FIRST HORIZON ASSET SECURITIES INC
424B5, 2000-11-22
ASSET-BACKED SECURITIES
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<PAGE>

                                               Filed pursuant to Rule 424 (B)(5)
                                                          SEC File No. 333-74467
PROSPECTUS SUPPLEMENT
(To Prospectus dated July 20, 2000)

                                  $181,719,100
                                 (Approximate)

                 [LOGO OF FIRST HORIZON HOME LOAN CORPORATION]

                           Seller and Master Servicer

                First Horizon Mortgage Pass-Through Trust 2000-5
                                     Issuer

               Mortgage Pass-Through Certificates, Series 2000-5
           Distributions payable monthly commencing in December 2000



   You should carefully          The trust will issue:
   consider the risk
   factors beginning on
   page S-11 of this
   prospectus supplement
   and on page 6 of the
   accompanying
   prospectus.

                                     .  5 classes of senior certificates; and

                                     .  6 classes of subordinated
                                        certificates.


  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 original 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.

  Banc of America Securities LLC will purchase the offered 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 99.16%
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 November 30, 2000.

Banc of America Securities LLC

                                          First Tennessee Securities Corporation

                               November 21, 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

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 certificates purchased at a
                   premium or discount may be severe................................................  S-13
         We cannot guarantee you regular payments
                    on your certificates............................................................  S-13
         Subordination may not be sufficient to protect senior
                    certificates from losses........................................................  S-14
         Concentration of California mortgage loans may increase
                   risk of losses...................................................................  S-14
         Residual Certificates have adverse tax consequences........................................  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-24
         Foreclosure, Delinquency and Loss Experience...............................................  S-25
         Servicing Compensation and Payment of Expenses.............................................  S-28
         Adjustment to Master Servicing Fee in Connection with Principal Prepayments................  S-28
         Advances...................................................................................  S-28
         Unanticipated Recoveries of Losses on the Mortgage Loans...................................  S-29

DESCRIPTION OF THE CERTIFICATES.....................................................................  S-29
         General....................................................................................  S-29
         Book-Entry Certificates....................................................................  S-30
         Payments on Mortgage Loans; Accounts.......................................................  S-31
         Distributions on the Certificates..........................................................  S-31
         Allocation of Realized Losses on the Certificates..........................................  S-34
         Voting Rights..............................................................................  S-36
         Additional Rights of the Residual Certificateholders.......................................  S-36
         Subordination..............................................................................  S-36
         Structuring Assumptions....................................................................  S-38
         Optional Purchase of Defaulted Loans.......................................................  S-39
         Optional Termination.......................................................................  S-40
         The Trustee................................................................................  S-40
         Restrictions on Transfer of the Residual Certificates......................................  S-40
</TABLE>

                                      S-3
<PAGE>

                               TABLE OF CONTENTS

                             PROSPECTUS SUPPLEMENT

<TABLE>
<CAPTION>
                                                                                                      PAGE
                                                                                                      ----
<S>                                                                                                   <C>
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS.......................................................  S-40
         General....................................................................................  S-40
         General Prepayment Considerations and Risks................................................  S-41
         Prepayment Considerations and Risks for the Class A-4 Certificates.........................  S-42
         Prepayment Considerations and Risks for the Class B Certificates...........................  S-42
         Additional Information.....................................................................  S-43
         Weighted Average Lives of the Offered Certificates.........................................  S-43
         Decrement Tables...........................................................................  S-44
         Last Scheduled Distribution Date...........................................................  S-51

USE OF PROCEEDS.....................................................................................  S-51

MATERIAL FEDERAL INCOME TAX CONSEQUENCES............................................................  S-51

ERISA CONSIDERATIONS................................................................................  S-52

UNDERWRITING........................................................................................  S-54

LEGAL MATTERS.......................................................................................  S-54

RATINGS.............................................................................................  S-54

GLOSSARY OF TERMS...................................................................................  S-56
</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-56.

The Issuer

         The Issuer of the certificates will be First Horizon Mortgage
Pass-Through Trust 2000-5. The trust was created for the sole purpose of issuing
the certificates.

Offered Certificates

         On the closing date, the trust will issue 11 classes of certificates, 8
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 $183,555,414 as of November 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                     Balance                      Rate                            Type
        -----                     -------                      ----                            ----
---------------------- ----------------------------- ------------------------- -------------------------------------
<S>                          <C>                           <C>                 <C>
Class A-1                      $ 132,597,000                  7.50%            senior/accretion directed
---------------------- ----------------------------- ------------------------- -------------------------------------
Class A-2                      $   6,850,000                  7.50%            senior/accrual
---------------------- ----------------------------- ------------------------- -------------------------------------
Class A-3                      $  17,950,000                  7.50%            senior/retail
---------------------- ----------------------------- ------------------------- -------------------------------------
Class A-4                      $  18,355,000                  7.50%            senior/lockout
---------------------- ----------------------------- ------------------------- -------------------------------------
Class A-R                      $         100                  7.50%            senior/residual
---------------------- ----------------------------- ------------------------- -------------------------------------
Class B-1                      $   3,213,000                  7.50%            subordinated
---------------------- ----------------------------- ------------------------- -------------------------------------
Class B-2                      $   1,928,000                  7.50%            subordinated
---------------------- ----------------------------- ------------------------- -------------------------------------
Class B-3                      $     826,000                  7.50%            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 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 A-R
Certificates, will be book-entry certificates.

                                      S-5
<PAGE>

         The trust will issue the certificates in the following minimum
denominations:

<TABLE>
<CAPTION>
                      ---------------------------- --------------------------------------
                                 Class                     Minimum Denomination
                                 -----                     --------------------
                      ---------------------------- --------------------------------------
                      <S>                          <C>
                               Class A-1                         $25,000
                      ---------------------------- --------------------------------------
                               Class A-2                         $25,000
                      ---------------------------- --------------------------------------
                               Class A-3                         $ 1,000
                      ---------------------------- --------------------------------------
                               Class A-4                         $25,000
                      ---------------------------- --------------------------------------
                               Class A-R                           $100
                      ---------------------------- --------------------------------------
                               Class B-1                         $100,000
                      ---------------------------- --------------------------------------
                               Class B-2                         $100,000
                      ---------------------------- --------------------------------------
                               Class B-3                         $100,000
                      ---------------------------- --------------------------------------
</TABLE>

         Certificates with principal balances in excess of these amounts, other
than the Class A-R Certificates, 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 November 1, 2000:

         .    Total current principal balance/(1)/:   $183,555,414
         .    Original terms to maturity: 20 to 30 years
         .    Range of remaining terms to maturity:  between 239 and 360 months
         .    Range of annual interest rates:  between 7.625% and 9.250%
         .    Largest geographic concentration: 18.45% of the mortgage loans are
              secured by property located in California

-----------
/(1)/ Approximate, after deducting payments of principal due on or before
November 1, 2000, and subject to the variance described in this prospectus
supplement.

         See "The Mortgage Pool-- General".

Cut-off Date

         November 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.

                                      S-6
<PAGE>

Closing Date

         On or about November 30, 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
December 26, 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 senior certificate, the amount of
              interest payable to you will be in proportion to the interest
              payable on all of the senior certificates together. All of the
              senior certificates entitled to interest payments will receive
              these payments at the same time.

         .    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 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 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 necessarily 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
November 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:

         .    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.

                                      S-8
<PAGE>

         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 represent 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, and the Class B-1, Class B-2 and the Class B-3 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.

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 A-R                                                AAA                                   AAA
---------------------------------------- ------------------------------------ --------------------------------------
Class B-1                                                 AA                                   N/A
---------------------------------------- ------------------------------------ --------------------------------------
Class B-2                                                 A                                    N/A
---------------------------------------- ------------------------------------ --------------------------------------
Class B-3                                                BBB                                   N/A
---------------------------------------- ------------------------------------ --------------------------------------
</TABLE>

                                      S-9
<PAGE>

         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.

                  [remainder of page intentionally left blank]

                                      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.

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.

                                     .  if you purchase the Class A-2
                                        Certificates, you will not receive
                                        payments of interest on these
                                        certificates until the occurrence of
                                        certain specified events as described in
                                        this prospectus supplement under
                                        "Description of the Certificates -
                                        Distributions on the Certificates."

                                      S-11
<PAGE>

                                     You should also carefully consider the
                                     further risks discussed below and under the
                                     heading "Yield, Prepayment and Maturity
                                     Considerations" in this prospectus
                                     supplement and under the heading "Risk
                                     Factors" in the prospectus.

Prepayments are unpredictable
 and will affect the yield on
  your certificates...............   Borrowers may prepay their mortgage loans
                                     in whole or in part at any time. We cannot
                                     predict the rate at which borrowers will
                                     repay their mortgage loans. A prepayment of
                                     a mortgage loan, however, will usually
                                     result in a prepayment on the certificates
                                     and will affect the yield to maturity on
                                     your certificates. In addition, you will be
                                     subject to any reinvestment risks resulting
                                     from faster or slower prepayments of
                                     mortgage loans.

                                     The rate of principal payments on the
                                     mortgage loans will be affected by, among
                                     other things:

                                     .  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.

                                      S-12
<PAGE>

                                     .  If interest rates on similar mortgage
                                        loans rise above the mortgage rates on
                                        the mortgage loans owned by the trust,
                                        we would expect the rate of prepayment
                                        to decrease. Reduced prepayments could
                                        result in a slower return of principal
                                        to you at a time when you may be able to
                                        reinvest the principal at a higher rate
                                        of interest than the pass-through rate
                                        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
 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 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".

We cannot guarantee
 you regular payments
 on your certificates............    The amounts you receive on your
                                     certificates will depend on the amount of
                                     the payments borrowers make on the mortgage
                                     loans. Because we cannot predict the rate
                                     at which borrowers will repay their loans,
                                     you may receive distributions on your
                                     certificates in amounts that are larger or
                                     smaller than you expect. In addition, the
                                     life of your certificates may be longer or
                                     shorter than anticipated. Because of this,
                                     we cannot guarantee that you

                                      S-13
<PAGE>

                                     will receive distributions at any specific
                                     future date or in any specific amount.

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. The
                                     first 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 classes comprise the sole
                                     source of funds from which this type of
                                     credit enhancement is provided. With
                                     respect to the second form of credit
                                     enhancement, 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 18.45% 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

                                      S-14
<PAGE>

                                     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 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
                                     class of "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 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.

                                      S-15
<PAGE>

                                    See "Description of the Certificates --
                                    Restrictions on Transfer of the Residual
                                    Certificates," "ERISA Considerations" and
                                    "Material Federal Income Tax Consequences"
                                    in this prospectus supplement.

                          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 seller will have directly originated or acquired the mortgage
loans from various unaffiliated third parties. All of the mortgage loans were
underwritten substantially in accordance with the seller's underwriting
standards. See "Mortgage Loan Program -- Underwriting Standards" in the
prospectus. 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 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

                                      S-16
<PAGE>

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 approximately $183,555,414, 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. Substantially all of the mortgage
loans were underwritten pursuant to full/alternative documentation loan
programs. See "Mortgage Loan Program -- Underwriting Standards -- Guide
Standards" in the prospectus.

     Each mortgage loan was originated after August 5, 1998.

     The latest stated maturity date of any mortgage loan is November 1, 2030.
The earliest stated maturity date of any mortgage loan is October 1, 2020.

     As of the cut-off date, no mortgage loan was delinquent more than 30 days.

     Substantially all of the mortgage loans will not 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 generally 12% for
loan-to-value ratios between 80.01% and 85.00%, 25% for loan-to-value ratios
between 85.01% and 90.00%, and 30% for loan-to-value ratios between 90.01% and
95.00%.

     No primary mortgage guaranty insurance policy will be required with
respect to any mortgage loan

                                      S-17
<PAGE>

     .    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>
7.501 to 7.625  ..............             2             $    867,611.65              0.47%
7.626 to 7.750  ..............             4               1,681, 570.88              0.92
7.751 to 7.875  ..............            12                4,217,855.75              2.30
7.876 to 8.000  ..............            25                8,838,676.09              4.82
8.001 to 8.125  ..............            58               22,189,510.59             12.09
8.126 to 8.250  ..............            89               32,504,430.60             17.71
8.251 to 8.375  ..............           102               36,561,196.88             19.92
8.376 to 8.500  ..............            88               34,529,179.46             18.81
8.501 to 8.625  ..............            53               19,267,393.95             10.50
8.626 to 8.750  ..............            26               10,370,634.57              5.65
8.751 to 8.875  ..............            18                6,751,441.73              3.68
8.876 to 9.000  ..............            10                3,368,563.13              1.84
9.001 to 9.125  ..............             1                  327,825.45              0.18
9.126 to 9.250  ..............             6                2,079,523.43              1.13
                                         ---             ---------------            ------
         TOTAL:...............           494             $183,555,414.16            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 8.396%. The mortgage
interest rates on a per annum basis range between 7.625% and 9.250%.

