefits under a primary mortgage insurance policy covering a mortgage
loan will consist of the insured percentage of the unpaid principal amount of
the covered mortgage loan and accrued and unpaid interest on it and
reimbursement of certain expenses, less
. all rents or other payments collected or received by the insured,
other than the proceeds of hazard insurance, that are derived from
or in any way related to the mortgaged property,
. hazard insurance proceeds in excess of the amount required to
restore the mortgaged property and which have not been applied to
the payment of the mortgage loan,
. amounts expended but not approved by the issuer of the related
primary mortgage insurance policy,
. claim payments previously made by the primary insurer, and
. unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained
from defaults in payments by borrowers. Primary mortgage insurance policies will
not insure against, and exclude from coverage, a loss sustained from a default
arising from or involving certain matters, including
. fraud or negligence in origination or servicing of the mortgage
loans, including misrepresentation by the originator, mortgagor or
other persons involved in the origination of the mortgage loan;
. 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
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. all hazard insurance policy premiums, and
. as necessary and approved in advance by the primary insurer,
real estate property taxes, all expenses required to maintain
the related mortgaged property in at least as good a condition
as existed at the effective date of the primary mortgage
insurance policy, ordinary wear and tear excepted, mortgaged
property sales expenses, any specified outstanding liens on
the mortgaged property and foreclosure costs, including court
costs and reasonable attorneys' fees;
. upon any physical loss or damage to the mortgaged property, have
the mortgaged property restored and repaired to at least as good a
condition as existed at the effective date of the primary mortgage
insurance policy, ordinary wear and tear excepted; and
. tender to the primary insurer good and merchantable title to and
possession of the mortgaged property.
The master servicer, on behalf of itself, the trustee and the
certificateholders, will present claims to the insurer under each primary
mortgage insurance policy, and will take any reasonable steps consistent with
its practices regarding comparable mortgage loans and necessary to receive
payment or to permit recovery under the policy with respect to defaulted
mortgage loans. As set forth above, all collections by or on behalf of the
master servicer under any primary mortgage insurance policy and, when the
mortgaged property has not been restored, the hazard insurance policy, are to be
deposited in the Certificate Account, subject to withdrawal as heretofore
described.
If the mortgaged property securing a defaulted mortgage loan is damaged
and proceeds, if any, from the related hazard insurance policy are insufficient
to restore the damaged mortgaged property to a condition sufficient to permit
recovery under the related primary mortgage insurance policy, if any, the master
servicer is not required to expend its own funds to restore the damaged
mortgaged property unless it determines that the restoration will increase the
proceeds 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
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reimbursement to the master servicer of its expenses, in excess of the principal
balance of the mortgage loan plus interest accrued on it that is payable to
certificateholders, the master servicer will be entitled to withdraw or retain
from the Certificate Account amounts representing its normal servicing
compensation with respect to the mortgage loan and, unless otherwise specified
in the related prospectus supplement, amounts representing the balance of the
excess, exclusive of any amount required by law to be forwarded to the related
mortgagor, as additional servicing compensation.
If the master servicer or its designee recovers insurance proceeds not
used to restore the property which, when added to any related liquidation
proceeds and after deduction of certain expenses reimbursable to the master
servicer, exceed the principal balance of a mortgage loan plus accrued interest
that is payable to certificateholders, the master servicer will be entitled to
withdraw or retain from the Certificate Account amounts representing its normal
servicing compensation with respect to the mortgage loan. If the master servicer
has expended its own funds to restore the damaged mortgaged property and the
funds have not been reimbursed under the related hazard insurance policy, it
will be entitled to withdraw from the Certificate Account out of related
liquidation proceeds or insurance proceeds an amount equal to the expenses
incurred by it, in which event the trust fund may realize a loss up to the
amount so charged. Since insurance proceeds cannot exceed deficiency claims and
certain expenses incurred by the master servicer, no insurance payment or
recovery will result in a recovery to the trust fund that exceeds the principal
balance of the defaulted mortgage loan together with accrued interest on it. See
"Credit Enhancement" in this prospectus and in the related prospectus
supplement.
Unless the related pooling and servicing agreement provides for a
different application of liquidation proceeds, the proceeds from any liquidation
of a mortgage loan will be applied in the following order of priority:
. first, to reimburse the master servicer for any unreimbursed
expenses incurred by it to restore the related mortgaged property
and any unreimbursed servicing compensation payable to the master
servicer with respect to the mortgage loan;
. second, to reimburse the master servicer for any unreimbursed
advances with respect to the mortgage loan;
. third, to accrued and unpaid interest on the outstanding principal
balance of the mortgage loan, to the extent no advance has been
made for that amount; and
. fourth, as a recovery of principal of the mortgage loan.
FHA Insurance; VA Guaranties. Mortgage loans designated in the related
prospectus supplement as insured by the FHA will be insured by the FHA as
authorized under the United States National Housing Act of 1934, as amended.
Those mortgage loans will be insured under various FHA programs including the
standard FHA 203(b) program to finance the acquisition of one-to four-
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family housing units and the FHA 245 graduated payment mortgage program. These
programs generally limit the principal amount and interest rates of the mortgage
loans insured. Mortgage loans insured by the FHA generally require a minimum
down payment of approximately 5% of the original principal amount of the loan.
No FHA-insured mortgage loans relating to a series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of the loan.
The insurance premiums for mortgage loans insured by the FHA are
collected by lenders approved by the HUD or by the master servicer or any
sub-servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure, or other acquisition of possession, and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
mortgage loan to HUD. With respect to a defaulted FHA-insured mortgage loan, the
master servicer or any sub-servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the master servicer or
any sub-servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the master servicer or any sub-servicer is expected to make
an effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the mortgagor. These plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with the payments to be made up on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or beyond the maturity
date. In addition, when a default caused by circumstances beyond the mortgagor's
control is accompanied by certain other criteria, HUD may provide relief by
making payments to the master servicer or any sub- servicer in partial or full
satisfaction of amounts due under the mortgage loan, which payments are to be
repaid by the mortgagor to HUD, or by accepting assignment of the loan from the
master servicer or any sub-servicer. With certain exceptions, at least three
full monthly installments must be due and unpaid under the 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
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mortgage loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA-insured mortgage loan, bears interest from a
date 30 days after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the mortgage loan and, upon assignment,
from the date of assignment to the date of payment of the claim, in each case at
the same interest rate as the applicable HUD debenture interest rate as
described above.
Mortgage loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no mortgage loan guaranteed by the VA will
have an original principal amount greater than five times the partial VA
guaranty for the mortgage loan.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As of
February 1996, the maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,750. The liability on the
guaranty is reduced or increased pro rata with any reduction or increase in the
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.
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Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master servicer
in respect of its master servicing activities for each series of certificates
will be equal to the percentage per annum described in the related prospectus
supplement of the outstanding principal balance of each mortgage loan, and the
compensation will be retained by it from collections of interest on the mortgage
loan in the related trust fund. As compensation for its servicing duties, a
sub-servicer or, if there is no sub- servicer, the master servicer will be
entitled to a monthly servicing fee as described in the related prospectus
supplement. In addition, generally the master servicer or a sub-servicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from mortgagors, and investment income from funds in the
applicable Certificate Account.
The master servicer will, to the extent provided in the related pooling
and servicing agreement, pay or cause to be paid certain ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related pooling and servicing agreement, including,
without limitation, payment of the fees and disbursements of the trustee, any
custodian appointed by the trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
sub-servicers and sellers. The master servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of sub-servicers and sellers
under certain limited circumstances. In addition, as indicated in the preceding
section, the master servicer will be entitled to reimbursement for certain
expenses incurred by it in connection with any defaulted mortgage loan as to
which it has determined that all recoverable liquidation proceeds and insurance
proceeds have been received, 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
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Mac (rendered within one year of the statement) of firms of independent public
accountants with respect to the related sub-servicer.
Each pooling and servicing agreement will also provide for delivery to
the trustee, on or before a specified date in each year, of an annual statement
signed by two officers of the master servicer to the effect that the master
servicer has fulfilled its obligations under the pooling and servicing agreement
throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by certificateholders of the
related series without charge upon written request to the master servicer at the
address set forth in the related prospectus supplement.
List of Certificateholders
Each pooling and servicing agreement will provide that three or more
holders of certificates of any series may, by written request to the trustee,
obtain access to the list of all certificateholders maintained by the trustee
for the purpose of communicating with other certificateholders with respect to
their rights under the pooling and servicing agreement and the certificates.
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
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agreement) and any loss, liability or expense incurred for willful misfeasance,
bad faith or negligence in the performance of duties under the pooling and
servicing agreement or for reckless disregard of obligations and duties under
the pooling and servicing agreement. In addition, each pooling and servicing
agreement will provide that neither the master servicer nor the depositor will
be under any obligation to appear in, prosecute or defend any legal action that
is not incidental to its respective responsibilities under the pooling and
servicing agreement and that in its opinion may involve it in any expense or
liability. The master servicer or the depositor may, however, in its discretion
undertake any action that it deems appropriate with respect to the pooling and
servicing agreement and the rights and duties of the parties to the pooling and
servicing agreement and the interests of the certificateholders under the
pooling and servicing agreement. In that event, the legal expenses and costs of
the action and any liability resulting from it will be expenses, costs and
liabilities of the trust fund, and the master servicer or the depositor, as the
case may be, will be entitled to be reimbursed for them out of funds otherwise
distributable to certificateholders.
Any person into which the master servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the master servicer is a party, or any person succeeding to the business of the
master servicer, will be the successor of the master servicer under each pooling
and servicing agreement, provided that the person is qualified to sell 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.
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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
evidenced by the certificates and under any other circumstances specified in the
pooling and servicing agreement, the trustee shall, terminate all of the rights
and obligations of the master servicer under the pooling and servicing agreement
relating to the trust fund and in the Mortgage Assets, whereupon the trustee
will succeed to all of the responsibilities, duties and liabilities of the
master servicer under the pooling and servicing agreement, including, if
specified in the related prospectus supplement, the obligation to make advances,
and will be entitled to similar compensation arrangements. If the trustee is
unwilling or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a mortgage loan servicing institution with
a net worth of at least $10,000,000 to act as successor to the master servicer
under the pooling and servicing agreement. Pending appointment, the trustee is
obligated to act as master servicer. The trustee and any successor may agree
upon the servicing compensation to be paid to the successor servicer, which may
not be greater than the compensation payable to the master servicer under the
pooling and servicing agreement.
No certificateholder, solely by virtue of its status as a
certificateholder, will have any right under any pooling and servicing agreement
to institute any proceeding with respect to the pooling and servicing agreement,
unless the holder previously has given to the trustee written notice of default
and unless the holders of any class of certificates of the series evidencing not
less than 25% of the voting rights evidenced by the certificates have requested
the trustee in writing to institute a proceeding in its own name as trustee and
have offered to the trustee reasonable indemnity, and the trustee for 60 days
has neglected or refused to institute the proceeding.
Amendment
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, then each pooling and servicing agreement may be
amended by the depositor, the master servicer and the trustee, without the
consent of any of the certificateholders,
(a) to cure any ambiguity or mistake;
(b) to correct any defective provision in the pooling and
servicing agreement or to supplement any provision in the pooling and
servicing agreement that may be inconsistent with any other provision
in it;
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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,
from the related trust fund of all of the remaining Mortgage
Assets and all property acquired in respect of the Mortgage
Assets.