                                      S-19
<PAGE>

                   CURRENT MORTGAGE LOAN PRINCIPAL BALANCES

<TABLE>
<CAPTION>
                                                                Aggregate
                                             Number of          Principal
                                             Mortgage            Balance                Percentage of
  Current Mortgage Loan Amounts               Loans            Outstanding              Mortgage Pool
  -----------------------------               -----            -----------              -------------
<S>                                          <C>            <C>                         <C>
$  250,001 to $300,000 ..............           145         $ 40,574,241.44                   22.10%
$  300,001 to $350,000 ..............           122           39,456,717.61                   21.50
$  350,001 to $400,000 ..............            90           34,003,604.87                   18.52
$  400,001 to $450,000 ..............            53           22,541,162.50                   12.28
$  450,001 to $500,000 ..............            39           18,737,673.97                   10.21
$  500,001 to $550,000 ..............            14            7,369,775.53                    4.02
$  550,001 to $600,000 ..............            10            5,811,061.82                    3.17
$  600,001 to $650,000 ..............            13            8,197,270.98                    4.47
$  650,001 to $700,000 ..............             1              698,648.90                    0.38
$  700,001 to $750,000 ..............             1              708,000.00                    0.39
$  750,001 to $800,000 ..............             1              799,027.28                    0.44
$  800,001 to $850,000 ..............             1              839,029.92                    0.46
$  850,001 to $900,000 ..............             1              896,413.24                    0.49
$  900,001 to $950,000 ..............             1              923,440.24                    0.50
$950,001 to $1,000,000 ..............             2            1,999,345.86                    1.09
                                                ---         ---------------                  ------
                  TOTALS:............           494         $183,555,414.16                  100.00%
                                                ===         ===============                  ======
</TABLE>

     As of the cut-off date, the average principal balance of the mortgage loans
is expected to be approximately $371,570.

                         ORIGINAL LOAN-TO-VALUE RATIOS

<TABLE>
<CAPTION>
                                                                  Aggregate
                     Original                 Number of           Principal
                  Loan-to-Value               Mortgage             Balance         Percentage of
                    Ratios (%)                 Loans             Outstanding       Mortgage Pool
                    ----------                 -----             -----------       -------------
<S>                                           <C>             <C>                  <C>
50.00 and Below .......................          19           $  8,771,927.09           4.78%
50.01 to 55.00  .......................           9              3,428,073.12           1.87
55.01 to 60.00  .......................          10              3,753,858.97           2.05
60.01 to 65.00  .......................          21              7,442,634.15           4.05
65.01 to 70.00  .......................          25             11,754,386.72           6.40
70.01 to 75.00  .......................          42             15,789,623.15           8.60
75.01 to 80.00  .......................         294            109,228,241.87          59.51
80.01 to 85.00  .......................          13              4,196,852.98           2.29
85.01 to 90.00  .......................          43             14,232,410.72           7.75
90.01 to 95.00  .......................          18              4,957,405.39           2.70
                                                ---           ---------------         ------

                  TOTALS:..............         494           $183,555,414.16         100.00%
                                                ===           ===============         ======
</TABLE>

     The weighted average original loan-to-value ratio of the mortgage loans is
expected to be approximately 76.05%.

                                      S-20
<PAGE>

                              STATE DISTRIBUTION
                            OF MORTGAGE PROPERTIES

<TABLE>
<CAPTION>
                                                       Aggregate
                                    Number of          Principal
                                    Mortgage            Balance          Percent of
       State                         Loans            Outstanding       Mortgage Pool
       -----                         -----            -----------       -------------
<S>                              <C>               <C>                  <C>
Arizona.........................       7            $  2,834,817.49           1.54%
California......................      93              33,874,475.61          18.45
Colorado........................      25               9,011,641.29           4.91
District of Columbia............       3                 914,185.89           0.50
Delaware........................       4               1,244,240.45           0.68
Florida.........................      13               5,457,443.32           2.97
Georgia.........................      29              11,490,180.21           6.26
Idaho...........................       2                 808,279.65           0.44
Illinois........................       7               2,831,995.19           1.54
Indiana.........................       4               1,612,284.15           0.88
Iowa............................       1                 299,808.70           0.16
Kansas..........................       1                 549,675.29           0.30
Louisiana.......................       1                 299,808.70           0.16
Maryland........................      30              11,885,654.75           6.48
Massachusetts...................       9               3,114,023.55           1.70
Michigan........................       1                 549,296.15           0.30
Minnesota.......................       3               1,083,807.03           0.59
Mississippi.....................       1                 407,310.10           0.22
Missouri........................       2                 823,622.40           0.45
Nebraska........................       1                 278,226.95           0.15
Nevada..........................      11               4,035,833.60           2.20
New Hampshire...................       3                 913,414.14           0.50
New Jersey......................      16               6,101,140.14           3.32
New York........................      77              27,316,612.65          14.88
North Carolina..................      12               4,209,098.10           2.29
Ohio............................       2                 548,509.94           0.30
Oregon..........................      10               3,432,978.81           1.87
Pennsylvania....................       6               1,860,246.26           1.01
Rhode Island....................       3                 959,683.34           0.52
South Carolina..................       6               2,079,348.73           1.13
Tennessee.......................      23               9,769,182.20           5.32
Texas...........................      21               9,982,356.52           5.44
Utah............................       2                 745,280.83           0.41
Virginia........................      38              12,687,925.57           6.91
Washington......................      26               9,063,882.76           4.94
West Virginia...................       1                 479,143.70           0.26
                                     ---            ---------------         ------

     TOTALS:....................     494            $183,555,414.16         100.00%
                                     ===            ===============         ======
</TABLE>

     No more than approximately 0.89% 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...........................   398           $146,606,270.54          79.87%
Refinance (rate/term)..............    78             30,529,117.23          16.63
Refinance (cash out)...............    18              6,420,026.39           3.50
                                      ---           ---------------        -------
     TOTALS:.......................   494           $183,555,414.16         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*.....................   433           $161,544,410.41          88.01%
Attached Planned Unit..............    27              9,803,313.14           5.34
2-4 Family.........................    20              6,741,142.63           3.67
Condominium........................    14              5,466,547.98           2.98
                                      ---           ---------------         ------
     TOTALS:.......................   494           $183,555,414.16         100.00%
                                      ===           ===============         ======
</TABLE>

*Includes detached units within planned unit developments.

                                OCCUPANCY TYPES

<TABLE>
<CAPTION>
                                                       Aggregate
                                    Number of          Principal
                                    Mortgage            Balance            Percent of
           Occupancy Type             Loans           Outstanding        Mortgage Pool
           --------------             -----           -----------        -------------
<S>                                 <C>             <C>                  <C>
Primary Residence..................   457           $168,413,044.82          91.75%
Second Residence...................    32             13,394,686.06           7.30
Investor Property..................     5              1,747,683.28           0.95
                                      ---           ---------------         ------
     TOTALS:.......................   494           $183,555,414.16         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>
229 to 240 mos.....................     1           $    319,481.56            0.17%
325 to 336 mos.....................     1                564,332.14            0.31
337 to 348 mos.....................     5              2,250,964.51            1.23
349 to 360 mos.....................   487            180,420,635.95           98.29
                                      ---           ---------------         -------
     TOTALS:.......................   494           $183,555,414.16          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 358 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, if
          available, provided that the title policy will be delivered as soon as
          it becomes available, and if the title policy is not available, and to
          the extent required in connection with the rating of the certificates,
          a written commitment or interim binder or preliminary report of the
          title issued by the title insurance or escrow company with respect to
          the 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 or an
original or certified copy of the applicable title policy, to the extent
unavailable, each of 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 (or the custodian,
as applicable) 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 in each state where
recording is required in order to protect the trustee's interests in the
mortgage loan against the claim of any subsequent transferee or any successor to
or creditor of the depositor or the seller.

                                      S-23
<PAGE>

     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 or in the case of the original or
certified copy of the applicable title policy, 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.

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

                                      S-24
<PAGE>

correspondents nationwide. First Horizon's mortgage loans are principally first-
lien, fixed or adjustable rate mortgage loans secured by single-family
residences.

     At September 30, 2000, First Horizon provided servicing for approximately
$54.144 billion aggregate principal amount of mortgage loans, including certain
mortgage loans for which the servicing rights have been sold by the master
servicer but not yet transferred. Substantially all of these mortgage loans 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 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
$4.778 billion at December 31, 1999, and to approximately $5.427 billion at
September 30, 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-25
<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
                                               ----                                             ----
                           No. of      % of      Principal       % of       No. of       % of      Principal      % of
                            Loans     Loans     Balance($)     Balance      Loans       Loans     Balance($)     Balance
                            -----     -----     ----------     -------      -----       -----     ----------     -------
<S>                        <C>        <C>       <C>            <C>          <C>         <C>       <C>            <C>
JUMBO LOAN
PORTFOLIO

Total Portfolio            4,543                1,332,476                  10,160                3,169,165

Period of Delinquency
30-59 Days                    77     1.69%         20,763       1.56%         120       1.18%       35,247        1.11%
60-89 Days                    17     0.37%          9,405       0.71%          16       0.16%        6,473        0.20%
90 Days or more               39     0.86%          8,860       0.66%          32       0.31%        8,932        0.28%

Foreclosures Pending          24     0.53%          5,457       0.41%          15       0.15%        3,432        0.11%

Total Delinquencies          157     3.46%         44,485       3.34%         183       1.80%       54,084        1.71%

<CAPTION>

                                                1999
                                                ----
                            No. of       % of      Principal      % of
                            Loans       Loans     Balance($)     Balance
                            -----       -----     ----------     -------
<S>                         <C>         <C>       <C>            <C>
JUMBO LOAN
PORTFOLIO

Total Portfolio            14,819                4,778,328

Period of Delinquency
30-59 Days                    175       1.18%       53,661         1.12%
60-89 Days                     20       0.13%        7,663         0.16%
90 Days or more                31       0.21%        8,248         0.17%

Foreclosures Pending           19       0.13%        5,123         0.11%

Total Delinquencies           245       1.65%       74,695         1.56%
</TABLE>

<TABLE>
<CAPTION>
                                   As of September 30, 2000
                                   ------------------------
                             No. of       % of     Principal       % of
                             Loans       Loans     Balance($)     Balance
                             -----       -----     ----------     -------
<S>                          <C>         <C>       <C>            <C>
JUMBO LOAN PORTFOLIO

Total Portfolio              16,608                5,427,495

Period of Delinquency
         30-59 Days             241       1.45%       83,147        1.53%
         60-89 Days              34       0.20%       12,046        0.22%
         90 Days or more         25       0.15%        7,423        0.14%

Foreclosures Pending             10       0.06%        2,159        0.04%

Total Delinquencies             310       1.87%      104,775        1.93%
</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-26
<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 December 31,
                                           ------------------                                ------------------
                                                  1998                                              1999
                                                  ----                                              ----

                             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               408,877                   39,646,269                    465,667                 48,855,787

Period of Delinquency
     30-59 Days                13,319        3.26%       1,078,000        2.72%        15,192       3.26%      1,332,172      2.73%
     60-89 Days                 2,909        0.71%         227,208        0.57%         3,624       0.78%        299,359      0.61%
     90-119 Days                1,451        0.35%         112,578        0.28%         1,342       0.29%        110,077      0.23%
     120 Days                   4,088        1.00%         302,972        0.76%         3,938       0.85%        305,213      0.62%

Foreclosures Pending            4,895        1.20%         301,411        0.76%         4,422       0.95%        242,609      0.50%

Total Delinquencies            26,662        6.52%       2,022,169        5.10%        28,518       6.12%      2,289,430      4.69%
</TABLE>

<TABLE>
<CAPTION>
                                     As of September 30,
                                     ------------------
                                             2000
                                             ----
                          No. of      % of      Principal      % of
                           Loans      Loans     Balance($)    Balance
                          ------      -----     ----------    -------
<S>                       <C>         <C>       <C>           <C>
TOTAL SERVICING
PORTFOLIO

Total Portfolio            501,041              54,144,474

Period of Delinquency
     30-59 Days             17,327      3.46%    1,643,875      3.04%
     60-89 Days              4,598      0.92%      411,221      0.76%
     90-119 Days             1,647      0.33%      145,159      0.27%
     120 Days                3,968      0.79%      322,976      0.60%

Foreclosures Pending         3,889      0.78%      209,766      0.39%

Total Delinquencies         31,429      6.27%    2,732,997      5.05%
</TABLE>

     The above table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All dollar
amounts are reported in thousands.

                                      S-27
<PAGE>

     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 with
respect to substantially all of the mortgage loans will be equal to 0.25% per
annum of the Stated Principal Balance of each such mortgage loan and the master
servicing fee will be utilized to pay certain other fees, including the
trustee's fee. 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 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, any Prepayment Interest Excess, 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 substantially all of the mortgage loans on each distribution
date in an amount equal to the product of (i) the excess of the mortgage rate
thereof over 7.75% per annum, and (ii) the Stated Principal Balance thereof.

Adjustment to Master Servicing Fee in Connection with Principal Prepayments

     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
0.0083% 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 during the period from the sixteenth day of the month
prior to a distribution date through the last day of such month exceed an amount
equal to 0.0083% 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".

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

                                      S-28
<PAGE>

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 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, and subject to the insurer's subrogation
rights 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.
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, 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,


         (1)   as reduced by:

                                      S-29
<PAGE>

         .     all amounts previously distributed to certificateholders of the
               class as payments of principal; and

         .     the amount of Realized Losses, including Excess Losses, allocated
               to the class,

         (2)   in the case of any class of Accrual Certificates, as increased by
               all Accrued Certificate Interest added to the class certificate
               balance thereof on previous distribution dates.

     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 the 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 senior certificates will have an initial aggregate class certificate
balance of approximately $175,752,100 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 1.75%, 1.05%, 0.45%, 0.45%, 0.25% and 0.30%,
respectively, in the trust fund.

     The 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-30
<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 December 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; provided, however, that on each
     distribution date through the related Accretion Termination Date, such
     amounts with respect to the Accrual Certificates will not be distributed on
     such certificates under this priority first but will instead be added to
     the class certificate balance thereof and distributed in accordance with
     the paragraph following priority seventh below;


          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; provided, however, that on each distribution date
     through the related Accretion Termination Date, such amounts with respect
     the Accrual Certificates will not be distributed on such certificates under
     this priority second but will instead be added to the class certificate
     balance thereof and distributed in accordance with the paragraph following
     priority seventh below unless such amounts have already been added to the
     class certificate balance of the Accrual Certificates and distributed in
     accordance with the paragraph following priority seventh below, as provided
     in priority first above;

          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, the Senior Optimal Principal
     Amount for such distribution date, in the order of priority set forth
     below;

          fourth, 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;

                                      S-31
<PAGE>

          fifth, 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;

          sixth, 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

          seventh, 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.

     On each distribution date, before distributions are made pursuant to the
following paragraph, an amount equal to the Accrual Amount for the Class A-2
Certificates will be distributed in the following order of priority to the
following classes in reduction of their class certificate balances:

          (i)  to the Class A-1 Certificates, until the class certificate
     balance thereof has been reduced to zero; and

          (ii) to the Class A-2 Certificates, until the class certificate
     balance thereof has been reduced to zero.

     Amounts allocated to the senior certificates pursuant to priority third
above will be distributed in the following order of priority:

          (a) to the Class A-R Certificates, until the class certificate balance
     thereof has been reduced to zero;

          (b) 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

          (c) the remaining amount, sequentially, to the Class A-1, Class A-2
     and Class A-3 Certificates, in that order, until their class certificate
     balances have been reduced to zero.

     On each distribution date prior to the related Accretion Termination Date,
the Accrual Amounts for the Accrual Certificates will be added to the class
certificate balance thereof.

     On each distribution date after the Cross-Over Date, distributions of
principal on the outstanding senior certificates entitled to principal
distributions 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 class certificate balances of 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.

     As to any distribution date and any mortgage loan with respect to which a
prepayment in full has occurred during the period from the sixteenth day of the
month preceding the distribution

                                      S-32
<PAGE>

date through the last day of such month, 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 during such period. 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.

     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 or, in the case of the Accrual Certificates through the
Accretion Termination Date, the amounts that would otherwise have been added to
the class certificate balance thereof. Such reduction with respect to the
Accrual Certificates will effect a corresponding reduction in the Accrual Amount
on such distribution date and the amount distributed in respect of the Accrual
Amount as principal on certain classes of certificates as described above. 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 (or added to the class certificate balance of the
Accrual Certificates through the related Accretion Termination Date) 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 class certificate balance of each class
of certificates 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 to the senior certificates entitled to
principal distributions and the subordinated certificates.

     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 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 fourth, fifth and
sixth 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 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

                                      S-33
<PAGE>

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 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, will 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.

Allocation of Realized Losses on the Certificates

Losses Allocable to the Certificates

     Prior to the Cross-Over Date (and on such date under certain
circumstances), 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 the Class B-5
Certificates, and so on). 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 principal portion of any Realized
Loss will be allocated among the outstanding classes of senior certificates
entitled to principal distributions 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 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 based on their class
certificate balances.

     Upon the initial issuance of the certificates, the Fraud Loss Coverage
Amount will equal approximately $1,835,554 (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 fourth anniversary of the Cut-off Date, the
Fraud Loss Coverage Amount will equal approximately $1,835,554 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 fourth 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

                                      S-34
<PAGE>

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 $2,000,000 (approximately 1.1% 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 the greater of

     .    1% (or if greater than 1%, the highest percentage of mortgage loans by
          principal balance secured by mortgaged properties in any single
          California zip code) of the outstanding principal balance of all the
          mortgage loans as of the related Determination Date, and

     .    twice the outstanding principal balance of the mortgage loan which has
          the largest outstanding principal balance as of the related
          Determination Date,

less, in each case, 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.

     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 $106,500, 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.

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 (or the calculation of the Accrual Amount for the Accrual
Certificates) commencing on the following distribution date. For purposes of
allocating the principal portion of Realized Losses (including Excess Losses)
the class certificate balance of each class of Accrual Certificates will be
deemed to be the lesser of (1) their original class certificate balance, and (2)
their outstanding class certificate balance.

     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 class certificate
balances of all classes 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 class
certificate balance of any class of certificates. However, after the Bankruptcy
Loss Coverage Amount has been reduced to zero, the

                                      S-35
<PAGE>

amounts distributable under clause (1) of the definitions of Senior Optimal
Principal 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.

Voting Rights

     There are actions specified in the prospectus that may be taken by holders
of certificates evidencing a specified percentage of all undivided interests in
the trust and may be taken by holders of certificates entitled in the aggregate
to that percentage of the voting rights. 98% of all voting rights will be
allocated among all holders of the certificates, other than the Class A-R
Certificates, in proportion to their then outstanding class certificate
balances. In addition, 2.0% of all voting rights will be allocated among the
holders of Class A-R Certificates, in proportion to the percentage interests
evidenced by their respective certificates. The pooling and servicing agreement
may be amended without the consent of the certificateholders in specified
circumstances.

Additional Rights of the Residual Certificateholders

     In addition to distributions of principal and interest the holders of the
Residual 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 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 the
     certificates have each been reduced to zero.

     It is not anticipated that any material assets will be remaining for such
distributions on the Residual 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
class certificate balance of the classes of subordinated certificates will equal
approximately 4.25% of the aggregate class 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

                                      S-36
<PAGE>

     (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; and

          (2) the allocation to the subordinated certificates of the principal
     portion of any Non-Excess Loss to the extent set forth herein.

     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 class certificate balance of the
classes of 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 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 during at least the first five years
after the date of initial issuance of the certificates, with such allocation
being subject to reduction 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 on each distribution date after the Cross-Over Date. In addition,
the Class A-4 Certificates are not entitled to receive scheduled principal
payments or prepayments 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 class
certificate 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 1.00% of the initial
aggregate class certificate balance of all of the classes of certificates and
approximately 23.53% of the initial aggregate class certificate balance of all
of the classes of

                                      S-37
<PAGE>

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 principal portion of any
Non-Excess Loss with respect to a mortgage loan 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 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, 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.

     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 one mortgage loan 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>
    $183,555,414.16           8.3958817342%           7.5000000000%              360                   358
</TABLE>

     .    the mortgage loans prepay at the specified constant percentages of
          PSA,

     .    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,

                                      S-38
<PAGE>

     .    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 $826,000, $459,000 and
          $551,314, 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 November 30, 2000,

     .    the seller is not required to repurchase or substitute for any
          mortgage loan, and

     .    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 PSA, 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
PSA, which represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans. PSA 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% PSA 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% PSA assumes a
constant prepayment rate of 6% per annum. Multiples may be calculated from this
prepayment rate sequence. For example, 150% PSA 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% PSA assumes no prepayments.
There is no assurance that prepayments will occur at any PSA 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.

                                      S-39
<PAGE>

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 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.

     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 Residual Certificates

     The Residual 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
Residual Certificates, in addition to certain other ERISA restricted classes of
certificates, may not be acquired by an ERISA Plan. See "ERISA Considerations".
Each Residual 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 result of shortfalls, the aggregate of the class
certificate balances of all classes of the certificates exceeds the Pool
Principal Balance, the class certificate balance of the class of subordinated

                                      S-40
<PAGE>

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, Excess Losses will be borne by all classes of certificates on a
pro rata basis. 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.

General 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.

     You should consider the risk that,

     .    if you purchase an offered certificate at a discount, a slower than
          anticipated rate of principal payments (including prepayments) on the
          mortgage loans could result in an actual yield on your certificates
          that is lower than the anticipated yield;

     .    if you purchase an offered certificate at a premium, a faster than
          anticipated rate of principal payments (including prepayments) on the
          mortgage loans could result in an actual yield on your certificates
          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

                                      S-41
<PAGE>

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.

     Voluntary prepayments in full of principal on the mortgage loans received
by the master servicer from the first day through the fifteenth day of each
month (other than the month of the cut-off date) are passed through to the
certificateholders in the month of receipt or payment. Voluntary prepayments of
principal in full received from the sixteenth day (or, in the case of the month
of the Cut-off Date, from the Cut-off Date) through the last day of each month,
and all voluntary partial prepayments of principal on the mortgage loans are
passed through to the certificateholders in the month following the month of
receipt or payment. Any prepayment of a mortgage loan or liquidation of a
mortgage loan (by foreclosure proceedings or by virtue of the purchase of a
mortgage loan in advance of its stated maturity as required or permitted by the
Agreement) will generally have the effect of passing through to the
certificateholders principal amounts which would otherwise be passed through (or
reduced) in amortized increments over the remaining term of such mortgage loan.

     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.

Prepayment Considerations and Risks for the Class A-4 Certificates

     As described under "Description of the Certificates -- Distributions on the
Certificates -- Principal," the entire amount of 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 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 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 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 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 or prepayments during the first
five years after the closing date (except as otherwise described herein on or
following the Group I Final Distribution Date).

Prepayment Considerations and Risks for 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

                                      S-42
<PAGE>

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, 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.

     To the extent that the Class B Certificates are being purchased at
discounts from their initial class certificate 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.

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 Banc of America Securities LLC at the request of one or more
prospective investors, based on assumptions provided by, and satisfying the
special requirements of, the prospective investors. The tables and assumptions
may be based on assumptions that differ from the Structuring Assumptions.
Accordingly, the tables and other materials may not be relevant to or
appropriate for investors other than those specifically requesting them.

Weighted Average Lives of the Offered Certificates

     The weighted average life of an offered certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the class certificate
balance of the certificate on each distribution date by the number of years from
the date of issuance to the distribution date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the net reductions in class
certificate balance of the certificate referred to in clause (a).

     For a discussion of the factors which may influence the rate of payments,
including prepayments, of the mortgage loans, see "--Prepayment Considerations
and Risks" in this prospectus supplement and "Yield and Prepayment
Considerations" in the prospectus.

     In general, the weighted average lives of the offered certificates will be
shortened if the level of prepayments of principal of the mortgage loans
increases. However, the weighted

                                      S-43
<PAGE>

average lives of the offered certificates will depend upon a variety of other
factors, including the timing of changes in the rate of principal payments, the
priority sequence of distributions of principal of the classes of certificates.
See "Description of the Certificates --Principal".

     The interaction of the foregoing factors may have different effects on
various classes of offered certificates and the effects on any class may vary at
different times during the life of the class. Accordingly, no assurance can be
given as to the weighted average life of any class of offered certificates.
Further, to the extent the prices of the offered certificates represent
discounts or premiums to their respective original class certificate balances,
variability in the weighted average lives of the classes of offered certificates
will result in variability in the related yields to maturity. For an example of
how the weighted average lives of the classes of offered certificates may be
affected at various constant percentages of PSA, 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 PSA
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 PSA 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
PSA, 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.

                 [remainder of page intentionally left blank]

                                      S-44
<PAGE>

            PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
                OF THE CLASS A-1 CERTIFICATES AT THE FOLLOWING
                          CONSTANT PERCENTAGES OF PSA

<TABLE>
<CAPTION>
                                                                         Class A-1 Certificates

Distribution Date                                         0%          100%        250%        400%         500%
-----------------                                        ---          ----        ----        ----         ----
<S>                                                     <C>         <C>          <C>        <C>          <C>
Initial...............................................   100          100         100         100          100
November 2001.........................................    99           96          93          89           87
November 2002.........................................    97           89          78          67           60
November 2003.........................................    95           80          59          41           29
November 2004.........................................    93           71          43          20            8
November 2005.........................................    91           63          29           5            0
November 2006.........................................    89           55          19           0            0
November 2007.........................................    87           48          10           0            0
November 2008.........................................    85           42           3           0            0
November 2009.........................................    82           36           0           0            0
November 2010.........................................    79           31           0           0            0
November 2011.........................................    76           25           0           0            0
November 2012.........................................    73           20           0           0            0
November 2013.........................................    70           16           0           0            0
November 2014.........................................    66           11           0           0            0
November 2015.........................................    62            6           0           0            0
November 2016.........................................    57            2           0           0            0
November 2017.........................................    52            0           0           0            0
November 2018.........................................    47            0           0           0            0
November 2019.........................................    41            0           0           0            0
November 2020.........................................    35            0           0           0            0
November 2021.........................................    29            0           0           0            0
November 2022.........................................    21            0           0           0            0
November 2023.........................................    13            0           0           0            0
November 2024.........................................     5            0           0           0            0
November 2025.........................................     0            0           0           0            0
November 2026.........................................     0            0           0           0            0
November 2027.........................................     0            0           0           0            0
November 2028.........................................     0            0           0           0            0
November 2029.........................................     0            0           0           0            0
November 2030.........................................     0            0           0           0            0
Weighted Average Life (in years)*.....................    16.00         7.45        3.86        2.74         2.35
</TABLE>
     *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-45
<PAGE>

            PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
                OF THE CLASS A-2 CERTIFICATES AT THE FOLLOWING
                          CONSTANT PERCENTAGES OF PSA

<TABLE>
<CAPTION>

                                                                         Class A-2 Certificates

Distribution Date                                          0%         100%        250%        400%         500%
-----------------                                         ---         ----        ----        ----         ----
<S>                                                     <C>         <C>          <C>        <C>          <C>
Initial................................................   100         100          100         100         100
November 2001..........................................   108         108          108         108         108
November 2002..........................................   116         116          116         116         116
November 2003..........................................   125         125          125         125         125
November 2004..........................................   135         135          135         135         135
November 2005..........................................   145         145          145         145           2
November 2006..........................................   157         157          157          54           0
November 2007..........................................   169         169          169           0           0
November 2008..........................................   182         182          182           0           0
November 2009..........................................   196         196          149           0           0
November 2010..........................................   211         211           81           0           0
November 2011..........................................   228         228           23           0           0
November 2012..........................................   245         245            0           0           0
November 2013..........................................   264         264            0           0           0
November 2014..........................................   285         285            0           0           0
November 2015..........................................   307         307            0           0           0
November 2016..........................................   331         331            0           0           0
November 2017..........................................   356         301            0           0           0
November 2018..........................................   384         243            0           0           0
November 2019..........................................   414         188            0           0           0
November 2020..........................................   446         136            0           0           0
November 2021..........................................   481          87            0           0           0
November 2022..........................................   518          40            0           0           0
November 2023..........................................   558           0            0           0           0
November 2024..........................................   602           0            0           0           0
November 2025..........................................   563           0            0           0           0
November 2026..........................................   419           0            0           0           0
November 2027..........................................   262           0            0           0           0
November 2028..........................................    91           0            0           0           0
November 2029..........................................     0           0            0           0           0
November 2030..........................................     0           0            0           0           0
Weighted Average Life (in years)*......................   26.66       19.47         9.88        5.91        4.76
</TABLE>