See "Material Federal Income Tax Consequences" in this prospectus and in the
related prospectus supplement.
Any purchase of Mortgage Assets and property acquired in respect of
Mortgage Assets evidenced by a series of certificates will be made at the option
of the master servicer or the party specified in the related prospectus
supplement, including the holder of the REMIC residual interest, at a price, and
in accordance with the procedures, specified in the related prospectus
supplement. The exercise of that right will effect early retirement of the
certificates of that series, but the right of the master servicer or the other
party or, if applicable, the holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Mortgage Assets
being less than the percentage specified in the related prospectus supplement of
the aggregate principal balance of the Mortgage Assets at the cut-off date for
the series. The foregoing is subject to the provision that if a REMIC election
is made with respect to a trust fund, any repurchase pursuant to the second
bulleted item above will be made only in connection with a "qualified
liquidation" of the REMIC for federal tax purposes.
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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.
LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the mortgage loans. Because the
legal aspects are governed primarily by applicable state laws, which may differ
substantially from state to state, the summaries do not purport to be complete
or to reflect the laws of any particular state or to encompass the laws of all
states in which the security for the mortgage loans is situated.
General
The mortgage loans will be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not before the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until the underlying debt is
repaid. The trustee's authority under a deed of trust, the mortgagee's authority
under a mortgage and the grantee's authority under a security deed or deed to
secure debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
Cooperatives. Certain of the mortgage loans may be cooperative loans.
The cooperative owns all the real property that comprises the project, including
the land, separate dwelling units and all common areas. The cooperative is
directly responsible for project management and, in most cases, payment of real
estate taxes and hazard and liability insurance. If there is a blanket mortgage
on the cooperative or underlying land or both, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is
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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 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
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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 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.
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Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's certificate of
incorporation and bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by the tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the cooperative to terminate the lease or agreement
if an obligor fails to make payments or defaults in the performance of covenants
required under it. Typically, the lender and the cooperative enter into a
recognition agreement, which establishes the rights and obligations of both
parties upon a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the tenant-
stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest on it.
Recognition agreements also provide that upon foreclosure of a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice
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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.
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
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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 specific statutory liabilities on lenders who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans or contracts.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral was conducted in a
commercially reasonable manner. In the case of a cooperative loan, the
collateral would be the shares of the cooperative and the related proprietary
lease or occupancy agreement.
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Environmental Risks
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the payment of
the costs of clean-up. In several states that lien has priority over the lien of
an existing mortgage on the property. In addition, under CERCLA, the EPA may
impose a lien on property where the EPA has incurred clean-up costs. However, a
CERCLA lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that
a secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
mortgaged property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes liability for the costs on
any and all "responsible parties," including owners or operators. However,
CERCLA excludes from the definition of "owner or operator" a secured creditor
who holds indicia of ownership primarily to protect its security interest but
does not "participate in the management" of the property. Thus, if a lender's
activities begin to encroach on the actual management of a contaminated facility
or property, the lender may incur liability as an "owner or operator" under
CERCLA. Similarly, if a lender forecloses and takes title to a contaminated
facility or property, the lender may incur CERCLA liability in various
circumstances, including when it holds the facility or property as an
investment, including leasing the facility or property to a third party, or
fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a property causing the lender to lose the protection of the
secured creditor exclusion has been a matter of judicial interpretation of the
statutory language, and court decisions have historically been inconsistent. In
United States v. Fleet Factors Corp. (1990), the United States Court of Appeals
for the Eleventh Circuit suggested that the mere capacity of the lender to
influence a borrower's decisions regarding disposal of hazardous substances was
sufficient participation in the management of the borrower's business to deny
the protection of the secured creditor exclusion to the lender, regardless of
whether the lender actually exercised influence. Other judicial decisions did
not interpret the secured creditor exclusion as narrowly as did the Eleventh
Circuit.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation Act, which took effect on September 30, 1996. The Asset
Conservation Act provides that to be deemed to have participated in the
management of a secured property, a lender must actually participate in the
operational affairs of the property or of the borrower. The Asset Conservation
Act also provides that participation in the management of the property does not
include "merely having the capacity to influence, or unexercised right to
control" operations. Rather, a lender will lose the protection of the secured
creditor exclusion only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the secured property.
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If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous owner
or operator, who created the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that the costs
arising from the circumstances set forth above would result in a loss to
certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of RCRA, which regulates underground
petroleum storage tanks, but not heating oil tanks. The EPA has adopted a lender
liability rule for underground storage tanks under Subtitle I of RCRA. Under
that rule, a holder of a security interest in an underground storage tank or
real property containing an underground storage tank is not considered an
operator of the underground storage tank as long as petroleum is not added to,
stored in or dispensed from the tank. Moreover, under the Asset Conservation
Act, the protections accorded to lenders under CERCLA are also accorded to
holders of security interests in underground petroleum storage tanks. It should
be noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protection for
secured creditors.
Except as otherwise specified in the applicable prospectus supplement,
at the time the mortgage loans were originated, no environmental assessment or a
very limited environmental assessment of the Mortgage Properties was conducted.
Due-on-Sale Clauses
Generally, each conventional mortgage loan will contain a due-on-sale
clause which will generally provide that if the mortgagor or obligor sells,
transfers or conveys the mortgaged property, the loan may be accelerated by the
mortgagee. In recent years, court decisions and legislative actions have placed
substantial restriction on the right of lenders to enforce these clauses in many
states. For instance, the California Supreme Court in August 1978 held that
due-on-sale clauses were generally unenforceable. However, the Garn-St Germain
Act, subject to specified exceptions, preempts state constitutional, statutory
and case law prohibiting the enforcement of due-on-sale clauses. As to loans
secured by an owner-occupied residence, the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Garn-St Germain Act may
not exercise its rights under a due- on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related mortgaged property to
an uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
mortgage loans and the number of mortgage loans which may extend to maturity.
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Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the mortgaged properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed on many of the mortgage
loans. The absence of this a restraint on prepayment, particularly with respect
to fixed rate mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirement of the loans or contracts.
Applicability of Usury Laws
Title V of DIDMCA provides that state usury limitations shall not apply
to certain types of residential first mortgage loans originated by certain
lenders after March 31, 1980. The OTS, as successor to the Federal Home Loan
Bank Board, is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V of DIDMCA. The statute
authorized the states to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision that expressly rejects an application
of the federal law. In addition, even where Title V of DIDMCA is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V of DIDMCA.
Certain states have taken action to reimpose interest rate limits or to limit
discount points or other charges, or both.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of the borrower's mortgage loan, or a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the mortgage loan and is later called to active duty,
may not be charged interest above an annual rate of 6% during the period of the
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that this interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the master
servicer to collect full amounts of interest on some of the mortgage loans.
Unless the applicable prospectus supplement provides a special feature for a
particular trust fund, any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
certificates. In addition, the Relief Act imposes limitations which would impair
the ability of the master servicer to foreclose on an affected mortgage loan
during the borrower's period of active duty status. Thus, if an affected
mortgage loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the mortgaged property in a timely fashion.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is the opinion of Andrews & Kurth L.L.P.,
counsel to the depositor, as to the material federal income tax consequences of
the purchase, ownership, and disposition of certificates. The opinion of Andrews
& Kurth L.L.P. is based on laws, regulations, administrative rulings, and
judicial decisions now in effect, all of which are subject to change either
prospectively or retroactively. The following discussion does not describe
aspects of federal tax law that are unique to insurance companies, securities
dealers and investors who hold certificates as part of a straddle within the
meaning of Section 1092 of the Code. Prospective investors are encouraged to
consult their tax advisors regarding the federal, state, local, and any other
tax consequences to them of the purchase, ownership, and disposition of
certificates.
General
The federal income tax consequences to certificateholders will vary
depending on whether an election is made to treat the trust fund relating to a
particular series of certificates as a REMIC under the Code referred to in this
section unless otherwise indicated). The prospectus supplement for each series
of certificates will specify whether a REMIC election will be made.
Non-REMIC Certificates
If a REMIC election is not made, the trust fund will not be classified
as an association taxable as a corporation and each trust fund will be
classified as a grantor trust under subpart E, Part I of subchapter J of chapter
1 of subtitle A of the Code. In this case, owners of certificates will be
treated for federal income tax purposes as owners of a portion of the trust
fund's assets as described below. Andrews & Kurth L.L.P. will issue an opinion
confirming the above-stated conclusions for each trust fund for which no REMIC
election is made and will file the opinion, along with their consent to its use,
with the SEC by means of a Current Report on Form 8-K on or prior to the closing
date.
a. Single Class of Certificates
Characterization. The trust fund may be created with one class of
certificates. In this case, each certificateholder will be treated as the owner
of a pro rata undivided interest in the interest and principal portions of the
trust fund represented by the certificates and will be considered the equitable
owner of a pro rata undivided interest in each of the mortgage loans in the
Pool. Any amounts received by a certificateholder in lieu of amounts due with
respect to any mortgage loans because of a default or delinquency in payment
will be treated for federal income tax purposes as having the same character as
the payments they replace.
Each certificateholder will be required to report on its federal income
tax return in accordance with its method of accounting its pro rata share of the
entire income from the mortgage loans in the trust fund represented by
certificates, including interest, OID, if any, prepayment fees, assumption
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fees, any gain recognized upon an assumption and late payment charges received
by the master servicer. Under Code Sections 162 or 212 each certificateholder
will be entitled to deduct its pro rata share of servicing fees, prepayment
fees, assumption fees, any loss recognized upon an assumption and late payment
charges retained by the master servicer, provided that the amounts are
reasonable compensation for services rendered to the trust fund.
Certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent expenses of the trust fund
plus their other miscellaneous itemized deductions, as defined in the Code,
exceed two percent of their adjusted gross income. A certificateholder using the
cash method of accounting must take into account its pro rata share of income
and deductions as and when collected by or paid to the master servicer. A
certificateholder using an accrual method of accounting must take into account
its pro rata share of income as it accrues, or when received if the income is
received before it accrues, and must take into account its pro rata share of
deductions as they accrue. If the servicing fees paid to the master servicer are
deemed to exceed reasonable servicing compensation, the amount of any excess
could be considered as an ownership interest retained by the master servicer, or
any person to whom the master servicer assigned for value all or a portion of
the servicing fees, in a portion of the interest payments on the mortgage loans.
The mortgage loans would then be subject to the "coupon stripping" rules of the
Code discussed below.
Generally, as to each series of certificates:
. a certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on mortgage loans will be
considered to represent "loans . . . secured by an interest in
real property which is . . . residential property" within the
meaning of Code Section 7701(a)(19)(C)(v), to the extent that the
mortgage loans represented by that certificate are of a type
described in that Code section;
. a certificate owned by a real estate investment trust representing
an interest in mortgage loans will be considered to represent
"real estate assets" within the meaning of Code Section
856(c)(4)(A), and interest income on the mortgage loans will be
considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), to the
extent that the mortgage loans represented by that certificate are
of a type described in that Code section; and
. a certificate owned by a REMIC will represent an "obligation . . .
which is principally secured, directly or indirectly, by an
interest in real property" within the meaning of Code Section
860G(a)(3).