     *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-46
<PAGE>

            PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
                OF THE CLASS A-3 CERTIFICATES AT THE FOLLOWING
                          CONSTANT PERCENTAGES OF PSA

<TABLE>
<CAPTION>
                                                                       Class A-3
Distribution Date                                0%          100         250%        400%         500%
-----------------                                --          ---         ----        ----         ----
<S>                                            <C>         <C>          <C>          <C>         <C>
Initial....................................      100         100          100         100         100
November 2001..............................      100         100          100         100         100
November 2002..............................      100         100          100         100         100
November 2003..............................      100         100          100         100         100
November 2004..............................      100         100          100         100         100
November 2005..............................      100         100          100         100         100
November 2006..............................      100         100          100         100          42
November 2007..............................      100         100          100          73          10
November 2008..............................      100         100          100          45           0
November 2009..............................      100         100          100          30           0
November 2010..............................      100         100          100          22           0
November 2011..............................      100         100          100          17           0
November 2012..............................      100         100           90          12           0
November 2013..............................      100         100           75           9           0
November 2014..............................      100         100           62           7           0
November 2015..............................      100         100           51           5           0
November 2016..............................      100         100           42           4           0
November 2017..............................      100         100           34           3           0
November 2018..............................      100         100           28           2           0
November 2019..............................      100         100           22           1           0
November 2020..............................      100         100           18           1           0
November 2021..............................      100         100           14           1           0
November 2022..............................      100         100           11           *           0
November 2023..............................      100          98            8           *           0
November 2024..............................      100          82            6           *           0
November 2025..............................      100          66            5           *           0
November 2026..............................      100          51            3           *           0
November 2027..............................      100          37            2           *           0
November 2028..............................      100          23            1           *           0
November 2029..............................       64          10            *           *           0
November 2030..............................        0           0            0           0           0
Weighted Average Life (in years)**.........    29.21       26.21        16.27        8.90        6.00
</TABLE>

     *Indicates an amount above zero and less than 0.5% of the original class
certificate balance is outstanding.

     **The weighed average life shown in the table for this class of
certificates represents the weighted average life of these certificates taken as
a whole and is not likely to reflect the experience of any particular investor.
Because holders of these certificates will receive distributions in reduction of
the class certificate balance of these certificates on the basis of requested
distributions the weighted average life of any such certificates owned by an
individual investor may vary significantly from the weighted average life of
this class of certificates taken as a whole.

                                      S-47
<PAGE>

            PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
                OF THE CLASS A-4 CERTIFICATES AT THE FOLLOWING
                          CONSTANT PERCENTAGES OF PSA

<TABLE>
<CAPTION>
                                                                          Class A-4 Certificates
Distribution Date                                          0%        100%         250%        400%        500%
-----------------                                          --        ----         ----        ----        ----
<S>                                                     <C>         <C>          <C>          <C>         <C>
Initial.............................................      100         100          100         100         100
November 2001.......................................      100         100          100         100         100
November 2002.......................................      100         100          100         100         100
November 2003.......................................      100         100          100         100         100
November 2004.......................................      100         100          100         100         100
November 2005.......................................      100         100          100         100         100
November 2006.......................................      100          98           95          91          88
November 2007.......................................       99          95           88          80          74
November 2008.......................................       98          90           79          66          54
November 2009.......................................       97          85           68          52          36
November 2010.......................................       95          78           57          39          25
November 2011.......................................       93          72           47          29          17
November 2012.......................................       91          66           39          21          12
November 2013.......................................       89          61           32          16           8
November 2014.......................................       86          55           27          12           5
November 2015.......................................       83          50           22           9           4
November 2016.......................................       80          46           18           6           2
November 2017.......................................       77          41           15           5           2
November 2018.......................................       74          37           12           3           1
November 2019.......................................       70          33           10           2           1
November 2020.......................................       66          29            8           2           *
November 2021.......................................       61          26            6           1           *
November 2022.......................................       56          22            5           1           *
November 2023.......................................       51          19            4           1           *
November 2024.......................................       45          16            3           *           *
November 2025.......................................       39          13            2           *           *
November 2026.......................................       32          10            1           *           *
November 2027.......................................       25           7            1           *           *
November 2028.......................................       17           5            1           *           *
November 2029.......................................        8           2            *           *           *
November 2030.......................................        0           0            0           0           0
Weighted Average Life (in years)*...................    21.86       16.07        11.90        9.88        8.81
</TABLE>


     *Indicates an amount above zero and less than 0.5% of the original class
certificate balance is outstanding.

     **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-R CERTIFICATES AT THE FOLLOWING
                          CONSTANT PERCENTAGES OF PSA

<TABLE>
<CAPTION>
                                                                         Class A-R Certificates
Distribution Date                                         0%         100%         250%        400%        500%
-----------------                                         --         ----         ----        ----        ----
<S>                                                      <C>         <C>          <C>         <C>         <C>
Initial.............................................      100         100          100         100         100
November 2001.......................................        0           0            0           0           0
November 2002.......................................        0           0            0           0           0
November 2003.......................................        0           0            0           0           0
November 2004.......................................        0           0            0           0           0
November 2005.......................................        0           0            0           0           0
November 2006.......................................        0           0            0           0           0
November 2007.......................................        0           0            0           0           0
November 2008.......................................        0           0            0           0           0
November 2009.......................................        0           0            0           0           0
November 2010.......................................        0           0            0           0           0
November 2011.......................................        0           0            0           0           0
November 2012.......................................        0           0            0           0           0
November 2013.......................................        0           0            0           0           0
November 2014.......................................        0           0            0           0           0
November 2015.......................................        0           0            0           0           0
November 2016.......................................        0           0            0           0           0
November 2017.......................................        0           0            0           0           0
November 2018.......................................        0           0            0           0           0
November 2019.......................................        0           0            0           0           0
November 2020.......................................        0           0            0           0           0
November 2021.......................................        0           0            0           0           0
November 2022.......................................        0           0            0           0           0
November 2023.......................................        0           0            0           0           0
November 2024.......................................        0           0            0           0           0
November 2025.......................................        0           0            0           0           0
November 2026.......................................        0           0            0           0           0
November 2027.......................................        0           0            0           0           0
November 2028.......................................        0           0            0           0           0
November 2029.......................................        0           0            0           0           0
November 2030.......................................        0           0            0           0           0
Weighted Average Life (in years)*...................     0.07        0.07         0.07        0.07        0.07
</TABLE>


     *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 B-1, CLASS B-2 AND CLASS B-3 CERTIFICATES
                 AT THE FOLLOWING CONSTANT PERCENTAGES OF PSA

<TABLE>
<CAPTION>
                                                             Class B-1, Class B-2 and Class B-3 Certificates
Distribution Date                                        0%          100%        250%        400%         500%
-----------------                                        --          ----        ----        ----         ----
<S>                                                     <C>         <C>         <C>          <C>          <C>
Initial............................................       100         100         100         100          100
November 2001......................................        99          99          99          99           99
November 2002......................................        98          98          98          98           98
November 2003......................................        97          97          97          97           97
November 2004......................................        96          96          96          96           96
November 2005......................................        95          95          95          95           95
November 2006......................................        94          92          90          87           85
November 2007......................................        93          89          83          77           73
November 2008......................................        91          84          74          64           58
November 2009......................................        90          79          64          51           43
November 2010......................................        88          73          53          38           29
November 2011......................................        86          67          44          28           20
November 2012......................................        84          62          37          21           14
November 2013......................................        82          56          31          15            9
November 2014......................................        80          52          25          11            6
November 2015......................................        77          47          21           8            4
November 2016......................................        75          43          17           6            3
November 2017......................................        72          38          14           4            2
November 2018......................................        68          34          11           3            1
November 2019......................................        65          31           9           2            1
November 2020......................................        61          27           7           2            1
November 2021......................................        57          24           6           1            *
November 2022......................................        52          21           5           1            *
November 2023......................................        47          18           3           1            *
November 2024......................................        42          15           3           *            *
November 2025......................................        36          12           2           *            *
November 2026......................................        30           9           1           *            *
November 2027......................................        23           7           1           *            *
November 2028......................................        15           4           1           *            *
November 2029......................................         7           2           *           *            *
November 2030......................................         0           0           0           0            0
Weighted Average Life (in years)**.................     20.59       15.24       11.40        9.60         8.87
</TABLE>


     *Indicates an amount above zero and less than 0.5% of the original class
certificate balance is outstanding.

     *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>

Last Scheduled Distribution Date

     The last scheduled distribution date for each class of offered certificates
is the distribution date in December 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 of each class of offered certificates will depend on the
rate of payment, including prepayments, of the mortgage loans, the class
certificate balance 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.

                                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 represent the sole class
of residual interests in the REMIC.

     The Regular Certificates generally 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.

     Each class of Accrual Certificates will be treated as being issued with
OID in an amount equal to the excess of (1) the sum of all payments thereon,
determined under the prepayment assumption described below, over (2) 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 in an
amount equal to the excess of their initial respective class certificate balance
(plus accrued interest from the last day preceding the issue date corresponding
to a distribution date through the issue date), over their issue prices
(including all accrued interest). The prepayment assumption that is to be used
in determining the rate of accrual of original issue discount and whether the
original issue discount is considered de minimis, and that may be used by a
holder of a Regular Certificate to amortize premium, will be 250% of the PSA. 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 and this prospectus supplement 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

                                      S-51
<PAGE>

will be "interest on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(B) of the Code, to the extent the assets of the
trust fund are assets described in those sections.

     The Regular Certificates will represent qualifying assets under Section
860G(a)(3) if acquired by a REMIC within the prescribed time periods of the
Code.

     The holders of the Residual Certificates must include the taxable income of
the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to them during certain periods. All or a
portion of the taxable income from a Residual Certificate recognized by a holder
may be treated as "excess inclusion" income, which with limited exceptions, is
subject to U.S. federal income tax.

     In computing alternative minimum taxable income, the special rule providing
that taxable income cannot be less than the sum of the taxpayer's excess
inclusions for the year does not apply. However, a taxpayer's alternative
minimum taxable income cannot be less than the sum of the taxpayer's excess
inclusions for the year. In addition, the amount of any alternative minimum tax
net operating loss is determined without regard to any excess inclusions.

     Purchasers of a Residual Certificate are encouraged to consider carefully
the tax consequences of an investment in residual certificates discussed in the
prospectus and consult their own tax advisors with respect to those
consequences. See "Material Federal Income Tax Consequences -- REMIC
Certificates -- Residual Certificates" in the prospectus. Specifically,
prospective holders of a Residual Certificates should consult their tax advisors
regarding whether, at the time of acquisition, a Residual Certificate will be
treated as a "noneconomic" residual interest, a "non-significant value" residual
interest and a "tax avoidance potential" residual interest. See "Material
Federal Income Tax Consequences -- Tax-Related Restrictions on Transfer of
Residual Certificates -- Noneconomic Residual Certificates," "Material Federal
Income Tax Consequences -- Residual Certificates -- Mark to Market Rules," "--
Excess Inclusions" and "Material Federal Income Tax Consequences -- Tax Related
Restrictions on Transfers of Residual Certificates -- Foreign Investors" in the
prospectus. Additionally, for information regarding Prohibited Transactions and
Treatment of Realized Losses, see "Material Federal Income Tax Consequences --
Prohibited Transactions and Other Taxes" and "-- REMIC Certificates -- Regular
Certificates -- Treatment of Realized Losses" in the prospectus.

     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.

                                      S-52
<PAGE>

     Some employee benefit plans, including governmental plans and some church
plans, are not subject to ERISA's requirements. Accordingly, assets of those
plans may be invested in the offered certificates without regard to the ERISA
considerations described in this prospectus supplement and in the prospectus,
subject to the provisions of other applicable federal and state law. Any of
those plans that are qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code may nonetheless be subject to the prohibited transaction
rules set forth in Section 503 of the Code.

     Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary that decides to
invest the assets of a Plan in the offered certificates should consider, among
other factors, the extreme sensitivity of the investment to the rate of
principal payments, including prepayments, on the mortgage loans.

     The U.S. Department of Labor has granted to NationsBank Corporation, the
predecessor to Bank of America Corporation, the corporate parent of Banc of
America Securities LLC, on May 14, 1993, an individual administrative exemption,
Prohibited Transaction Exemption 93-31 (58 Fed. Reg. 28620, May 5, 1993) 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 93-31 applies to
mortgage loans such as the mortgage loans in the trust fund.

     For a general description of PTE 93-31 and the conditions that must be
satisfied for it to apply, see "ERISA Considerations" in the prospectus.

     On November 13, 2000, the U.S. Department of Labor published Prohibited
Transaction Exemption 2000-58 (65 Fed. Reg. 67765, November 13, 2000) which
amended, effective August 23, 2000, the Underwriter Exemptions, including PTE
93-31. Among other changes, the amended exemption generally provides that in the
case of "designated transactions" a Plan would be permitted to purchase
subordinate certificates rated in any of the four highest generic ratings
categories (provided that all other requirements are met). The designated
transactions include residential mortgages. Because the ratings of a class of
certificates are subject to change in the future by the rating agencies, classes
of certificates eligible for purchase by Plans and pursuant to PTE 93-31 and PTE
2000-58 on the closing date may not be eligible for purchase by Plans in the
future if their rating is reduced to below any of the four highest generic
ratings categories. However, any Plan holding such a certificate would not be
required to dispose of it solely because its rating had been lowered.

     It is expected that PTE 93-31 as amended by PTE 2000-58 will apply to the
acquisition and holding by Plans of the Class A Certificates, excluding the
Residual Certificates, and the Class B-1, Class B-2 and Class B-3 Certificates
and that all applicable conditions of PTE 93-31 and PTE 2000-58 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 characteristics of the Residual Certificates may not meet the
requirements of PTE 93-31 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 Residual Certificates. Consequently,
transfers of the Residual 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

                                      S-53
<PAGE>

          arrangement or using the assets of any plan or arrangement to effect
          the transfer, 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.

     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.

                                  UNDERWRITING

     Subject to the terms and conditions set forth in the Underwriting
Agreement, the depositor has agreed to sell the Underwritten Certificates to
Banc of America Securities, LLC. Distribution of the Underwritten Certificates
will be made by Banc of America Securities, LLC 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, may be deemed to have received compensation from the
depositor in the form of underwriting discounts.

     Each of Banc of America Securities, LLC 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 Underwritten 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 Banc of
America Securities LLC and First Tennessee Securities Corporation against, or
make contributions to Banc of America Securities LLC and First Tennessee
Securities Corporation with respect to, liabilities customarily indemnified
against, including liabilities under the Securities Act of 1933, as amended.

     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.

                                  LEGAL MATTERS

     The validity of the certificates, including their material federal income
tax consequences, will be passed upon for the depositor by Andrews & Kurth
L.L.P., Dallas, Texas. Brown & Wood LLP, Washington, DC, will pass upon certain
legal matters on behalf of the underwriter.

                                     RATINGS

     It is a condition to the issuance of the senior certificates that they
be rated "AAA" by each of Fitch and 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, respectively.

                                      S-54
<PAGE>

     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 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.

                 [remainder of page intentionally left blank]

                                      S-55
<PAGE>

                               GLOSSARY OF TERMS

     Accretion Directed Certificates -- The Class A-1 Certificates.

     Accretion Termination Date -- (a) For the Class A-2 Certificates, the
earlier of: (x) the Cross-Over Date, and (y) the distribution date on which the
class certificate balances of the Class A-1 Certificates have been reduced to
zero.

     Accrual Amount -- For the class of Accrual Certificates and each
distribution date through the related Accretion Termination Date, an amount
equal to the sum of (a) the Accrued Certificate Interest in respect of such
Class of Accrual Certificates in accordance with priority first of the second
paragraph under "Description of the Certificates -- Distributions on the
Certificates -- Allocation of Available Funds," and (b) any available amounts
allocable to such class in accordance with priority second under "Description of
the Certificates -- Distributions on the Certificates -- Allocation of Available
Funds," in each case on such distribution date.

     Accrual Certificates -- The Class A-2 Certificates.

     Accrued Certificate Interest -- For any class of certificates 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 class certificate balance of such class of certificates
immediately prior to such distribution date, less such class' 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.

     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, the trustee fee and any amounts due to First Horizon in respect
          of excess spread as described in the second paragraph under the
          heading "Servicing of the Mortgage Loans -- Servicing Compensation and
          Payment of Expenses," and all scheduled installments of 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, net of any Prepayment Interest Excess;

     .    any Compensating Interest in respect of full prepayments received
          during the period from the sixteenth day of the month prior to the
          month of such distribution date through the last day of such month;
          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

                                      S-56
<PAGE>

          reimbursed for out of the Certificate Account pursuant to the pooling
          and servicing agreement.

     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.

     Class A-4 Percentage -- For any distribution date, the percentage
(carried to six places rounded up) obtained by dividing (1) the aggregate class
certificate balance of the Class A-4 Certificates immediately preceding such
distribution date by (2) the aggregate class certificate balance of all
Certificates immediately preceding such distribution date.

     Class A-4 Prepayment Distribution Percentage -- 0% through the
distribution date in December 2005; 30% thereafter through the distribution date
in December 2006; 40% thereafter through the distribution date in December 2007;
60% thereafter through the distribution date in December 2008; 80% thereafter
through the distribution date in December 2009; and 100% thereafter.

     Class A-4 Principal Distribution Amount -- For any distribution date,
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.

     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 December 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 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.

                                      S-57
<PAGE>

     Compensating Interest -- As to any distribution date and any principal
prepayment in respect of mortgage loan that is received during the period from
the sixteenth day of the month prior to the month of such distribution date
through the last day of such month, 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 0.0083% of the Pool Principal Balance as of the related
determination date.

     Cross-over Date -- The distribution date on which all of the 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.

     Determination Date -- As to any distribution date, the earlier of (i)
the third business day after the 15th day of each month, and (ii) the second
business day prior to the related distribution date.

     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.

     DTC -- The Depository Trust Company.

     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.

     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, 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-1, Class A-2, Class A-3 and
Residual 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

                                      S-58
<PAGE>

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 amounts resulting
from 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-Excess Loss -- Any Realized Loss other than an Excess Loss.

     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.

     Prepayment Interest Excess -- As to any principal prepayment in full
received by the master servicer from the first day through the fifteenth day of
any calendar month (other than the calendar month in which the cut-off date
occurs), all amounts paid by the related mortgagor in respect of interest on
such principal prepayment. All Prepayment Interest Excess shall be paid to the
Master Servicer as additional master servicing compensation.

     Prepayment Interest Shortfall -- As to any distribution date, mortgage
loan and principal prepayment received (a) during the period from the sixteenth
day of the month preceding the month of such distribution date through the last
day of such month, in the case of a principal prepayment in full, or (b) during
the month preceding the month of such distribution date, in the case of a
partial principal prepayment, the amount, if any, by which one month's interest
at the related Net Mortgage Rate (exclusive of the trustee fee) on such
principal prepayment exceeds

                                      S-59
<PAGE>

the amount of interest actually paid by the borrower in connection with such
principal prepayment.

     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 fifteenth day of the month of such distribution date, 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.

     PSA -- The prepayment standard 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.

     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
Residual Certificates.

     Residual Certificates -- 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 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 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 Senior Prepayment 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 all partial prepayments of
     principal received during the applicable Prepayment Period;

          (4)  the lesser of:

               (a)  the Senior Prepayment 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

                                      S-60
<PAGE>

          was purchased by a private mortgage insurer during the related
          Prepayment Period as an alternative to paying a claim under the
          related mortgage insurance policy; and

               (b)(i)  the Senior 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 mortgage insurance policy minus (ii)
          the Senior 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 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 class certificate balances of all classes of senior certificates
immediately preceding such distribution date by the aggregate class certificate
balances of all classes of the certificates immediately preceding such
distribution date.

     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>
December 2000 - November 2005                   100%
----------------------------------------------------------------------------------------------------------------
December 2005 - November 2006                   Senior Percentage plus 70% of the Subordinated Percentage
----------------------------------------------------------------------------------------------------------------
December 2006 - November 2007                   Senior Percentage plus 60% of the Subordinated Percentage
----------------------------------------------------------------------------------------------------------------
December 2007 - November 2008                   Senior Percentage plus 40% of the Subordinated Percentage
----------------------------------------------------------------------------------------------------------------
December 2008 - November 2009                   Senior Percentage plus 20% of the Subordinated Percentage
----------------------------------------------------------------------------------------------------------------
December 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)

                                      S-61
<PAGE>

     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 December 2005 and
          November 2006;

               (b)  35% of the Original Subordinated Principal Balance if such
          distribution date occurs between and including December 2006 and
          November 2007;

               (c)  40% of the Original Subordinated Principal Balance if such
          distribution date occurs between and including December 2007 and
          November 2008;

               (d)  45% of the Original Subordinated Principal Balance if such
          distribution date occurs between and including December 2008 and
          November 2009; and

               (e)  50% of the Original Subordinated Principal Balance if such
          distribution date occurs during or after December 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

          (2)  cumulative Realized Losses do not exceed:

               (a)  10% of the Original Subordinated Principal Balance if such
          distribution date occurs between and including December 2005 and
          November 2006;

               (b)  15% of the Original Subordinated Principal Balance if such
          distribution date occurs between and including December 2006 and
          November 2007;

               (c)  20% of the Original Subordinated Principal Balance if such
          distribution date occurs between and including December 2007 and
          November 2008;

               (d)  25% of the Original Subordinated Principal Balance if such
          distribution date occurs between and including December 2008 and
          November 2009; and

               (e)  30% of the Original Subordinated Principal Balance if such
          distribution date occurs during or after December 2009.

     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

                                      S-62
<PAGE>

design, faulty workmanship or materials, except under some circumstances,
nuclear reaction, chemical contamination or waste by the mortgagor.

     Stated Principal Balance -- For any mortgage loan and due date, the
unpaid principal balance of the mortgage loan as of the due date, as specified
in its amortization schedule at the time, before any adjustment to the
amortization schedule for any moratorium or similar waiver or grace period,
after giving effect to any previous partial prepayments and liquidation proceeds
received and to the payment of principal due on the due date and irrespective of
any delinquency in payment by the related mortgagor.

     Structuring Assumptions -- The assumed characteristics of the mortgage
loans used for purposes of estimating the weighted average lives of the
certificates, as listed on page S-38.

     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 class certificate balances
of all 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.

     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 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 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 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 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 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 mortgage insurance policy exceeds (c) the sum of the amounts
     distributable to the senior certificateholders under clause (4) of the
     definition of Senior Optimal Principal Amount on such distribution date;
     and

          (5)  the Subordinated Prepayment 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.

                                      S-63
<PAGE>

     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.

     Underwriter Exemptions -- Administrative exemptions, granted by the U.S.
Department of Labor 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.

     Underwriting Agreement -- The underwriting agreement by and among First
Horizon Asset Securities Inc., First Horizon Home Loan Corporation and
PaineWebber Incorporated, as representative of the several underwriters.

     Underwritten Certificates -- The senior certificates, other than the Class
B-1, Class B-2 and Class B-3 Certificates.

                                      S-64
<PAGE>

PROSPECTUS



                      First Horizon Asset Securities Inc.
                                   Depositor


                      Mortgage Pass-Through Certificates
                             (Issuable in Series)



You should carefully consider the risk factors beginning on page 6 of this
prospectus.

The Trusts

   The depositor will periodically establish trusts to issue certificates
representing interests in the related trust fund.  The assets in each trust fund
will be specified in the prospectus supplement for the particular trust and will
generally consist of

 .  first lien mortgage loans secured by one- to four-family residential
   properties or participations in that type of loan,

 .  mortgage pass-through securities issued or guaranteed by Ginnie Mae, Fannie
   Mae, or Freddie Mac, or

 .  private mortgage-backed securities backed by first lien mortgage loans
   secured by one- to four-family residential properties or participations in
   that type of loan.


The Certificates

   The depositor will sell the certificates pursuant to a prospectus supplement.
The certificates will be grouped into one or more series, each having its own
distinct designation.  Each series will be issued in one or more classes and
each class will evidence beneficial ownership of a specified portion of future
payments on the assets in the trust fund that the series relates to.  A
prospectus supplement for a series will specify all of the terms of the series
and each of the classes in the series.

Underwriting

   The certificates may be offered to the public through several different
methods, including offerings through underwriters.

   The SEC and state securities regulators have not approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.