Buydown Loans. Certain trust funds may hold buydown loans. These loans
can be secured not only by a mortgage on real property but also by a pledged
account that is drawn upon to subsidize the mortgagor's monthly mortgage
payments for a limited period of time. So long as 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
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loan value of the real property is less than the amount of the loan, then, a
certificateholder could be required to treat the loan as one secured by an
interest in real property only to the extent of the loan value of the real
property. The related prospectus supplement for any series of certificates will
specify whether apportionment would be required.
Premium. The price paid for a certificate by a holder will be allocated
to the holder's undivided interest in each mortgage loan based on each mortgage
loan's relative fair market value, so that the holder's undivided interest in
each mortgage loan will have its own tax basis. A certificateholder that
acquires an interest in mortgage loans at a premium may elect, under Code
Section 171, to amortize the premium under a constant interest method, provided
that the underlying mortgage loans with respect to the mortgage loans were
originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on the mortgage loans and allowed as an ordinary deduction as
principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on the certificate. The basis for the certificate will
be reduced to the extent that amortizable premium is applied to offset interest
payments. It is not clear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under Code Section 171.
However, recent changes to the Code require the use of a prepayment assumption
to accrue original issue discount on pools of receivables the yield on which may
be affected by prepayments for tax years beginning after August 5, 1997 and
prior legislative history indicated that if a prepayment assumption applied to
an instrument for purposes of the OID rules, that prepayment assumption should
be applied in amortizing bond premium.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a certificate acquired at a premium should
recognize a loss if a mortgage loan, or an underlying mortgage loan, prepays in
full, equal to the difference between the portion of the prepaid principal
amount of the mortgage loan, or underlying mortgage loan, that is allocable to
the certificate and the portion of the adjusted basis of the certificate that is
allocable to the mortgage loan, or underlying mortgage loan. If a reasonable
prepayment assumption is used to amortize premium, it appears that any loss
would be available, if at all, only if prepayments have occurred at a rate
faster than the reasonable assumed prepayment rate. It is not clear whether any
other adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments. In addition, under recent
legislation, amounts received on the redemption of an obligation issued by a
natural person are considered received in exchange for the obligation if the
debt obligation is purchased or issued after June 8, 1997 (i.e., treated the
same as obligations issued by corporations). This change could affect the
character of any loss. For example, this change could cause the loss to be
treated as capital if the assets are held as capital assets by the taxpayer.
On December 30, 1997 the IRS issued the Amortizable Bond Premium
Regulations. These regulations specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6). Absent further guidance from the
IRS, the trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the certificates are
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encouraged to consult their tax advisors regarding the possible application of
the Amortizable Bond Premium Regulations.
OID. The IRS has stated in published rulings that, in circumstances
similar to those described in this prospectus, the special rules of the Code
relating to OID (currently Code Sections 1271 through 1273 and 1275) will be
applicable to a certificateholder's interest in those mortgage loans meeting the
conditions necessary for these sections to apply. OID generally must be reported
as ordinary gross income as it accrues under a constant interest method. See "
- -- Multiple Classes of Certificates -- Certificates Representing Interests in
Loans Other Than Adustable Rate Mortgage Loans."
Market Discount. A certificateholder that acquires an undivided
interest in mortgage loans may be subject to the market discount rules of the
Code to the extent an undivided interest in a mortgage loan is considered to
have been purchased at a "market discount." The amount of market discount is
equal to the excess of the portion of the principal amount of the mortgage loan
allocable to the holder's undivided interest in the mortgage loans over the
holder's tax basis in the undivided interest. Market discount with respect to a
certificate will be considered to be zero if the amount allocable to the
certificate is less than 0.25% of the certificate's stated redemption price at
maturity multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors are encouraged to consult their own tax
advisors regarding the application of these rules and the advisability of making
any of the elections allowed under the market discount provisions.
The Code provides that any principal payment, whether a scheduled
payment or a prepayment, or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of the payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Although the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history describe how market discount should be
accrued on instruments bearing market discount. According to the legislative
history, the holder of a market discount bond may elect to accrue market
discount either on the basis of a constant interest rate or according to one of
the following methods. If a certificate is issued with OID, the amount of market
discount that accrues during any accrual period would be equal to the 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
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amount of stated interest remaining to be paid at the beginning of the accrual
period. For purposes of calculating market discount under any of these methods
in the case of instruments that provide for payments that may be accelerated due
to prepayments of other obligations securing the instruments, the same
prepayment assumption applicable to calculating the accrual of OID will apply.
Recent legislation expands the required use of a prepayment assumption for
purposes of calculating OID for tax years beginning after August 5, 1997 to
pools of receivables the yield on which may be affected due to prepayments and
previous legislative history states Congress intends that if a prepayment
assumption would be used to calculate OID it should also be used to accrue
market discount. Because the regulations described above have not been issued,
it is impossible to predict what effect those regulations might have on the tax
treatment of a certificate purchased at a discount or premium in the secondary
market.
A holder who acquired a certificate at a market discount also may be
required to defer, until the maturity date of the certificate or its earlier
disposition in a taxable transaction, the deduction of a portion of the amount
of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the certificate in
excess of the aggregate amount of interest, including OID, includible in the
holder's gross income for the taxable year with respect to the certificate. The
amount of the net interest expense deferred in a taxable year may not exceed the
amount of market discount accrued on the certificate for the days during the
taxable year on which the holder held the certificate and, in general, would be
deductible when the market discount is includible in income. The amount of any
remaining deferred deduction is to be taken into account in the taxable year in
which the certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply if the
certificateholder elects to include the market discount in income currently as
it accrues on all market discount obligations acquired by the certificateholder
in that taxable year or thereafter.
Election to Treat All Interest as OID. The OID Regulations permit a
certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for certificates acquired on or after April 4,
1994. If an election to treat all interest as OID were to be made with respect
to a certificate with market discount, the certificateholder would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that the
certificateholder acquires during the year of the election or thereafter.
Similarly, a certificateholder that makes this election for a certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all 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.
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b. Multiple Classes of Certificates
1. Stripped Bonds and Stripped Coupons
The separation of ownership of the right to receive some or all of the
interest payments on an obligation from ownership of the right to receive some
or all of the principal payments results in the creation of "stripped bonds"
with respect to principal payments and "stripped coupons" with respect to
interest payments. For purposes of OID and market discount, the Code treats a
stripped bond or a stripped coupon as an obligation issued on the date that the
stripped interest is created. If a trust fund is created with two classes of
certificates, one class of certificates may consist of Stripped Bond
Certificates, while the second class of certificates may consist of Stripped
Coupon Certificates.
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If the excess servicing fee is less than 100
basis points or the certificates are initially sold with a de minimis discount,
which amount may be calculated without a prepayment assumption, any non- de
minimis discount arising from a subsequent transfer of the certificates should
be treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a mortgage loan by mortgage loan basis, which
could result in some mortgage loans being treated as having more than 100 basis
points of interest stripped off.
Although current authority is not entirely clear, a Stripped Bond
Certificate should be treated as an interest in mortgage loans issued on the day
the certificate is purchased for purposes of calculating any OID. Generally, if
the discount on a mortgage loan is larger than a de minimis amount, as
calculated for purposes of the OID rules, a purchaser of the certificate will be
required to accrue the discount under the OID rules of the Code. See " --
Non-REMIC Certificates" and " -- Single Class of Certificates -- Original Issue
Discount." However, a purchaser of a Stripped Bond Certificate will be required
to account for any discount on the mortgage loans as market discount rather than
OID if either the amount of OID with respect to the mortgage loan is treated as
zero under the OID de minimis rule when the certificate was stripped or no more
than 100 basis points (including any amount of servicing fees in excess of
reasonable servicing fees) is stripped off of the trust fund's mortgage loans.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that OID
computations be made for each payment from each mortgage loan. However, based on
the recent IRS guidance, it appears that all payments from a mortgage loan
underlying a Stripped Coupon Certificate should be treated as a single
installment obligation subject to the OID rules of the Code, in which case, all
payments from the 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
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premium or a Stripped Coupon Certificate. If the certificate is treated as a
single instrument, rather than an interest in discrete mortgage loans, and the
effect of prepayments is taken into account in computing yield with respect to
the certificate, it appears that no loss will be available as a result of any
particular prepayment unless prepayments occur at a rate faster than the assumed
prepayment rate. However, if a certificate is treated as an interest in discrete
mortgage loans, or if no prepayment assumption is used, then when a mortgage
loan is prepaid, any certificate so treated should be able to recognize a loss
equal to the portion of the unrecovered premium of the certificate that is
allocable to the mortgage loan. In addition, amounts received in redemption for
debt instruments issued by natural persons purchased or issued after June 8,
1997 are treated as received in exchange therefore (i.e., treated the same as
obligations issued by corporations). This change could affect the character of
any loss.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are encouraged to consult with their own tax advisors regarding the proper
treatment of these certificates for federal income tax purposes.
2. Certificates Representing Interests in Loans Other Than Adjustable
Rate Mortgage Loans
The original issue discount rules will be applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
other than individuals originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Under the OID Regulations, original
issue discount could arise by the charging of points by the originator of the
mortgage in an amount greater than the statutory de minimis exception, including
a payment of points that is currently deductible by the borrower under
applicable Code provisions, or under certain circumstances, by the presence of
"teaser" rates (i.e., the initial rates on the mortgage loans are lower than
subsequent rates on the mortgage loans) on the mortgage loans.
OID on each certificate must be included in the owner's ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
interest method that takes into account the compounding of interest, in advance
of receipt of the cash attributable to the income. The amount of OID required to
be included in an owner's income in any taxable year with respect to a
certificate representing an interest in mortgage loans other than adjustable
rate mortgage loans likely will be computed as described under " -- Accrual of
Original Issue Discount." The following discussion is based in part on Treasury
regulations issued on January 27, 1994, and amended on June 11, 1996, under Code
Sections 1271 through 1273 and 1275 (the "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
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origination fees. The stated redemption price at maturity of a mortgage loan is
the sum of all payments to be made on the mortgage loan other than payments that
are treated as qualified stated interest payments. The accrual of this OID, as
described under " -- Accrual of Original Issue Discount," will, unless otherwise
specified in the related prospectus supplement, utilize the original yield to
maturity of the certificates calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the certificates (the "Prepayment
Assumption"), and will take into account events that occur during the
calculation period. The Prepayment Assumption will be determined in the manner
prescribed by regulations that have not yet been issued. The legislative history
of the 1986 Act (the "Legislative History") provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of the certificate. No
representation is made that any certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in debt instruments, and, in tax years beginning after August 5, 1997,
to pools of receivables the yield on which may be affected by prepayments of
receivables such as those the certificates represent. However, no other legal
authority provides guidance with regard to the proper method for accruing OID on
obligations that are subject to prepayment, and, until further guidance is
issued, the master servicer intends to calculate and report OID under the method
described in " -- Accrual of Original Issue Discount."