                                 July 20, 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...................................................................   15
     The Mortgage Loans -- General...............................................   17
     Agency Securities...........................................................   21
     Private Mortgage-Backed Securities..........................................   23
     Substitution of Mortgage Assets.............................................   25
     Pre-Funding Arrangements....................................................   25
     Available Information.......................................................   26
     Incorporation of Certain Documents by Reference.............................   27

USE OF PROCEEDS..................................................................   27

THE DEPOSITOR....................................................................   27

THE MASTER SERVICER..............................................................   28

MORTGAGE LOAN PROGRAM............................................................   28
     Underwriting Standards......................................................   28
     Qualifications of Sellers...................................................   32
     Representations by Sellers; Repurchases.....................................   32

DESCRIPTION OF THE CERTIFICATES..................................................   34
     General.....................................................................   36
     Distributions on Certificates...............................................   38
     Advances....................................................................   40
     Reports to Certificateholders...............................................   41
     Categories of Classes of Certificates.......................................   42
     Indices Applicable to Floating Rate and Inverse Floating Rate Classes.......   45
     Book-Entry Certificates.....................................................   49

CREDIT ENHANCEMENT...............................................................   51
     General.....................................................................   51
</TABLE>

                                      -2-
<PAGE>

<TABLE>
<S>                                                                                 <C>
     Subordination...............................................................   52
     Mortgage Pool Insurance Policies............................................   53
     Special Hazard Insurance Policies...........................................   54
     Bankruptcy Bonds............................................................   56
     Reserve Fund................................................................   56
     Cross Support...............................................................   57
     Insurance Policies, Surety Bonds and Guaranties.............................   57
     Over-Collateralization......................................................   58

YIELD AND PREPAYMENT CONSIDERATIONS..............................................   58

THE POOLING AND SERVICING AGREEMENT..............................................   59
     Assignment of Mortgage Assets...............................................   60
     Payments on Mortgage Assets; Deposits to Certificate Account................   63
     Collection Procedures.......................................................   65
     Hazard Insurance............................................................   67
     Realization Upon Defaulted Mortgage Loans...................................   68
     Servicing and Other Compensation and Payment of Expenses....................   73
     Evidence as to Compliance...................................................   74
     List of Certificateholders..................................................   74
     Matters Regarding the Master Servicer and the Depositor.....................   74
     Events of Default...........................................................   75
     Rights Upon Event of Default................................................   76
     Amendment...................................................................   77
     Termination; Optional Termination...........................................   78
     The Trustee.................................................................   79

LEGAL ASPECTS OF THE MORTGAGE LOANS..............................................   79
     General.....................................................................   79
     Foreclosure/Repossession....................................................   80
     Rights of Redemption........................................................   83
     Anti-Deficiency Legislation and Other Limitations on Lenders................   83
     Environmental Risks.........................................................   85
     Due-on-Sale Clauses.........................................................   86
     Prepayment Charges..........................................................   86
     Applicability of Usury Laws.................................................   87
     Soldiers' and Sailors' Civil Relief Act.....................................   87

MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................   87
     General.....................................................................   88
     Non-REMIC Certificates......................................................   88
     REMIC Certificates..........................................................   97
     Prohibited Transactions and Other Taxes.....................................  112
</TABLE>

                                      -3-
<PAGE>

<TABLE>
<S>                                                                                 <C>
     Liquidation and Termination.................................................   112
     Administrative Matters......................................................   113
     Tax-Exempt Investors........................................................   113
     Non-U.S. Persons............................................................   113
     Tax-Related Restrictions on Transfers of Residual Certificates..............   114

STATE TAX CONSIDERATIONS.........................................................   116

ERISA CONSIDERATIONS.............................................................   116
     PTE 83-1....................................................................   117
     Underwriter Exemptions......................................................   119
     Insurance Company General Accounts..........................................   121
     Other Exemptions............................................................   122
     Consultation with Counsel...................................................   122

LEGAL INVESTMENT.................................................................   122

METHOD OF DISTRIBUTION...........................................................   124

LEGAL MATTERS....................................................................   125

FINANCIAL INFORMATION............................................................   125

RATING...........................................................................   125

GLOSSARY OF TERMS................................................................   127
</TABLE>

                                      -4-
<PAGE>

Important notice about information in this prospectus and each accompanying
prospectus supplement

   Information about each series of certificates is contained in two separate
   documents:

     .  this prospectus, which provides general information, some of which may
        not apply to a particular series; and

     .  the accompanying prospectus supplement for a particular series, which
        describes the specific terms of the certificates of that series.

     The prospectus supplement will contain information about a particular
series that supplements the information contained in this prospectus, and you
should rely on that supplementary information in the prospectus supplement.

     You should rely only on the information in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus.

                           _________________________

     If you require additional information, the mailing address of our principal
executive offices is First Horizon Asset Securities Inc., 4000 Horizon Way,
Irving, Texas 75063 and the telephone number is (214) 441-4000. For other means
of acquiring additional information about us or a series of securities, see "The
Trust Fund -- Incorporation of Certain Documents by Reference" beginning on page
28.

                          __________________________

                                      -5-
<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.

                                   See "Credit Enhancement."

                                      -6-
<PAGE>

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.

                                      -7-
<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

                                      -8-
<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:

                                   .  your ability to pledge book-entry
                                      certificates to someone who does not
                                      participate in the DTC


                                      -9-
<PAGE>

                                      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 your certificates will be lower than
                                   anticipated. Conversely, if you purchase a
                                   class of certificates at a

                                      -10-
<PAGE>

                                   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 identified in the
                                   prospectus supplement under "The Mortgage
                                   Pool."

                                      -11-
<PAGE>

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
                                   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

                                      -12-
<PAGE>

                                   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 borne by the
                                   holders of one or more classes of
                                   certificates.

                                   See "Legal Aspects of the Mortgage Loans".

                                      -13-
<PAGE>

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 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,

                                      -14-
<PAGE>

                                   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 transaction and thus
                                   the mortgage assets would not be included in
                                   the depositor's bankruptcy estate.

                                      -15-
<PAGE>

                                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

     .    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.

                                      -16-
<PAGE>

     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 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

                                      -17-
<PAGE>

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
          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

                                      -18-
<PAGE>

          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.

     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

                                      -19-
<PAGE>

          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-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.

                                      -20-
<PAGE>

     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
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.

                                      -21-
<PAGE>

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 "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

                                      -22-
<PAGE>

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. (S)1716 et. seq.). It is the nation's largest
supplier of residential mortgage funds. Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968. Fannie Mae provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending.  Although the
Secretary of the Treasury of the United States has authority to lend Fannie Mae
up to $2.25 billion outstanding at any time, neither the United States nor any
agency thereof is obligated to finance Fannie Mae's operations or to assist
Fannie Mae in any other manner.

     Fannie Mae Certificates.  Each Fannie Mae Certificate relating to a series
will represent a fractional undivided interest in a pool of mortgage loans
formed by Fannie Mae, except with respect to any stripped mortgage-backed
securities issued by Fannie Mae. Mortgage loans underlying Fannie Mae
Certificates will consist of fixed, variable or adjustable rate conventional
mortgage loans or fixed-rate FHA Loans or VA Loans. Such mortgage loans may be
secured by either one- to four-family or multi-family residential properties.
The characteristics of any Fannie Mae Certificates

                                      -23-
<PAGE>

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 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.

                                      -24-
<PAGE>

     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;

     .    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

                                      -25-
<PAGE>

     .    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 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-

                                      -26-
<PAGE>

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
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.

                                      -27-
<PAGE>

     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 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.

                                      -28-
<PAGE>

     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.

     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

                                      -29-
<PAGE>

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 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

                                      -30-
<PAGE>

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 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.

                                      -31-
<PAGE>

     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.

     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

                                      -32-
<PAGE>

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:

     .    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

                                      -33-
<PAGE>

          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 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

                                      -34-
<PAGE>

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."


                        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:

                                      -35-
<PAGE>

     .    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.

     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

                                      -36-
<PAGE>

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 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

                                      -37-
<PAGE>

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 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

                                      -38-
<PAGE>

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.

     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

                                      -39-
<PAGE>

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 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

                                      -40-
<PAGE>

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.

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

                                      -41-
<PAGE>

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;

       .  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;

                                      -42-
<PAGE>

       .  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.

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.

                                      -43-
<PAGE>

     CATEGORIES OF CLASSES                    DEFINITION
     ---------------------                    ----------

Principal Types

Accretion Directed...............  A class that receives principal payments from
                                   the accreted interest from specified accrual
                                   classes. An accretion directed class also may
                                   receive principal payments from principal
                                   paid on the underlying Mortgage Assets or
                                   other assets of the trust fund for the
                                   related series.

Component Certificates...........  A class consisting of "components." The
                                   components of a class of component
                                   certificates may have different principal and
                                   interest payment characteristics but together
                                   constitute a single class. Each component of
                                   a class of component certificates may be
                                   identified as falling into one or more of the
                                   categories in this chart.

Notional Amount Certificates.....  A class having no principal balance and
                                   bearing interest on the related notional
                                   amount. The notional amount is used for
                                   purposes of the determination of interest
                                   distributions.

Planned Principal Class or PACs..  A class that is designed to receive principal
                                   payments using a predetermined principal
                                   balance schedule derived by assuming two
                                   constant prepayment rates for the underlying
                                   Mortgage Assets. These two rates are the
                                   endpoints for the structuring range for the
                                   planned principal class. The planned
                                   principal classes in any series of
                                   certificates may be subdivided into primary
                                   planned principal classes, secondary planned
                                   principal classes and so forth, and may have
                                   different effective structuring ranges and
                                   different principal payment priorities. The
                                   structuring range for the secondary planned
                                   principal class of a series of certificates
                                   will be narrower than that for the primary
                                   planned principal class of the series.

Scheduled Principal Class........  A class that is designed to receive principal
                                   payments using a predetermined principal
                                   balance schedule but is not designated as a
                                   planned principal

                                      -44-
<PAGE>

     CATEGORIES OF CLASSES                    DEFINITION
     ---------------------                    ----------

                                        class or targeted principal class. In
                                        many cases, the schedule is derived by
                                        assuming two constant prepayment rates
                                        for the underlying Mortgage Assets.
                                        These two rates are the endpoints for
                                        the structuring range for the scheduled
                                        principal class.

Sequential Pay.......................   Classes that receive principal payments
                                        in a prescribed sequence, that do not
                                        have predetermined principal balance
                                        schedules and that under all
                                        circumstances receive payments of
                                        principal continuously from the first
                                        distribution date on which they receive
                                        principal until they are retired. A
                                        single class that receives principal
                                        payments before or after all other
                                        classes in the same series of
                                        certificates may be identified as a
                                        sequential pay class.

Strip................................   A class that receives a constant
                                        proportion, or strip, of the principal
                                        payments on the underlying Mortgage
                                        Assets or other assets of the trust
                                        fund.

Support Class (also sometimes
 referred to as companion
 classes)............................   A class that receives principal payments
                                        on any distribution date only if
                                        scheduled payments have been made on
                                        specified planned principal classes,
                                        targeted principal classes or scheduled
                                        principal classes.

Targeted Principal Class or TACs.....   A class that is designed to receive
                                        principal payments using a predetermined
                                        principal balance schedule derived by
                                        assuming a single constant prepayment
                                        rate for the underlying Mortgage Assets.

Interest Types

Fixed Rate...........................   A class with an interest rate that is
                                        fixed throughout the life of the class.

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.

                                      -45-
<PAGE>

     CATEGORIES OF CLASSES                        DEFINITION
     ---------------------                        ----------

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 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.

                                      -46-
<PAGE>

Indices Applicable to Floating Rate and Inverse Floating Rate Classes

     LIBOR. The applicable prospectus supplement may specify some other basis
for determining LIBOR, but if it does not, on the LIBOR determination date for
each class of certificates of a series for which the applicable interest rate is
determined by reference to LIBOR, the person designated in the related pooling
and servicing agreement as the calculation agent will determine LIBOR in
accordance with the LIBO Method or the BBA Method, each as described below,
which method will be specified in the related prospectus supplement:

          LIBO Method. If using this method to calculate LIBOR, the calculation
     agent will determine LIBOR by reference to the quotations, as set forth on
     the Reuters Screen LIBO Page, offered by the principal London office of
     each of the designated reference banks meeting the criteria set forth in
     this prospectus for making one-month United States dollar deposits in
     leading banks in the London Interbank market, as of 11:00 a.m. London time
     on the LIBOR determination date. In lieu of relying on the quotations for
     those reference banks that appear at the time on the Reuters Screen LIBO
     Page, the calculation agent will request each of the reference banks to
     provide the offered quotations at the time.

          Under this method LIBOR will be established by the calculation agent
     on each LIBOR determination date as follows:

       .  If on any LIBOR determination date two or more reference banks provide
          offered quotations, LIBOR for the next interest accrual period shall
          be the arithmetic mean of the offered quotations, rounded upwards if
          necessary to the nearest whole multiple of 1/32%.

       .  If on any LIBOR determination date only one or none of the reference
          banks provides offered quotations, LIBOR for the next interest accrual
          period shall be whichever is the higher of LIBOR as determined on the
          previous LIBOR determination date or the reserve interest rate. The
          reserve interest rate shall be the rate per annum which the
          calculation agent determines to be either the arithmetic mean, rounded
          upwards if necessary to the nearest whole multiple of 1/32%, of the
          one-month United States dollar lending rates that New York City 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

                                      -47-
<PAGE>

          interest accrual period shall be LIBOR as determined on the preceding
          LIBOR determination date, or, in the case of the first LIBOR
          determination date, LIBOR shall be considered to be the per annum rate
          specified in the related prospectus supplement.

          Each reference bank shall be a leading bank engaged in transactions in
     Eurodollar deposits in the international Eurocurrency market; shall not
     control, be controlled by, or be under common control with the calculation
     agent; and shall have an established place of business in London. If
     reference bank should be unwilling or unable to so act, or if appointment
     of a reference bank is terminated, another leading bank meeting the
     criteria specified above will be appointed.

          BBA Method. If using this method of determining LIBOR, the calculation
     agent will determine LIBOR on the basis of the British Bankers' Association
     "Interest Settlement Rate" for one-month deposits in United States dollars
     as found on Telerate page 3750 as of 11:00 a.m. London time on each LIBOR
     determination date. Interest Settlement Rates currently are based on rates
     quoted by eight British Bankers' Association designated banks as being, in
     the view of the banks, the offered rate at which deposits are being quoted
     to prime banks in the London interbank market. The Interest Settlement
     Rates are calculated by eliminating the two highest rates and the two
     lowest rates, averaging the four remaining rates, carrying the result,
     expressed as a percentage, out to six decimal places, and rounding to five
     decimal places.

     If on any LIBOR determination date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described under "LIBO Method."

     The establishment of LIBOR on each LIBOR determination date by the
calculation agent and its calculation of the rate of interest for the applicable
classes for the related interest accrual period shall, in the absence of
manifest error, be final and binding.

     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

                                      -48-
<PAGE>

of Eleventh District member institutions are: savings deposits, time deposits,
FHLBSF advances, repurchase agreements and all other borrowings. Because the
component funds represent a variety of maturities whose costs may react in
different ways to changing conditions, the Eleventh District Cost of Funds Index
does not necessarily reflect current market rates.

     A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices tied
to specific interest rates, such as United States Treasury Bills or LIBOR.
Because the liabilities upon which the Eleventh District Cost of Funds Index is
based were issued at various times under various market conditions and with
various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month before the month in which it is due
to be published. Additionally, the Eleventh District Cost of Funds Index may not
necessarily move in the same direction as market interest rates at all times,
since as longer term deposits or borrowings mature and are renewed at prevailing
market interest rates, the Eleventh District Cost of Funds Index is influenced
by the differential between the prior and the new rates on those deposits or
borrowings. In addition, movements of the Eleventh District Cost of Funds Index,
as compared to other indices tied to specific interest rates, may be affected by
changes instituted by the FHLBSF in the method used to calculate the Eleventh
District Cost of Funds Index.

     The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616-2600.

     The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month will be announced on or near the last
working day of the following 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

                                      -49-
<PAGE>

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 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

                                      -50-
<PAGE>

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.

     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.

                                      -51-
<PAGE>

     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 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.

                                      -52-
<PAGE>

     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.


                              CREDIT ENHANCEMENT

General

     Credit enhancement may be provided for one or more classes of a series of
certificates or with respect to the Mortgage Assets in the related trust fund.
Credit enhancement may be in the form of one or any combination of the
following:

     .  subordination of other classses of certificates of the same series;
     .  a limited guarantee;
     .  a financial guaranty insurance policy;
     .  a surety bond;
     .  a letter of credit;
     .  a pool insurance policy;
     .  a special hazard insurance policy;

                                      -53-
<PAGE>

     .  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 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.

                                      -54-
<PAGE>

Mortgage Pool Insurance Policies

     If specified in the related prospectus supplement relating to a mortgage
pool, a separate mortgage pool insurance policy will be obtained for the
mortgage pool and issued by the insurer named in the prospectus supplement. Each
mortgage pool insurance policy will, subject to policy limitations, cover loss
from default in payment on mortgage loans in the mortgage pool in an amount
equal to a percentage specified in the prospectus supplement of the aggregate
principal balance of the mortgage loans on the cut-off date that are not covered
as to their entire outstanding principal balances by primary mortgage insurance
policies. As more fully described below, the master servicer will present claims
under the insurance to the pool insurer on behalf of itself, the trustee and the
certificateholders. The mortgage pool insurance policies, however, are not
blanket policies against loss, since claims under them may be made only for
particular defaulted mortgage loans and only upon satisfaction of conditions
precedent in the policy. The applicable prospectus supplement may specify that
mortgage pool insurance will cover the failure to pay or the denial of a claim
under a primary mortgage insurance policy, but if it does not, the mortgage pool
insurance policies will not cover losses due to a failure to pay or denial of a
claim under a primary mortgage insurance policy.

     In general, each mortgage pool insurance policy will provide that no claims
may be validly presented unless

     .  any required primary mortgage insurance policy is in effect for the
        defaulted mortgage loan and a claim under it has been submitted and
        settled;

     .  hazard insurance on the related mortgaged property has been kept in
        force and real estate taxes and other protection and preservation
        expenses have been paid;

     .  if there has been physical loss or damage to the mortgaged property, it
        has been restored to its physical condition, with reasonable wear and
        tear excepted, at the time of issuance of the policy; and

     .  the insured has acquired good and merchantable title to the mortgaged
        property free and clear of liens except certain permitted encumbrances.

     Upon satisfaction of these conditions, the pool insurer will have the
option to either

     .  purchase the mortgaged property at a price equal to the principal
        balance of the related mortgage loan plus accrued and unpaid interest at
        the mortgage rate to the date of the purchase and certain expenses
        incurred by the master servicer on behalf of the trustee and
        certificateholders, or

     .  pay the amount by which the sum of the principal balance of the
        defaulted mortgage loan plus accrued and unpaid interest at the mortgage
        rate to the date of payment of the claim

                                      -55-
<PAGE>

        and the master servicer's expenses exceeds the proceeds received from an
        approved sale of the mortgaged property,

in either case net of certain amounts paid or assumed to have been paid under
the related primary mortgage insurance policy. If any mortgaged property is
damaged, and proceeds, if any, from the related hazard insurance policy or a
special hazard insurance policy or policies maintained for a series are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the mortgage pool insurance policy, the master servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that the restoration will increase the proceeds to certificateholders
on liquidation of the mortgage loan after reimbursement of the master servicer
for its expenses and the expenses will be recoverable by it through proceeds of
the sale of the mortgaged property or proceeds of the related mortgage pool
insurance policy or any related primary mortgage insurance policy.

     The applicable prospectus supplement may specify that mortgage pool
insurance will cover various origination and servicing defaults, but if it does
not, then no mortgage pool insurance policy will insure against loss sustained
from a default arising from, among other things, fraud or negligence in the
origination or servicing of a mortgage loan, including misrepresentation by the
mortgagor, the originator or persons involved in its origination, or failure to
construct a mortgaged property in accordance with plans and specifications. Many
primary mortgage insurance policies also do not insure against these types of
losses.  A failure of coverage for one of these reasons might result in a breach
of the related seller's representations and, in that case, might result in an
obligation on the part of the seller to repurchase the defaulted mortgage loan
if the breach cannot be cured by the seller.  In addition, no mortgage pool
insurance policy will cover, and many primary mortgage insurance policies do not
cover a claim with respect to a defaulted mortgage loan occurring when the
servicer of the mortgage loan, at the time of default or thereafter, was not
approved by the applicable insurer.

     The original amount of coverage under each mortgage pool insurance policy
will be maintained to the extent provided in the related prospectus supplement
and may be reduced over the life of the related certificates by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the pool insurer upon disposition of all foreclosed properties. The applicable
prospectus supplement may provide that the claims paid will be net of master
servicer expenses and accrued interest, but if it does not, then the amount of
claims paid will include certain expenses incurred by the master servicer as
well as accrued interest on delinquent mortgage loans to the date of payment of
the claim. Accordingly, if aggregate net claims paid under any mortgage pool
insurance policy reach the original policy limit, coverage under that mortgage
pool insurance policy will be exhausted and any further losses will be borne by
the certificateholders.

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

                                      -56-
<PAGE>

supplement. Each special hazard insurance policy will, subject to policy
limitations, protect holders of the related certificates from loss caused by the
application of the coinsurance clause contained in hazard insurance policies and
loss from damage to mortgaged properties caused by certain hazards not insured
against under the standard form of hazard insurance policy in the states where
the mortgaged properties are located or under a flood insurance policy if the
mortgaged property is located in a federally designated flood area. Some of the
losses covered include earthquakes and, to a limited extent, tidal waves and
related water damage and other losses that may be specified in the related
prospectus supplement. See "The Pooling and Servicing Agreement -- Hazard
Insurance." No special hazard insurance policy will cover losses from fraud or
conversion by the trustee or master servicer, war, insurrection, civil war,
certain governmental action, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear or chemical reaction, flood (if
the mortgaged property is located in a federally designated flood area), nuclear
or chemical contamination and certain other risks. The amount of coverage under
any special hazard insurance policy will be specified in the related prospectus
supplement. Each special hazard insurance policy will provide that no claim may
be paid unless hazard and, if applicable, flood insurance on the property
securing the mortgage loan have been kept in force and other protection and
preservation expenses have been paid.

     The applicable prospectus supplement may provide for other payment
coverage, but if it does not, each special hazard policy will insure against
damage to mortgaged properties caused by special hazard losses in an amount
equal to the lesser of:

     .  the cost of repair to or replacement of the damaged property, or

     .  upon transfer of the property to the special hazard insurer, the unpaid
        principal balance of the mortgage loan at the time of acquisition of the
        property by foreclosure or deed in lieu of foreclosure, plus accrued
        interest to the date of claim settlement and certain expenses incurred
        by the master servicer with respect to the property.

If the unpaid principal balance of a mortgage loan, plus accrued interest and
expenses, is paid by the special hazard insurer, the amount of further coverage
under the related special hazard insurance policy will be reduced by that amount
less any net proceeds from the sale of the property.  In adddition, any amount
paid to repair or replace the property will further reduce special hazard
coverage by that amount.

     No special hazard policy will insure against damage that is covered by a
hazard insurance policy or flood insurance policy, if any, maintained by the
mortgagor or the master servicer.

     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.

                                      -57-
<PAGE>

     To the extent specified in the prospectus supplement, the master servicer
may deposit cash, an irrevocable letter of credit, or any other instrument
acceptable to each rating agency rating the certificates of the related series
at the request of the depositor in a special trust account to provide protection
in lieu of or in addition to that provided by a special hazard insurance policy.
The amount of any special hazard insurance policy or of the deposit to the
special trust account relating to the certificates may be reduced so long as the
reduction will not result in a downgrading of the rating of the certificates by
a rating agency rating certificates at the request of the depositor.

Bankruptcy Bonds

     If specified in the related prospectus supplement, a bankruptcy bond to
cover losses resulting from proceedings under the federal Bankruptcy Code with
respect to a mortgage loan will be issued by an insurer named in the prospectus
supplement. Each bankruptcy bond will cover, to the extent specified in the
related prospectus supplement, certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a mortgage
loan or a reduction by the court of the principal amount of a mortgage loan and
will cover certain unpaid interest on the amount of a principal reduction from
the date of the filing of a bankruptcy petition. The required amount of coverage
under each bankruptcy bond will be set forth in the related prospectus
supplement. Coverage under a bankruptcy bond may be canceled or reduced by the
master servicer if the cancellation or reduction would not adversely affect the
then current rating or ratings of the related certificates. See "Legal Aspects
of the Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on
Lenders."

     To the extent specified in the prospectus supplement, the master servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the certificates
of the related series at the request of the depositor in a special trust account
to provide protection in lieu of or in addition to that provided by a bankruptcy
bond. The amount of any bankruptcy bond or of the deposit to the special trust
account relating to the certificates may be reduced so long as the reduction
will not result in a downgrading of the rating of the certificates by a rating
agency rating certificates at the request of the depositor.

Reserve Fund

     If so specified in the related prospectus supplement, credit support with
respect to a series of certificates may be provided by one or more reserve funds
held by the trustee, in trust, for the 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

                                      -58-
<PAGE>

specified in the related prospectus supplement to which the subordinated
certificateholders, if any, would otherwise be entitled; or in any other manner
specified in the related prospectus supplement.

     Any amounts on deposit in the reserve fund and the proceeds of any other
instrument deposited in it upon maturity will be held in cash or will be
invested in permitted investments which will generally consist of short term
investments that convert into cash or mature within a short period of time, have
minimal or no exposure to fluctuations in value as a result of market changes in
prevailing interest rates and are acceptable to each rating agency rating the
applicable series of certificates. To the extent that permitted investments
consist of debt obligations, they will be either registered or exempt from
registration under the Securities Act. If a letter of credit is deposited with
the trustee, the letter of credit will be irrevocable. Generally, any deposited
instrument will name the trustee, in its capacity as trustee for the
certificateholders, as beneficiary and will be issued by an entity acceptable to
each rating agency that rates the certificates at the request of the depositor.
Additional information about the instruments deposited in the reserve funds will
be set forth in the related prospectus supplement.

     Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the reserve fund for distribution to the
certificateholders for the purposes, in the manner and at the times specified in
the related prospectus supplement.

Cross Support

     If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of the related series of certificates. In that case, credit
support may be provided by a cross support feature that requires that
distributions be made on certificates evidencing a beneficial ownership interest
in other asset groups within the same trust fund. The related prospectus
supplement for a series that includes a cross support feature will describe the
material terms of any cross support feature, the impact of the cross support
feature on the interests of the certificateholders and all material applicable
risks.

     If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates 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

                                      -59-
<PAGE>


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.

     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

                                      -60-
<PAGE>

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.

     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.

                                      -61-
<PAGE>

     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

     .    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

                                      -62-
<PAGE>

     .    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.

     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

                                      -63-
<PAGE>

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.

     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;

                                      -64-
<PAGE>

     .    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 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,

                                      -65-
<PAGE>

     .    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;

     .    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

                                      -66-
<PAGE>

          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;

     .    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;

                                      -67-
<PAGE>

     .    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, 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

                                      -68-
<PAGE>

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 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.

                                      -69-
<PAGE>

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 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

                                      -70-
<PAGE>

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 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,

                                      -71-
<PAGE>

     .    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

          .    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

                                      -72-
<PAGE>

     .    tender to the primary insurer good and merchantable title to and
          possession of the mortgaged property.

     The master servicer, on behalf of itself, the trustee and the
certificateholders, will present claims to the insurer under each primary
mortgage insurance policy, and will take any reasonable steps consistent with
its practices regarding comparable mortgage loans and necessary to receive
payment or to permit recovery under the policy with respect to defaulted
mortgage loans. As set forth above, all collections by or on behalf of the
master servicer under any primary mortgage insurance policy and, when the
mortgaged property has not been restored, the hazard insurance policy, are to be
deposited in the Certificate Account, subject to withdrawal as heretofore
described.

     If the mortgaged property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged mortgaged property to a condition sufficient to permit
recovery under the related primary mortgage insurance policy, if any, the master
servicer is not required to expend its own funds to restore the damaged
mortgaged property unless it determines that the restoration will increase the
proceeds to certificateholders on liquidation of the mortgage loan after
reimbursement of the master servicer for its expenses and that the expenses will
be recoverable by it from related insurance proceeds or liquidation proceeds.