Accrual of Original Issue Discount. Generally, the owner of a
certificate must include in gross income the sum of the "daily portions," as
defined below, of the OID on any certificate for each day on which it owns the
certificate, including the date of purchase but excluding the date of
disposition. In the case of an original owner, the daily portions of OID with
respect to each component generally will be determined as set forth under the
OID Regulations. A calculation will be made by the master servicer or other
entity specified in the related prospectus supplement of the portion of OID that
accrues during each successive monthly accrual period, or shorter period from
the date of original issue, that ends on the day in the calendar year
corresponding to each of the distribution dates on the certificates, or the day
before each date. This will be done, in the case of each full month accrual
period, by adding the present value at the end of the accrual period determined
by using the original yield to maturity of the respective component under the
Prepayment Assumption as a discount factor, of all remaining payments to be
received under the Prepayment Assumption on the respective component and any
payments received during the same accrual period, and subtracting from that
total the "adjusted issue price" of the respective 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.
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Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest as it accrues rather than when received. However,
the amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if mortgage loans acquired by a certificateholder are purchased at a price equal
to the then unpaid principal amount of those mortgage loans, no original issue
discount attributable to the difference between the issue price and the original
principal amount of those mortgage loans (e.g., due to points) will be
includible by the holder. Other original issue discount on the mortgage loans
(e.g., that arising from a "teaser" rate) would still need to be accrued.
3. Certificates Representing Interests in Adustable Rate Mortgage
Loans
The OID Regulations do not address the treatment of instruments, such
as the certificates, which represent interests in adjustable rate mortgage
loans. Additionally, the IRS has not issued guidance under the Code's coupon
stripping rules with respect to instruments that represent interests in
adjustable rate mortgage loans. In the absence of any authority, the master
servicer will report OID on certificates attributable to adjustable rate
mortgage loans ("Stripped ARM Obligations") to holders in a manner it believes
is consistent with the rules described under the heading " -- Certificates
Representing Interests in Loans Other Than Adustable Rate Mortgage Loans" and
with the OID Regulations. As such, for purposes of projecting the remaining
payments and the projected yield, the assumed rate payable on the adjustable
rate mortgage loans will be the fixed rate equivalent on the issue date.
Application of these rules may require inclusion of income on a Stripped ARM
Obligation in advance of the receipt of cash attributable to the income.
Further, the addition of interest deferred due to negative amortization
("Deferred Interest") to the principal balance of an ARM Loan may require the
inclusion of the interest deferred due to negative amortization in the income of
the certificateholder when it accrues. Furthermore, the addition of Deferred
Interest to the certificate's principal balance will result in additional
income, including possibly OID income, to the certificateholder over the
remaining life of the certificates.
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
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of Code Section 1221 and will be long-term or short-term depending on whether
the certificate has been owned for the long-term capital gain holding period,
which is currently more than one year.
The certificates will be "evidences of indebtedness" within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from the sale of a
certificate by a bank or a thrift institution to which that section applies will
be ordinary income or loss.
d. Non-U.S. Persons
Generally, to the extent that a certificate evidences ownership in
underlying mortgage loans that were issued on or before July 18, 1984, interest
or OID paid by the person required to withhold tax under Code Section 1441 or
1442 to an owner that is not a U.S. Person or a certificateholder holding on
behalf of an owner that is not a U.S. Person will be subject to federal income
tax, collected by withholding, at a rate of 30% or any lower rate provided for
interest by an applicable tax treaty. Accrued OID recognized by the owner on the
sale or exchange of a certificate also will be subject to federal income tax at
the same rate. Generally, accrued OID payments would not be subject to
withholding to the extent that a certificate evidences ownership in mortgage
loans issued after July 18, 1984, by natural persons if the certificateholder
complies with certain identification requirements, including delivery of a
statement, signed by the certificateholder under penalties of perjury,
certifying that the certificateholder is not a U.S. Person and providing the
name and address of the certificateholder. Additional restrictions apply to
mortgage loans where the mortgagor is not a natural person in order to qualify
for the exemption from withholding. Any foreclosure property owned by the trust
could be treated as a U.S. real property interest owned by certificateholders.
Interest paid or accrued on the mortgage loans to a certificateholder who
is a non-U.S. Person will be considered "portfolio interest," and generally will
not be subject to United States federal income tax and withholding tax,
provided, that the interest is not effectively connected with the conduct of a
trade or business within the United States by the non-U.S. Person, and the non-
U.S. Person provides the trust or other person who is otherwise required to
withhold U.S. tax with respect to the mortgage loans with an appropriate
statement on Form W-8 or other similar form, signed under penalties of perjury,
certifying that the beneficial owner of the mortgage loan is a foreign person
and providing that non-U.S. person's name and address. If an interest in a
mortgage loan is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent. In that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form provided
by the non-U.S. Person that owns that interest in the mortgage loan. If interest
does not constitute portfolio interest, then it will be subject to U.S. federal
income and withholding tax at a rate of 30%, unless reduced or eliminated
pursuant to an applicable tax treaty and the non-U.S. Person provides the trust,
or an organization or financial institution described above, with an appropriate
statement (e.g., a Form 1001), signed under penalties of perjury, to that
effect.
The New Withholding Regulations were published in the Federal Register on
October 14, 1997. In general, the New Withholding Regulations do not
significantly alter the substantive
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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. In particular,
the New Witholding Regulations replace the current IRS Form W-8, Form 1001 and
Form 4224 with various revised Forms W-8 and provide that the current Form W-8,
Form 1001 and Form 4224 will be invalid as of December 31, 2000. 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 REMIC Certificates may
not be accorded the status or given the tax treatment described below. While the
Code authorizes the Treasury Department to issue regulations providing relief
upon an inadvertent termination of the status of a trust fund as a REMIC, no
regulations have been issued. Any relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
REMIC's income for the period in which the requirements for REMIC status are not
satisfied. Assuming compliance with all provisions of the related pooling and
servicing agreement, each trust fund that elects REMIC status will qualify as a
REMIC, and the Regular Certificates will be considered to be regular interests
in the REMIC and the Residual Certificates will be considered to be residual
interests in the REMIC.
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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 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
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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. 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
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supplement for each series of Regular Certificates will specify the Prepayment
Assumption to be used for the purpose of determining the amount and rate of
accrual of OID. No representation is made that the Regular Certificates will
prepay at the Prepayment Assumption or at any other rate.
The IRS issued the Contingent Regulations in June 1996. The Contingent
Regulations specifically do not apply for purposes of calculating OID on debt
instruments subject to Code Section 1272(a)(6), such as the Regular
Certificates. Additionally, the OID Regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6). The trustee intends to base
its computations on Code Section 1272(a)(6) and the OID Regulations as described
in this prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that this methodology
represents the correct manner of calculating OID.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its issue price. The issue price of a
Regular Certificate is the first price at which a substantial amount of Regular
Certificates of that class are first sold to the public, excluding bond houses,
brokers, underwriters or wholesalers. The issue price of a Regular Certificate
also includes the amount paid by an initial certificateholder for accrued
interest that relates to a period before the issue date of the Regular
Certificate. The stated redemption price at maturity of a Regular Certificate
includes the original principal amount of the Regular Certificate, but generally
will not include distributions of interest that constitute "qualified stated
interest." Qualified stated interest generally means interest unconditionally
payable at intervals of one year or less at a single fixed rate or qualified
variable rate (as described below) during the entire term of the Regular
Certificate. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Regular Certificates with respect to which Deferred
Interest will accrue will not constitute qualified stated interest payments, and
the stated redemption price at maturity of the Regular Certificates includes all
distributions of interest and principal on the Regular Certificates.
Where the interval between the issue date and the first distribution date
on a Regular Certificate is longer than the interval between subsequent
distribution dates, the greater of any original issue discount disregarding the
rate in the first period and any interest foregone during the first period is
treated as the amount by which the stated redemption price of the certificate
exceeds its issue price for purposes of the de minimis rule described below. The
OID Regulations suggest that all or a portion of the interest on a long first
period Regular Certificate that is issued with non-de minimis OID will be
treated as OID. Where the interval between the issue date and the first
distribution date on a Regular Certificate is shorter than the interval between
subsequent distribution dates, interest due on the first distribution date in
excess of the amount that accrued during the first period would be added to the
certificates stated redemption price at maturity. Regular Certificateholders are
encouraged to consult their own tax advisors to determine the issue price and
stated redemption price at maturity of a Regular Certificate. Additionally, it
is possible that the IRS could assert that the stated pass-through rate of
interest on the Regular Certificates is not unconditionally payable because late
payments or nonpayments on the mortgage loans are not
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penalized nor are there reasonable remedies in place to compel payment on the
mortgage loans. That position, if successful, would require all holders of
Regular Certificates to accrue income on the certificates under the OID
Regulations.
Under the de minimis rule, OID on a Regular Certificate will be considered
to be zero if it is less than 0.25% of the stated redemption price at maturity
of the Regular Certificate multiplied by the weighted average maturity of the
Regular Certificate. For this purpose, the weighted average maturity of the
Regular Certificate is computed as the sum of the amounts determined by
multiplying the number of full years (i.e., rounding down partial years) from
the issue date until each distribution in reduction of stated redemption price
at maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at maturity
of the Regular Certificate and the denominator of which is the stated redemption
price at maturity of the Regular Certificate. Although currently unclear, it
appears that the schedule of these distributions should be determined in
accordance with the Prepayment Assumption. The Prepayment Assumption with
respect to a series of Regular Certificates will be set forth in the related
prospectus supplement. Holders generally must report de minimis OID pro rata as
principal payments are received, and income will be capital gain if the Regular
Certificate is held as a capital asset. However, accrual method holders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method.
The prospectus supplement with respect to a trust fund may provide for the
issuance of Super-Premium Certificates. The income tax treatment of Super-
Premium Certificates is not entirely certain. For information reporting
purposes, the trust fund intends to take the position that the stated redemption
price at maturity of Super-Premium Certificates is the sum of all payments to be
made on these Regular Certificates determined under the Prepayment Assumption,
with the result that these Regular Certificates would be issued with OID. The
calculation of income in this manner could result in negative original issue
discount, which delays future accruals of OID rather than being immediately
deductible, when prepayments on the mortgage loans exceed those estimated under
the Prepayment Assumption. As discussed above, the Contingent Regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6), such as the Regular Certificates. However, if the Super-Premium
Certificates were treated as contingent payment obligations, it is unclear how
holders of those certificates would report income or recover their basis. In the
alternative, the IRS could assert that the stated redemption price at maturity
of Super-Premium Certificates should be limited to their principal amount
(subject to the discussion under " -- Accrued Interest Certificates"), so that
the Regular Certificates would be considered for federal income tax purposes to
be issued at a premium. If this position were to prevail, the rules described
under " -- Regular Certificates -- Premium" would apply. It is unclear when a
loss may be claimed for any unrecovered basis for a Super-Premium Certificate.
It is possible that a holder of a Super-Premium Certificate may only claim a
loss when its remaining basis exceeds the maximum amount of future payments,
assuming no further prepayments or when the final payment is received with
respect to the Super-Premium Certificate. Absent further guidance, the trustee
intends to treat the Super- Premium Certificates as described in this
prospectus.
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Under the REMIC Regulations, if the issue price of a Regular Certificate,
other than those based on a notional amount, does not exceed 125% of its actual
principal amount, the interest rate is not considered disproportionately high.
Accordingly, the Regular Certificate generally should not be treated as a Super-
Premium Certificate and the rules described under " --Regular Certificates --
Premium" should apply. However, it is possible that certificates issued at a
premium, even if the premium is less than 25% of the certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code section 171 is made to amortize the premium.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," determined as described above under "Non-REMIC Certificates --
Certificates Representing Interests in Loans Other Than Adjustable Rate Mortgage
Loans -- Accrual of Original Issue Discount".
Variable Rate Regular Certificates. Regular Certificates may provide for
interest based on a variable rate. Interest is treated as payable at a variable
rate and not as contingent interest if, generally, the issue price does not
exceed the original principal balance by more than a specified amount and the
interest compounds or is payable at least annually at current values of certain
objective rates matured by or based on lending rates for newly borrowed funds.
For a debt instrument issued after August 13, 1996, an objective rate is a rate,
other than a qualified floating rate, that is determined using a single fixed
formula and that is based on objective financial or economic information. The
variable interest generally will be qualified stated interest to the extent it
is unconditionally payable at least annually and, to the extent successive
variable rates are used, interest is not significantly accelerated or deferred.
The amount of OID with respect to a Regular Certificate bearing a variable
rate of interest will accrue in the manner described under " --Original Issue
Discount and Premium" by assuming generally that the index used for the variable
rate will remain fixed throughout the term of the certificate. Appropriate
adjustments are made for the actual variable rate.
Although unclear at present, the depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on mortgage loans as variable rate certificates. In such case,
the weighted average rate used to compute the initial pass-through rate on the
Regular Certificates will be deemed to be the index in effect through the life
of the Regular Certificates. It is possible, however, that the IRS may treat
some or all of the interest on Regular Certificates with a weighted average rate
as taxable under the rules relating to obligations providing for contingent
payments. This treatment may effect the timing of income accruals on the Regular
Certificates. Additionally, if some or all of the mortgage loans are subject to
"teaser rates" (i.e., the initial rates on the mortgage loans are less than
subsequent rates on the mortgage loans) the interest paid on some or all of the
Regular Certificates may be subject to accrual using a constant yield method
notwithstanding the fact that these certificates may not have been issued with
"true" non-de minimis original issue discount.
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Election to Treat All Interest as OID. The OID Regulations permit a
certificateholder to elect to accrue all interest, discount, including de
minimus market or original issue discount, and premium in income as interest,
based on a constant yield method for certificates acquired on or after April 4,
1994. If this type of an election were to be made with respect to a Regular
Certificate with market discount, a certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that the certificateholder
acquires during the year of the election or thereafter. Similarly, a
certificateholder that makes this election for a certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that the
certificateholder owns or acquires. See " -- Regular Certificates -- Premium."
The election to accrue interest, discount and premium on a constant yield method
with respect to a certificate cannot be revoked without the consent of the IRS.
Market Discount. A purchaser of a Regular Certificate may also be subject
to the market discount provisions of Code Sections 1276 through 1278. Under
these provisions and the OID Regulations, "market discount" equals the excess,
if any, of a Regular Certificate's stated principal amount or, in the case of a
Regular Certificate with OID, the adjusted issue price, which is determined for
this purpose as if the purchaser had purchased the Regular Certificate from an
original holder, over the price for the Regular Certificate paid by the
purchaser. A certificateholder that purchases a Regular Certificate at a market
discount will recognize income upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Code a holder
generally will be required to allocate each principal distribution first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent. A certificateholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis in accordance with the foregoing. If made, the election will
apply to all market discount bonds acquired by the electing certificateholder on
or after the first day of the first taxable year to which the election applies.
Market discount on Regular Certificates is accrued and subject to the rules
described above under "Non-REMIC Certificates -- Single Class of Certificates --
Market Discount".
Premium. A purchaser of a Regular Certificate that purchases the Regular
Certificate at a cost, not including accrued qualified stated interest, greater
than its remaining stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium and may elect to amortize
the premium under a constant yield method. It is not clear whether the
Prepayment Assumption would be taken into account in determining the life of the
Regular Certificate for this purpose. The Amortizable Bond Premium Regulations
described above specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Regular Certificates. Absent further
guidance from the IRS, the trustee intends to account for amortizable bond
premium in the manner described in this prospectus. However, the Legislative
History states that the same rules that apply to accrual of market discount,
which rules require use of a Prepayment Assumption in accruing market discount
with respect to Regular Certificates without regard to whether the certificates
have OID, will also apply in amortizing bond premium under Code Section 171. The
Code provides that amortizable bond premium will be allocated among the interest
payments on the
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Regular Certificates and will be applied as an offset against the interest
payment. Prospective purchasers of the Regular Certificates are encouraged to
consult their tax advisors regarding the possible application of the Amortizable
Bond Premium Regulations.
On December 30, 1997 the IRS issued final Amortizable Bond Premium
Regulations. These regulations specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6). Absent further guidance from the
IRS, the trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the certificates are encouraged to
consult their tax advisors regarding the possible application of the Amortizable
Bond Premium Regulations.
Deferred Interest. Certain classes of Regular Certificates will provide for
the accrual of Deferred Interest with respect to one or more adjustable rate
mortgage loans. Any Deferred Interest that accrues with respect to a class of
Regular Certificates will constitute income to the holders of the certificates
before the time distributions of cash with respect to the Deferred Interest are
made. It is unclear, under the OID Regulations, whether any of the interest on
the certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on the certificates must be included in the
stated redemption price at maturity of the certificates and accounted for as
OID, which could accelerate the inclusion. Interest on Regular Certificates must
in any event be accounted for under an accrual method by the holders of the
certificates and, therefore, applying the latter analysis may result only in a
slight difference in the timing of the inclusion in income of interest on the
Regular Certificates.
Effects of Defaults and Delinquencies. Certain series of certificates may
contain one or more classes of subordinated certificates, and in the event there
are defaults or delinquencies on the mortgage loans, amounts that would
otherwise be distributed on the subordinated certificates may instead be
distributed on the certificates. Subordinated certificateholders nevertheless
will be required to report income with respect to their certificates under an
accrual method without giving effect to delays and reductions in distributions
on the subordinated certificates attributable to defaults and delinquencies on
the mortgage loans, except to the extent that it can be established that the
amounts are uncollectible. As a result, the amount of income reported by a
subordinated certificateholder in any period could significantly exceed the
amount of cash distributed to the holder in that period. The holder will
eventually be allowed a loss, or will be allowed to report a lesser amount of
income, to the extent that the aggregate amount of distributions on the
subordinated certificate is reduced as a result of defaults and delinquencies on
the mortgage loans. However, the timing and characterization of any losses or
reductions in income are uncertain, and, accordingly, subordinated
certificateholders are encouraged to consult their own tax advisors on this
point.
Sale, Exchange or Redemption. If a Regular Certificate is sold, exchanged,
redeemed or retired, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the Regular Certificate. The
adjusted basis generally will equal the cost of the Regular Certificate to the
seller, increased by any OID and market discount included in the seller's gross
income with respect to the
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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 Certi
The Regular Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Regular Certificate by a bank or a thrift institution to which this section
applies will be ordinary income or loss.
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between distribution dates but that ends
before each distribution date. The period between the Closing Date for Payment
Lag Certificates and their first distribution date may or may not exceed that
interval. Purchasers of Payment Lag Certificates for which the period between
the Closing Date and the first distribution date does not exceed that interval
could pay upon purchase of the Regular Certificates accrued interest in excess
of the accrued interest that would be paid if the interest paid on the
distribution date were interest accrued from distribution date to distribution
date. If a portion of the initial purchase price of a Regular Certificate is
allocable to Pre-issuance Accrued Interest and the Regular Certificate provides
for a payment of stated interest on the first payment date (and the first
payment date is within one year of the issue date) that equals or exceeds the
amount of the Pre- issuance Accrued Interest, then the Regular Certificates
issue price may be computed by subtracting from the issue price the amount of
Pre-issuance Accrued Interest, rather than as an amount payable on the Regular
Certificate. However, it is unclear under this method how the OID Regulations
treat
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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 allowed
to deduct as a short-term capital loss any loss sustained during the taxable
year on account of the certificates becoming wholly worthless. Although the
matter is unclear, non-corporate holders of certificates may be allowed a bad
debt deduction at the time that the principal balance of a certificate is
reduced to reflect realized losses resulting from any liquidated mortgage loans.
The IRS, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all mortgage
loans remaining in the related trust fund have been liquidated or the
certificates of the related series have been otherwise retired. Potential
investors and Holders of the certificates are encouraged to consult their own
tax advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to their certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income.
Non-U.S. Persons. Generally, payments of interest, including any payment
with respect to accrued OID, on the Regular Certificates to a Regular
Certificateholder who is not a U.S. Person and is not engaged in a trade or
business within the United States will not be subject to federal withholding tax
if the Regular Certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that the Regular
Certificateholder is a foreign person and providing the name and address of the
Regular Certificateholder. If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued OID, the holder may be subject to a 30% withholding tax, subject to
reduction under any applicable tax treaty.
Further, it appears that a Regular Certificate would not be included in the
estate of a non- resident alien individual and would not be subject to United
States estate taxes. However,
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Certificateholders who are non-resident alien individuals are encouraged to
consult their tax advisors concerning this question.
It is recommended that Regular Certificateholders who are not U.S. Persons
and persons related to them not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders not
acquire any Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
As previously mentioned, the New Withholding Regulations were published in
the Federal Register on October 14, 1997 and generally will be effective for
payments made after December 31, 2000, subject to certain transition rules. The
discussion set forth above does not take the new withholding regulations into
account. Prospective Non-U.S. Persons who own Regular Certificates are strongly
encouraged to consult their own tax advisor with respect to the New Withholding
Regulations.
Information Reporting and Backup Withholding. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a Regular Certificateholder at any time
during the year, any information deemed appropriate to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make the information available to beneficial owners or financial
intermediaries that hold the Regular Certificates on behalf of beneficial
owners. If a holder, beneficial owner, financial intermediary or other recipient
of a payment on behalf of a beneficial owner fails to supply a certified
taxpayer identification number or if the Secretary of the Treasury determines
that the person has not reported all interest and dividend income required to be
shown on its federal income tax return, 31% backup withholding may be required
with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against a recipient's
federal income tax liability. In addition, prospective investors are encouraged
to consult their tax advisors with respect to the New Withholding Regulations.
b. Residual Certificates
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See " -- Prohibited
Transactions and Other Taxes." Instead, each original holder of a Residual
Certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which it owns any Residual Certificates. The taxable income of the REMIC
for each day will be determined by allocating the taxable income of the REMIC
for each calendar quarter ratably to each day in the quarter. An original
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding Residual Certificates that the holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the holders of Residual Certificates without
regard to the timing or amounts of cash distributions by the REMIC. Ordinary
income derived from Residual Certificates will be "portfolio income" for
purposes of the
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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 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
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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 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
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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.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
Residual Certificates. In the case of a single class REMIC, however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the Regular Certificateholders and the
Residual Certificateholders on a daily basis in proportion to the relative
amounts of income accruing to each certificateholder on that day. In general
terms, a single class REMIC is one that either would qualify, under existing
Treasury regulations, as a grantor trust if it were not a REMIC (treating all
interests as ownership interests, even if they would be classified as debt for
federal income tax purposes) or (ii) is similar to a grantor trust and is
structured with the principal purpose of avoiding the single class REMIC rules.
The applicable prospectus supplement may apportion expenses to the Regular
Certificates, but if it does not, then the expenses of the REMIC will be
allocated to holders of the related Residual Certificates in their entirety and
not to holders of the related Regular Certificates.
In the case of individuals, or trusts, estates or other persons that
compute their income in the same manner as individuals, who own an interest in a
Regular Certificate or a Residual Certificate directly or through a pass-through
interest holder that is required to pass miscellaneous itemized deductions
through to its owners or beneficiaries (e.g. a partnership, an S corporation or
a grantor trust), the trust expenses will be deductible under Code Section 67
only to the extent that those expenses, plus other "miscellaneous itemized
deductions" of the individual, exceed 2% of the individual's adjusted gross
income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the lesser
of 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by Residual Certificateholders who are subject to the limitations of
either Code Section 67 or Code Section 68 may be substantial. Further, holders,
other than corporations, that are subject to the alternative minimum tax may not
deduct miscellaneous itemized deductions in determining their alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS the holder's allocable share, if any, of the
REMIC's non-interest expenses. The term "pass-through interest holder" generally
refers to individuals, entities taxed as individuals and certain pass-through
entities, but does not include real estate investment trusts.
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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 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.
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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 Certificateholder with respect
to the Residual Certificate and by the distributions received by the Residual
Certificateholder. In general, the gain or loss will be capital gain or loss
provided the Residual Certificate is held as a capital asset. However, Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a Residual
Certificate by a bank or thrift institution to which that section applies would
be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a Residual Certificate reacquires the Residual Certificate, or acquires any
other Residual Certificate, any residual interest in another REMIC or similar
interest in a "taxable mortgage pool" (as defined in Code Section 7701(i))
during the period beginning six months before, and ending six months after, the
date of the sale, the sale will be subject to the "wash sale" rules of Code
Section 1091. In that event, any loss realized by the Residual Certificateholder
on the sale will not be deductible, but, instead, will increase the Residual
Certificateholder's adjusted basis in the newly acquired asset.
Prohibited Transactions and Other Taxes
The Code imposes a Prohibited Transactions Tax on REMICs equal to 100
percent of the net income derived from "prohibited transactions" and prohibits
deducting any loss with respect to prohibited transactions. In general, subject
to certain specified exceptions, a prohibited transaction means the disposition
of a mortgage loan, the receipt of income from a source other than a mortgage
loan or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the mortgage loans for temporary investment pending distribution on the
certificates. It is not anticipated that the trust fund for any series of
certificates will engage in any prohibited transactions in which it would
recognize a material amount of net income.
In addition, certain contributions to a trust fund as to which an election
has been made to treat the trust fund as a REMIC made after the day on which the
trust fund issues all of its interest could result in the imposition of a
Contributions Tax on the trust fund equal to 100% of the value of the
contributed property. No trust fund for any series of certificates will accept
contributions that would subject it to a Contributions Tax.
In addition, a trust fund as to which an election has been made to treat
the trust fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts.
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"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
. 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
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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 the
first five taxable years of its existence. Any person that holds a Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of the person and other information.
Tax-Exempt Investors
Any Residual Certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of Code Section 512 will be subject to the tax on
that portion of the distributions received on a Residual Certificate that is
considered an excess inclusion. See " -- Residual Certificates -- Excess
Inclusions."
Non-U.S. Persons
Amounts paid to Residual Certificateholders who are not U.S. persons (see
" --Regular Certificates -- Non-U.S. Persons") are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Amounts distributed to holders of Residual Certificates should qualify as
"portfolio interest," subject to the conditions described in " -- Regular
Certificates," but only to the extent that the underlying mortgage loans were
originated after July 18, 1984. Furthermore, the rate of withholding on any
income on a Residual Certificate that is excess inclusion income will not be
subject to reduction under any applicable tax treaties. See " -- Residual
Certificates -- Excess Inclusions." If the portfolio interest exemption is
unavailable, the amount will be subject to United States withholding tax when
paid or otherwise distributed, or when the Residual Certificate is disposed of,
under rules similar to those for withholding upon disposition of debt
instruments that have OID. The Code, however, grants the Treasury Department
authority to issue regulations requiring that those amounts be taken into
account earlier than otherwise provided where necessary to prevent avoidance of
tax, for example, where the Residual Certificates do not have significant value.
See " -- Residual Certificates --Excess Inclusions." If the amounts paid to
Residual Certificateholders that are not U.S. persons are effectively connected
with their conduct of a trade or business within the United States, the 30% (or
lower treaty rate) withholding tax rate will not apply. Instead, the amounts
paid to the non-U.S. Person will be subject to U.S. federal income taxation at
regular graduated rates. For special restrictions on the transfer of Residual
Certificates, see " -- Tax-Related Restrictions on Transfers of Residual
Certificates."
Tax-Related Restrictions on Transfers of Residual Certificates
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
the entity are not held by "disqualified organizations." Further, a tax is
imposed on the transfer of a residual interest in a
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REMIC to a "disqualified organization." The amount of the tax equals the product
of an amount, as determined under the REMIC Regulations, equal to the present
value of the total anticipated "excess inclusions" with respect to the interest
for periods after the transfer and the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent, including a broker or other middleman, for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to it an affidavit that the transferee is not a
disqualified organization and, at the time of the transfer, the person does not
have actual knowledge that the affidavit is false. A "disqualified organization"
means the United States, any State, possession or political subdivision of the
United States, any foreign government, any international organization or any
agency or instrumentality of any of the foregoing entities (provided that the
term does not include an instrumentality if all its activities are subject to
tax and, except for Freddie Mac, a majority of its board of directors is not
selected by a governmental agency), any organization (other than certain farmers
cooperatives) generally exempt from federal income taxes unless the organization
is subject to the tax on "unrelated business taxable income" and a rural
electric or telephone cooperative.
A tax is imposed on a "pass-through entity" holding a residual interest in
a REMIC if at any time during the taxable year of the pass-through entity a
disqualified organization is the record holder of an interest in the entity. The
amount of the tax is equal to the product of the amount of excess inclusions for
the taxable year allocable to the interest held by the disqualified organization
and the highest marginal federal income tax rate applicable to corporations. The
pass-through entity otherwise liable for the tax, for any period during which
the disqualified organization is the record holder of an interest in the entity,
will be relieved of liability for the tax if the record holder furnishes to the
entity an affidavit that the record holder is not a disqualified organization
and, for the applicable period, the pass-through entity does not have actual
knowledge that the affidavit is false. For this purpose, a "pass-through entity"
means a regulated investment company, real estate investment trust, or common
trust fund; a partnership, trust, or estate; and certain cooperatives. Except as
may be provided in Treasury regulations not yet issued, any person holding an
interest in a pass-through entity as a nominee for another will, with respect to
the interest, be treated as a pass- through entity. Large partnerships which
generally contain 250 or more partners are taxable on excess inclusion income as
if all partners were disqualified organizations.
To comply with these rules, the pooling and servicing agreement will
provide that no record or beneficial ownership interest in a Residual
Certificate may be purchased, transferred or sold, directly or indirectly,
without the express written consent of the master servicer. The master servicer
will grant consent to a proposed transfer only if it receives an affidavit from
the proposed transferee to the effect that it is not a disqualified organization
and is not acquiring the Residual Certificate as a nominee or agent for a
disqualified organization and a covenant by the proposed transferee to the
effect that the proposed transferee agrees to be bound by and to abide by the
transfer restrictions applicable to the Residual Certificate.
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Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a "U.S. Person," as defined in the following sentence, unless no significant
purpose of the transfer is to enable the transferor to impede the assessment or
collection of tax. In general, the definition of a U.S. Person is the same as
provided under "Glossary of Terms," except that entities or individuals that
would otherwise be treated as Non-U.S. Persons, may be considered U.S. Persons
for this purpose if their income from the residual is subject to tax under Code
Section 871(b) or Code Section 882 (income effectively connected with a U.S.
trade or business). A Noneconomic Residual Certificate is any Residual
Certificate (including a Residual Certificate with a positive value at issuance)
unless, at the time of transfer, taking into account the Prepayment Assumption
and any required or permitted clean up calls or required liquidation provided
for in the REMIC's organizational documents, the present value of the expected
future distributions on the Residual Certificate at least equals the product of
the present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs and the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. A
significant purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on its share of
the taxable income of the REMIC. A transferor is presumed not to have that
knowledge if the transferor conducted a reasonable investigation of the
transferee and the transferee acknowledges to the transferor that the residual
interest may generate tax liabilities in excess of the cash flow and the
transferee represents that it intends to pay the taxes associated with the
residual interest as they become due. If a transfer of a Noneconomic Residual
Certificate is disregarded, the transferor would continue to be treated as the
owner of the Residual Certificate and would continue to be subject to tax on its
allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person unless the transferee's income in
respect of the Residual Certificate is effectively connected with the conduct of
a United States trade or business. A Residual Certificate is deemed to have a
tax avoidance potential unless, at the time of transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee amounts that
will equal at least 30 percent of each excess inclusion, and that the amounts
will be distributed at or after the time the excess inclusion accrues and not
later than the end of the calendar year following the year of accrual. If the
non-U.S. Person transfers the Residual Certificate to a U.S. Person, the
transfer will be disregarded, and the foreign transferor will continue to be
treated as the owner, if the transfer has the effect of allowing the transferor
to avoid tax on accrued excess inclusions. The pooling and servicing agreement
will provide that no record or beneficial ownership interest in a Residual
Certificate may be transferred, directly or indirectly, to a non-U.S. Person
unless the person provides the trustee with a duly completed I.R.S. Form 4224
and the trustee consents to the transfer in writing.
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Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in Residual Certificates are encouraged to consult their
own tax advisors with respect to transfers of the Residual Certificates and
pass-through entities are encouraged to consult their own tax advisors with
respect to any tax which may be imposed on a pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Considerations," potential investors are encouraged to
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the certificates. State and local income tax law
may differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the income tax laws of any state or
locality. Therefore, potential investors are encouraged to consult their own tax
advisors with respect to the various tax consequences of investments in the
certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to certificates of a series that are not divided into
subclasses. If certificates are divided into subclasses, the related prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to them.
ERISA imposes requirements on Plans and on Parties in Interest. Generally,
ERISA applies to investments made by Plans. Among other things, ERISA requires
that the assets of Plans be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority and discretion to manage and
control the assets of the Plans. ERISA also imposes certain duties on persons
who are fiduciaries of Plans. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of the Plan, subject to certain exceptions
not here relevant. Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of those plans may be
invested in certificates without regard to the described ERISA considerations,
subject to the provisions of applicable state law. However, any of those plans
that are qualified and exempt from taxation under Code Sections 401(a) and
501(a) are subject to the prohibited transaction rules set forth in Code Section
503.
On November 13, 1986, the DOL issued final regulations concerning the
definition of what constitutes the assets of a Plan. (Labor Reg. Section
2510.3-101.) Under this regulation, the underlying assets and properties of
corporations, partnerships and certain other entities in which a Plan makes an
"equity" investment could be deemed for purposes of ERISA to be assets of the
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investing Plan in certain circumstances. However, the regulation provides that,
generally, the assets of a corporation or partnership in which a Plan invests
will not be deemed for purposes of ERISA to be assets of the Plan if the equity
interest acquired by the investing Plan is a publicly-offered security. A
publicly-offered security, as defined in Labor Reg. Section 2510.3-101, is a
security that is widely held, freely transferable and registered under the
Exchange Act.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and the Code prohibit a broad range of
transactions involving Plan assets of a Plan and Parties in Interest with
respect to the Plan and impose additional prohibitions where Parties in Interest
are fiduciaries with respect to the Plan. Because the mortgage loans may be
deemed Plan assets of each Plan that purchases certificates, an investment in
the certificates by a Plan might be a prohibited transaction under ERISA
Sections 406 and 407 and subject to an excise tax under Code Section 4975 unless
a statutory, regulatory or administrative exemption applies.
PTE 83-1
In PTE 83-1, the DOL exempted from ERISA's prohibited transaction rules
and from the excise tax imposed under Code Section 4975 certain transactions
relating to the operation of residential mortgage pool investment trusts and the
purchase, sale and holding of "mortgage pool pass-through certificates" in the
initial issuance of the certificates. PTE 83-1 permits, subject to certain
conditions, transactions that might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans related to the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass- through certificates representing an interest in those mortgage pools by
Plans. If the general conditions of PTE 83-1 are satisfied, investments by a
Plan in Single Family Certificates will be exempt from the prohibitions of ERISA
Sections 406(a) and 407 (relating generally to transactions with Parties in
Interest who are not fiduciaries) if the Plan purchases the Single Family
Certificates at no more than fair market value and will be exempt from the
prohibitions of ERISA Sections 406(b)(1) and (2) (relating generally to
transactions with fiduciaries) if, in addition, the purchase is approved by an
independent fiduciary, no sales commission is paid to the pool sponsor, the Plan
does not purchase more than twenty-five percent (25%) of all Single Family
Certificates and at least fifty percent (50%) of all Single Family Certificates
are purchased by persons independent of the pool sponsor or pool trustee.
PTE 83-1 does not provide an exemption for transactions involving subordinated
certificates. Accordingly, no transfer of a subordinated certificate generally
may be made to a Plan.
The discussion in this and the next paragraph applies only to Single
Family Certificates. The depositor believes that, for purposes of PTE 83-1, the
term "mortgage pass-through certificate" would include: (1) certificates issued
in a series consisting of only a single class of 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
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greater than zero percent and a specified percentage greater than zero percent
of future principal payments on the mortgage loans. It is not clear whether a
class of certificates that evidences the beneficial ownership in a trust fund
divided into mortgage loan groups, beneficial ownership of a specified
percentage of interest payments only or principal payments only, or a notional
amount of either principal or interest payments, or a class of certificates
entitled to receive payments of interest and principal on the mortgage loans
only after payments to other classes or after the occurrence of certain
specified events would be a "mortgage pass-through certificate" for purposes of
PTE 83-1.
PTE 83-1 sets forth three general conditions that must be satisfied for any
transaction to be eligible for exemption:
. the maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing the loans and for
indemnifying certificateholders against reductions in pass-through
payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the
principal balance of the largest covered pooled mortgage loan;
. the existence of a pool trustee who is not an affiliate of the pool
sponsor; and
. a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to not more
than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to
the mortgage pool.
The depositor believes that the first general condition referred to above
will be satisfied with respect to the certificates in a series issued without a
subordination feature, or the senior certificates only in a series issued with a
subordination feature, provided that the subordination and reserve fund,
subordination by shifting of interests, the pool insurance or other form of
credit enhancement described in this prospectus, that subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above, with respect to a series of certificates is
maintained in an amount not less than the greater of one percent of the
aggregate principal balance of the mortgage loans or the principal balance of
the largest mortgage loan. See "Description of the Certificates." In the absence
of a ruling that the system of insurance or other protection with respect to a
series of certificates satisfies the first general condition referred to above,
there can be no assurance that these features will be so viewed by the DOL. The
trustee will not be affiliated with the depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Certificates
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other PTEs. Each Plan fiduciary should also determine whether, under the general
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fiduciary standards of investment prudence and diversification, an investment in
the certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
Underwriter Exemptions
The DOL has granted Underwriter Exemptions to certain underwriters which
exempt certain transactions from certain of the prohibited transaction rules of
ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, the holding and the subsequent resale by Plans
of certificates in pass-through trusts that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Underwriter Exemptions.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
. the acquisition of the certificates by a Plan is on terms, including
the price for the certificates, that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated
party;
. the rights and interest evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund;
. the certificates acquired by the Plan have received a rating at the
time of acquisition that is one of the three highest generic rating
categories from Standard & Poor's Ratings Group, a division of McGraw-
Hill Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. or Fitch IBCA, Inc.;
. the trustee is not an affiliate of any other member of the Restricted
Group;
the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the certificates;
the sum of all payments made to and retained by the seller pursuant to
the assignment of the loans to the trust fund represents not more than
the fair market value of the loans; the sum of all payments made to
and retained by the master servicer and any other servicer represents
not more than reasonable 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.
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In addition, for transactions that utilize prefunding, the following
conditions must be satisfied:
. The principal amount of Subsequent mortgage loans must not exceed 25%
of the principal balance of all certificates being offered as of the
closing date;
. All such Subsequent mortgage loans must meet the same terms and
conditions for eligibility as the initial mortgage loans, which terms
and conditions have been approved by one of the rating agencies,
except that such terms and conditions may be modified with the prior
approval of a rating agency or of a majority of the holders of the
certificates;
. The addition of Subsequent mortgage loans during the funding
period does not result in a ratings downgrade;
. The weighted average annual percentage rate of all mortgage loans in
the trust at the end of the funding period is not more than 100 basis
points lower than such weighted average as of the closing date;
. The characteristics of the Subsequent mortgage loans are monitored by
an insurer that is independent of the seller, or an independent
accountant delivers a letter, with copies to the relevant rating
agencies, underwriters and trustee, stating that the characteristics
of the Subsequent mortgage loans conform to the characteristics with
respect thereto specified in the related prospectus supplement;
. The funding period ends no later than 90 days after the closing date;
and
. Amounts on deposit in the related prefunding account and capitalized
interest account are invested only in investments permitted by the
rating agencies that are (i) direct obligations of or fully guaranteed
by the United States or any agency or instrumentality thereof or (ii)
rated, or issued by an issuer rated, in one of the three highest
generic rating categories by the rating agencies.
The trust fund must also meet the following requirements:
. the corpus of the trust fund must consist solely of assets of the type
that have been included in other investment pools;
. 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
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. certificates evidencing interests in the other investment pools must
have been purchased by investors other than Plans for at least one
year before any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing and conflict of interest prohibited transactions that may occur
when the Plan fiduciary causes a Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor provided
that, among other requirements:
. in the case of an acquisition in connection with the initial issuance
of certificates, at least fifty percent of each class of certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group,
. the fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained
in the trust;
. the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class
outstanding at the time of the acquisition; and
. immediately after the acquisition, no more than twenty-five percent of
the assets of any Plan with respect to which the person is a fiduciary
is invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity.
The Underwriter Exemptions do not apply to Plans sponsored by Restricted
Groups.
The prospectus supplement for each series of certificates will indicate the
classes of certificates, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
Any Plan fiduciary that proposes to cause a Plan to purchase certificates
is encouraged to consult with its counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83- 1, the availability and applicability of any
Underwriter Exemption or any other exemptions from the prohibited transaction
provisions of ERISA and the Code and the potential consequences in their
specific circumstances, before making the investment. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification an investment in the certificates is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
Insurance Company General Accounts
Section III of PTE 95-60 exempts from the application of the prohibited
transaction provisions of Sections 406(a), 406(b) and 407(a) of ERISA and
Section 4975 of the Code transactions in connection with the servicing,
management and operation of a trust in which an
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insurance company general account has an interest as a result of its acquisition
of certificates issued by the trust, provided that certain conditions are
satisfied. If these conditions are met, insurance company general accounts would
be allowed to purchase certain classes of certificates which do not meet the
requirements of any of the Underwriter Exemptions solely because they are
subordinated to other classes of certificates in a trust or have not received a
rating at the time of the acquisition in one of the three highest rating
categories from S&P, Moody's DCR or Fitch. All other conditions of one of the
Underwriter Exemptions would have to be satisfied in order for PTE 95-60 to be
available. Before purchasing a class of certificates, an insurance company
general account seeking to rely on Section III of PTE 95-60 should itself
confirm that all applicable conditions and other requirements have been
satisfied.
Other Exemptions
One or more other PTEs issued by the DOL may be available to a Plan
investing in the certificates, depending in part upon the type of Plan fiduciary
making the decision to acquire certificates and the circumstances under which
the decision is made, including but not limited to PTE 84-14, regarding
investments effected by "qualified plan asset managers," PTE 90-1, regarding
investments by insurance company pooled separate accounts, PTE 91-38, regarding
investments by bank collective investment funds, and PTE 96-23, regarding
investments effected by "in-house asset managers." However, even if the
conditions specified in one or more of these other exemptions are met, the scope
of the relief provided might or might not cover all acts which might be
construed as prohibited transactions.
Consultation with Counsel
Any Plan fiduciary which proposes to cause a Plan to purchase certificates
is encouraged to consult with its counsel concerning the impact of ERISA and the
Code, the applicability of PTE 83- 1, the availability and applicability of any
Underwriter Exemption or any other exemptions from the prohibited transaction
provisions of ERISA and the Code and the potential consequences in their
specific circumstances, before investing in the certificates. Moreover, each
Plan fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification an investment in the certificates is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
LEGAL INVESTMENT
The prospectus supplement for each series of certificates will specify
which, if any, of the classes of certificates offered by it will constitute
"mortgage related securities" for purposes of SMMEA. Classes of certificates
that qualify as "mortgage related securities" will be legal investments for
those investors whose authorized investments are subject to state regulation, to
the same extent as, under applicable law, obligations issued by or guaranteed as
to principal and interest by the United States constitute legal investments for
them. Those investors are persons, trusts,
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corporations, partnerships, associations, business trusts and business entities,
including depository institutions, life insurance companies and pension funds,
created pursuant to or existing under the laws of the United States or of any
state, including the District of Columbia and Puerto Rico. Under SMMEA, if a
state enacts legislation before October 4, 1991 specifically limiting the legal
investment authority of those entities with respect to "mortgage related
securities," the certificates will constitute legal investments for entities
subject to the legislation only to the extent provided in it. Approximately
twenty-one states adopted limiting legislation before the October 4, 1991
deadline.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in certificates
without limitations as to the percentage of their assets represented by them,
federal credit unions may invest in mortgage related securities, and national
banks may purchase certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to regulations that the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration Letter to Credit Unions No. 96, as
modified by Letter to Credit Unions No. 108, which includes guidelines to assist
federal credit unions in making investment decisions for mortgage related
securities, and the regulation "Investment and Deposit Activities" (12 C.F.R.
Part 703), whether or not the class of certificates under consideration for
purchase constitutes a "mortgage related security".
All depository institutions considering an investment in the certificates,
whether or not the class of certificates under consideration for purchase
constitutes a "mortgage related security", should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on Securities
Activities (to the extent adopted by their respective regulators), setting
forth, in relevant part, certain securities trading and sales practices deemed
unsuitable for an institution's investment portfolio, and guidelines for (and
restrictions on) investing in mortgage derivative products, including "mortgage
related securities" that are "high-risk mortgage securities" as defined in the
policy statement. According to the policy statement, "high-risk mortgage
securities" include securities such as certificates not entitled to
distributions allocated to principal or interest, or subordinated certificates.
Under the policy statement, each depository institution must determine, before
purchase (and at stated intervals thereafter), whether a particular mortgage
derivative product is a "high-risk mortgage security," and whether the purchase
or retention of such a product would be consistent with the policy statement.
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
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advisors in determining whether and to what extent the certificates constitute
legal investments for them.
METHOD OF DISTRIBUTION
Certificates are being offered by the prospectus and the accompanying
prospectus supplement in series from time to time, with each series evidencing a
separate trust fund, through any of the following methods:
. by negotiated firm commitment underwriting and public reoffering by
underwriters;
. by agency placements through one or more placement agents primarily
with institutional investors and dealers; and
. by placement directly by the depositor with institutional investors.
A prospectus supplement will be prepared for each series which will
describe the method of offering being used for that series and will set forth
the identity of any of its underwriters and either the price at which the series
is being offered, the nature and amount of any underwriting discounts or
additional compensation to the underwriters and the proceeds of the offering to
the depositor, or the method by which the price at which the underwriters will
sell the certificates will be determined. Each prospectus supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters obligations, any material relationship between the depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the certificates so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the certificates of the series if any certificates are purchased. Certificates
may be acquired by the underwriters for their own accounts and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
This prospectus, together with the related prospectus supplement, may be
used by First Tennessee Capital Markets, an affiliate of the depositor, in
connection with offers and sales related to market making transactions in the
certificates in which First Tennessee Capital Markets acts as principal. First
Tennessee Capital Markets may also act as agent in those transactions. Sales in
those transactions will be made at prices related to prevailing prices at the
time of sale.
Underwriters and agents may be entitled under agreements entered into with
the depositor to indemnification by the depositor against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which the underwriters or agents may be required to
make in respect thereof.
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If a series is offered other than through underwriters, the prospectus
supplement relating to it will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of certificates of the series.
LEGAL MATTERS
The validity of the certificates, including certain federal income tax
consequences with respect to the certificates, will be passed upon for the
depositor by Andrews & Kurth L.L.P., Dallas, Texas. Certain of the legal aspects
of the certificates will be passed upon for the Underwriters by Brown & Wood
LLP, Washington, D.C.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of certificates and no
trust fund will engage in any business activities or have any assets or
obligations before the issuance of the related series of certificates.
Accordingly, no financial statements for any trust fund will be included in this
prospectus or in the related prospectus supplement.
RATING
It is a condition to the issuance of the certificates of each series
offered by this prospectus and by the prospectus supplement that they shall have
been rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies specified in the related
prospectus supplement.
A rating is based on the adequacy of the value of the trust assets and any
credit enhancement for that class, and reflects the rating agency's assessment
of how likely it is that holders of the class of certificates will receive the
payments to which they are entitled. A rating does not constitute an assessment
of how likely it is that principal prepayments on the underlying loans will be
made, the degree to which the rate of prepayments might differ from that
originally anticipated, or the likelihood that the certificates will be redeemed
early. As a result, 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.
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For example, the rating agency could lower or withdraw its rating due to:
. a decrease in the adequacy of the value of the trust assets or any
related credit enhancement,
. an adverse change in the financial or other condition of a credit
enhancement provider, or
. a change in the rating of the credit enhancement provider's long-term
debt.
The amount, type, and nature of credit enhancement established for a class
of certificates will be determined on the basis of criteria established by each
rating agency rating classes of the certificates. These criteria are sometimes
based upon an actuarial analysis of the behavior of similar loans in a larger
group. That analysis is often the basis upon which each rating agency determines
the amount of credit enhancement required for a class. The historical data
supporting any actuarial analysis may not accurately reflect future experience,
and the data derived from a large pool of similar loans may not accurately
predict the delinquency, foreclosure, or loss experience of any particular pool
of mortgage loans.
Each security rating should be evaluated independently of any other
security rating.
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GLOSSARY OF TERMS
1986 Act -- The Tax Reform Act of 1986.
Amortizable Bond Premium Regulations -- Final regulations issued by the
IRS on December 30, 1997 which deal with amortizable bond premium.
Asset Conservation Act -- The Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, which took effect on September 30,
1996.
Available Funds -- The amount on deposit in the related Certificate
Account on the distribution date, net of related fees and expenses payable by
the related trust fund, other than amounts to be held in the Certificate Account
for distribution on future distribution dates.
CERCLA-- The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, under which the Environmental Protection Agency may
impose a lien on property where the Environmental Protection Agency has incurred
clean-up costs.
Certificate Account -- An account established and maintained by the master
servicer in the name of the trustee for the benefit of the holders of each
series of certificates, for the disbursement of payments on the mortgage loans
evidenced by each series of certificates.
Code -- The Internal Revenue Code of 1986, as amended.
Contingent Regulations -- Final regulations issued by the IRS in June 1996
governing the calculation of OID on instruments having contingent interest
payments.
Contributions Tax -- A tax on a trust fund equal to 100% of the value of
the contributed property.
Deferred Interest -- Interest deferred due to negative amortization.
DIDMCA -- The Depository Institutions Deregulation and Monetary Control Act
of 1980.
DOL -- The U.S. Department of Labor.
Eleventh District -- The Eleventh Federal Home Loan Bank District.
ERISA -- The Employee Retirement Income Security Act of 1974, as amended.
Exchange Act -- The Securities Exchange Act of 1934, as amended.
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FHLBSF -- The Federal Home Loan Bank of San Francisco.
Freddie Mac Act -- Title III of the Emergency Home Finance Act of 1970,
as amended.
Garn-St Germain Act -- The Garn-St Germain Depository Institutions Act
of 1982.
Guide -- First Horizon's Seller Guide and Servicer Guide, collectively.
Housing Act -- The National Housing Act of 1934, as amended.
Legislative History -- The legislative history of the 1986 Act.
Mortgage Assets -- The mortgage-related assets of a trust fund for a series
of certificates, including:
. a pool of first lien mortgage loans or participation interests in first
lien mortgage loans, in each case secured by one- to four-family
residential properties,
. agency securities, or
. private mortgage-backed securities.
National Cost of Funds Index -- The National Monthly Median Cost of Funds
Ratio to SAIF- Insured Institutions published by the OTS for the third preceding
month, or the fourth preceding month, if the National Cost of Funds Index for
the third preceding month has not been published on the tenth day of an interest
accrual period.
New Withholding Regulations -- Final regulations dealing with backup
withholding and information reporting on income paid to foreign persons and
related matters which were published in the Federal Register on October 14,
1997.
Non-U.S. Person -- A person other than a U.S. Person.
OID Regulations -- The Treasury regulations issued under Code Sections
1271 through 1273 and 1275.
OID -- Original issue discount.
OTS -- The Office of Thrift Supervision.
Parties in Interest -- Persons who bear specified relationships to Plans or
who are fiduciaries with respect to Plans.
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Payment Lag Certificates -- Regular Certificates which provide for payments
of interest based on a period that corresponds to the interval between
distribution dates but that ends before each distribution date.
Plans -- Employee benefit plans subject to ERISA and certain retirement
plans and arrangements, including individual retirement accounts and annuities,
Keogh plans and collective investment funds and separate accounts in which the
plans, accounts or arrangements are invested.
Pre-Funding Account -- When a Pre-Funding Arrangement is utilized in
connection with the issuance of a series of certificates, a segregated account
into which a trustee will be required to deposit all or a portion of the
proceeds received by such trustee in connection with the sale of one or more
classes of certificates of the series.
Pre-Funding Arrangement -- An arrangement in which the depositor
commits to purchase Subsequent mortgage loans for deposit into the trust fund
after the date on which the related certificates are issued.
Pre-issuance Accrued Interest -- Interest that has accrued on a certificate
before the issue date.
PTE -- A prohibited tranaction exemption issued by the DOL.
Prohibited Transactions Tax -- A tax on REMICs equal to 100% of the net
income derived from prohibited transactions.
RCRA -- The Resource Conservation and Recovery Act.
Regular Certificateholders -- Holders of Regular Certificates.
Regular Certificates -- The regular interests of a trust fund that elects
REMIC status.
Relief Act -- The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
REMIC -- A real estate mortgage investment conduit, as defined in the Code.
REMIC Certificates -- The certificates of a trust fund that elects REMIC
status.
REMIC Regulations -- The regulations governing REMICs under the Code.
Residual Certificateholder -- A holder of a Residual Certificate.
Residual Certificates --The residual interests in a trust fund that elects
REMIC status.
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Restricted Group -- Any one or more of the seller, the underwriter, the
trustee, the master servicer, any servicer, any insurer with respect to the
mortgage loans, any obligor with respect to mortgage loans included in the trust
fund constituting more than five percent of the aggregate unamortized principal
balance of the assets in the trust fund, or any affiliate of those parties.
Retained Interest -- For a Mortgage Asset, the amount or percentage
specified in the related prospectus supplement which is not sold by the
depositor or seller of the Mortgage Asset and, therefore, is not included in the
trust for the related series.
Securities Act -- The Securities Act of 1933, as amended.
Single Family Certificates -- Certificates that represent interests in a
mortgage pool consisting of mortgage loans representing loans for single family
homes.
SMMEA -- The Secondary Mortgage Market Enhancement Act of 1984.
Stripped Arm Obligations -- OID on certificates attributable to adjustable
rate mortgage loans.
Stripped Bond Certificates -- A class of certificates that represents the
right to principal and interest, or principal only, on all or a portion of the
mortgage loans.
Stripped Coupon Certificates -- A class of certificates that represents the
right to some or all of the interest on all or a portion of the mortgage loans,
including mortgage loans underlying a Stripped Bond Certificate.
Subsequent mortgage loans -- Additional mortgage loans purchased by the
depositor after the date on which the related certificates are issued.
Super-Premium Certificates -- Regular Certificates issued at prices
significantly exceeding their principal amounts or notional principal balances.
U.S. Person -- a person who is;
. a citizen or resident of the United States,
. a corporation or a partnership, including an entity treated as a
corporation or partnership for U.S. federal income tax purposes,
which is organized in or created under the laws of the United
States or any State thereof or the District of Columbia, unless in
the case of a partnership, Treasury Regulations provide otherwise,
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. an estate the income of which, from sources outside the United
States, is includible in gross income for federal income tax
purposes regardless of its connection with the conduct of a trade
or business within the United States,
. a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have authority to control all
substantial decisions of the trust, or
. a trust that can elect to be treated as a U.S. Person.
Underwriter Exemptions -- Administrative exemptions, granted by the DOL to
certain underwriters, from certain of the prohibited transaction rules of ERISA
and the related excise tax provisions of Section 4975 of the Code with respect
to the initial purchase, the holding and the subsequent resale by Plans of
certificates in pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of such
exemptions.
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$184,864,227
(Approximate)
[FIRST HORIZON LOGO]
Seller and Master Servicer
First Horizon Mortgage Pass-through Trust 2000-1
Issuer
Mortgage Pass-through Certificates, Series 2000-1
---------------------
PROSPECTUS SUPPLEMENT
April 26, 2000
---------------------
Lehman Brothers
First Tennessee Securities Corporation
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Series 2000-1 Mortgage Pass-Through Certificates and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the Series 2000-1 Mortgage Pass-Through Certificates will be required
to deliver a prospectus supplement and prospectus until July 27, 2000.