     If recovery on a defaulted mortgage loan under any related primary mortgage
insurance policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted mortgage loan is not covered by a primary
mortgage insurance policy, the master servicer will be obligated to follow or
cause to be followed the normal practices and procedures that it deems
appropriate to realize upon the defaulted mortgage loan. If the proceeds of any
liquidation of the mortgaged property securing the defaulted mortgage loan are
less than the principal balance of the mortgage loan plus interest accrued on it
that is payable to certificateholders, the trust fund will realize a loss in the
amount of the difference plus the aggregate of expenses incurred by the master
servicer in connection with the proceedings that are reimbursable under the
pooling and servicing agreement. In the unlikely event that the proceedings
result in a total recovery which is, after reimbursement to the master servicer
of its expenses, in excess of the principal balance of the mortgage loan plus
interest accrued on it that is payable to certificateholders, the master
servicer will be entitled to withdraw or retain from the Certificate Account
amounts representing its normal servicing compensation with respect to the
mortgage loan and, unless otherwise specified in the related prospectus
supplement, amounts representing the balance of the excess, exclusive of any
amount required by law to be forwarded to the related mortgagor, as additional
servicing compensation.

     If the master servicer or its designee recovers insurance proceeds not used
to restore the property which, when added to any related liquidation proceeds
and after deduction of certain expenses reimbursable to the master servicer,
exceed the principal balance of a mortgage loan plus accrued interest that is
payable to certificateholders, the master servicer will be entitled to withdraw
or retain from the Certificate Account amounts representing its normal servicing
compensation with

                                      -73-
<PAGE>

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-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

                                      -74-
<PAGE>

in its ability to initiate foreclosure proceedings. When it is determined,
either by the master servicer or any sub-servicer or HUD, that default was
caused by circumstances beyond the mortgagor's control, the master servicer or
any sub-servicer is expected to make an effort to avoid foreclosure by entering,
if feasible, into one of a number of available forms of forbearance plans with
the mortgagor. These plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with the payments to be made up on or
before the maturity date of the mortgage, or the recasting of payments due under
the mortgage up to or beyond the maturity date. In addition, when a default
caused by circumstances beyond the mortgagor's control is accompanied by certain
other criteria, HUD may provide relief by making payments to the master servicer
or any sub-servicer in partial or full satisfaction of amounts due under the
mortgage loan, which payments are to be repaid by the mortgagor to HUD, or by
accepting assignment of the loan from the master servicer or any sub-servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the mortgage loan and HUD must have rejected any request for
relief from the mortgagor before the master servicer or any sub-servicer may
initiate foreclosure proceedings.

     HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The master servicer of any sub-servicer of each FHA-
insured mortgage loan will be obligated to purchase the debenture issued in
satisfaction of the mortgage loan upon default for an amount equal to the
principal amount of the debenture.

     The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted mortgage loan adjusted to
reimburse the master servicer or sub-servicer for certain costs and expenses and
to deduct certain amounts received or retained by the master servicer or sub-
servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
master servicer or sub-servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for accrued and unpaid interest but in
general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the mortgage loan to HUD, the insurance payment includes full compensation
for interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA-insured mortgage loan, bears interest from a
date 30 days after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the mortgage loan and, upon assignment,
from the date of assignment to the date of payment of the claim, in each case at
the same interest rate as the applicable HUD debenture interest rate as
described above.

     Mortgage loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as 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

                                      -75-
<PAGE>

guarantee of mortgage loans of up to 30 years' duration. However, no mortgage
loan guaranteed by the VA will have an original principal amount greater than
five times the partial VA guaranty for the mortgage loan.

     The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As of
February 1996, the maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,750. The liability on the
guaranty is reduced or increased pro rata with any reduction or increase in the
amount of indebtedness, but in no event will the amount payable on the guaranty
exceed the amount of the original guaranty. The VA may, at its option and
without regard to the guaranty, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.

     With respect to a defaulted VA guaranteed mortgage loan, the master
servicer or sub-servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guaranty is submitted after liquidation
of the mortgaged property.

     The amount payable under the guaranty will be the percentage of the VA-
insured mortgage loan originally guaranteed applied to indebtedness outstanding
as of the applicable date of computation specified in the VA regulations.
Payments under the guaranty will be equal to the unpaid principal amount of the
loan, interest accrued on the unpaid balance of the loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that the amounts have not been recovered through liquidation of the
mortgaged property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.

Servicing and Other Compensation and Payment of Expenses

     The principal servicing compensation to be paid to the master servicer in
respect of its master servicing activities for each series of certificates will
be equal to the percentage per annum described in the related prospectus
supplement 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

                                      -76-
<PAGE>

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 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

                                      -77-
<PAGE>

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 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

                                      -78-
<PAGE>

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.

     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

                                      -79-
<PAGE>

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;

       (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.

                                      -80-
<PAGE>

     In addition, to the extent provided in the related pooling and servicing
agreement, a pooling and servicing agreement may be amended without the consent
of any of the certificateholders to change the manner in which the Certificate
Account is maintained, if the change does not adversely affect the then current
rating of the class or classes of certificates of the series that have been
rated at the request of the depositor. Moreover, the related pooling and
servicing agreement may be amended to modify, eliminate or add to any of its
provisions to the extent necessary to maintain the qualification of the related
trust fund as a REMIC or to avoid or minimize the risk of imposition of any tax
on the REMIC, if a REMIC election is made with respect to the trust fund, or to
comply with any other requirements of the Code, if the trustee has received an
opinion of counsel to the effect that the action is necessary or helpful to
maintain the qualification, avoid or minimize that risk or comply with those
requirements, as applicable.

     The applicable prospectus supplement may specify other amendment
provisions, but if it does not, then each pooling and servicing agreement may
also be amended by the depositor, the master servicer and the trustee with the
consent of holders of certificates of the series evidencing a majority in
interest of each class affected thereby for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the pooling
and servicing agreement or of modifying in any manner the rights of the holders
of the related certificates. However, no amendment may

       (a) reduce in any manner the amount of, or delay the timing of, payments
     received on Mortgage Assets that are required to be distributed on any
     certificate without the consent of the holder of the certificate,

       (b) adversely affect in any material respect the interests of the holders
     of any class of certificates in a manner other than as described in (a),
     without the consent of the holders of certificates of the class evidencing,
     as to the class, percentage interests aggregating 66%, or

       (c) reduce the aforesaid percentage of certificates of any class of
     holders that is required to consent to the amendment without the consent of
     the holders of all certificates of the class covered by the pooling and
     servicing agreement then outstanding.

If a REMIC election is made with respect to a trust fund, the trustee will not
be entitled to consent to an amendment to the related pooling and servicing
agreement without having first received an opinion of counsel to the effect that
the amendment will not cause the trust fund to fail to qualify as a REMIC.

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

                                      -81-
<PAGE>

     .    the final payment or other liquidation of the last of the Mortgage
          Assets subject to it or the disposition of all property acquired upon
          foreclosure of the Mortgage Assets remaining in the trust fund and

     .    the purchase by the master servicer or, if REMIC treatment has been
          elected and if specified in the related prospectus supplement, by the
          holder of the residual interest in the REMIC, from the related trust
          fund of all of the remaining Mortgage Assets and all property acquired
          in respect of the Mortgage Assets.

See "Material Federal Income Tax Consequences" in this prospectus and in the
related prospectus supplement.

     Any purchase of Mortgage Assets and property acquired in respect of
Mortgage Assets evidenced by a series of certificates will be made at the option
of the master servicer or the party specified in the related prospectus
supplement, including the holder of the REMIC residual interest, at a price, and
in accordance with the procedures, specified in the related prospectus
supplement. The exercise of that right will effect early retirement of the
certificates of that series, but the right of the master servicer or the other
party or, if applicable, the holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Mortgage Assets
being less than the percentage specified in the related prospectus supplement of
the aggregate principal balance of the Mortgage Assets at the cut-off date for
the series. The foregoing is subject to the provision that if a REMIC election
is made with respect to a trust fund, any repurchase pursuant to the second
bulleted item above will be made only in connection with a "qualified
liquidation" of the REMIC for federal tax purposes.

The Trustee

     The trustee under each pooling and servicing agreement will be named in the
applicable prospectus supplement. The commercial bank or trust company serving
as trustee may have normal banking relationships with the depositor, the master
servicer and any of their respective affiliates.


                      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.

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<PAGE>

General

     The mortgage loans will be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not before the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.

     Cooperatives.  Certain of the mortgage loans may be cooperative loans. The
cooperative owns all the real property that comprises the project, including the
land, separate dwelling units and all common areas. The cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
cooperative or underlying land or both, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the cooperative's
apartment building. The interest of the occupant under proprietary leases or
occupancy agreements to which that cooperative is a party are generally
subordinate to the interest of the holder of the blanket mortgage in that
building. If the cooperative is unable to meet the payment obligations arising
under its blanket mortgage, the mortgagee holding the blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements. In addition, the blanket mortgage on a cooperative may
provide financing in the form of a mortgage that does not fully amortize with a
significant 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.

                                      -83-
<PAGE>

     The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing the tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying rights is financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.

Foreclosure/Repossession

     Deed of Trust.  Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, such as California, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of any notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest of record in the real property,
including any junior lien holders. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, including California, published for a specified period of
time in one or more newspapers. In addition, these notice provisions require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the property. In California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.

     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

                                      -84-
<PAGE>

property. Delays in completion of the foreclosure may occasionally result from
difficulties in locating necessary parties. Judicial foreclosure proceedings are
often not contested by any of the parties. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time consuming. After the completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints a
referee or other court officer to conduct the sale of the property. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated,
a notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.

     Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making repairs at its own expense necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale of
the property may not equal the lender's investment in the property.

     Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers 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

                                      -85-
<PAGE>

occupancy agreement generally permits the cooperative to terminate the lease or
agreement if an obligor fails to make payments or defaults in the performance of
covenants required under it. Typically, the lender and the cooperative enter
into a recognition agreement, which establishes the rights and obligations of
both parties upon a default by the tenant-stockholder on its obligations under
the proprietary lease or occupancy agreement. A default by the tenant-
stockholder under the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the lender and the
tenant-stockholder.

     The recognition agreement generally provides that, if the tenant-
stockholder has defaulted under the proprietary lease or occupancy agreement,
the cooperative will take no action to terminate the lease or agreement until
the lender has been provided with an opportunity to cure the default. The
recognition agreement typically provides that if the proprietary lease or
occupancy agreement is terminated, the cooperative will recognize the lender's
lien against proceeds from the sale of the cooperative apartment, subject,
however, to the cooperative's right to sums due under the proprietary lease or
occupancy agreement. The total amount owed to the cooperative by the tenant-
stockholder, which the lender generally cannot restrict and does not monitor,
could reduce the value of the collateral below the outstanding principal balance
of the cooperative loan and accrued and unpaid interest on it.

     Recognition agreements also provide that upon foreclosure of a cooperative
loan, the lender must obtain the approval or consent of the cooperative as
required by the proprietary lease before transferring the cooperative shares or
assigning the proprietary lease. Generally, the lender is not limited in any
rights it may have to dispossess the tenant-stockholders.

     In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, 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."

                                      -86-
<PAGE>

     In the case of foreclosure on a building converted from a rental building
to a building owned by a cooperative under a non-eviction plan, some states
require that a purchaser at a foreclosure sale take the property subject to rent
control and rent stabilization laws that apply to certain tenants who elected to
remain in the building but who did not purchase shares in the cooperative when
the building was so converted.

Rights of Redemption

     In some states after a sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale, or
of any purchaser from the lender after judicial foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.

Anti-Deficiency Legislation and Other Limitations on Lenders

     Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or a sale under a deed of trust. A deficiency judgment is a personal
judgment against the borrower equal in most cases to the difference between the
amount due to the lender and the current fair market value of the property at
the time of the foreclosure sale. As a result of these prohibitions, it is
anticipated that in most instances the master servicer 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.

                                      -87-
<PAGE>

     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.

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

                                      -88-
<PAGE>

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.

     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

                                      -89-
<PAGE>

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.

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

                                      -90-
<PAGE>

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.


                   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.

                                      -91-
<PAGE>

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 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.

                                      -92-
<PAGE>

     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 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

                                      -93-
<PAGE>

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 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

                                      -94-
<PAGE>

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 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

                                      -95-
<PAGE>

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.

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.

                                      -96-
<PAGE>

     Although current authority is not entirely clear, a Stripped Bond
Certificate should be treated as an interest in mortgage loans issued on the day
the certificate is purchased for purposes of calculating any OID. Generally, if
the discount on a mortgage loan is larger than a de minimis amount, as
calculated for purposes of the OID rules, a purchaser of the certificate will be
required to accrue the discount under the OID rules of the Code. See " -- Non-
REMIC Certificates" and " -- Single Class of Certificates -- Original Issue
Discount." However, a purchaser of a Stripped Bond Certificate will be required
to account for any discount on the mortgage loans as market discount rather than
OID if either the amount of OID with respect to the mortgage loan is treated as
zero under the OID de minimis rule when the certificate was stripped or no more
than 100 basis points (including any amount of servicing fees in excess of
reasonable servicing fees) is stripped off of the trust fund's mortgage loans.

     The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each mortgage loan. However, based on the recent IRS
guidance, it appears that all payments from a mortgage loan underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from the
mortgage loan would be included in the mortgage loan's stated redemption price
at maturity for purposes of calculating income on the Stripped Coupon
Certificate under the OID rules of the Code.

     Based on current authority it is unclear under what circumstances, if any,
the prepayment of mortgage loans will give rise to a loss to the holder of a
Stripped Bond Certificate purchased at a premium or a Stripped Coupon
Certificate. If the certificate is treated as a single instrument, rather than
an interest in discrete mortgage loans, and the effect of prepayments is taken
into account in computing yield with respect to the certificate, it appears that
no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate. However, if
a certificate is treated as an interest in discrete mortgage loans, or if no
prepayment assumption is used, then when a mortgage loan is prepaid, any
certificate so treated should be able to recognize a loss equal to the portion
of the unrecovered premium of the certificate that is allocable to the mortgage
loan. In addition, amounts received in redemption for debt instruments issued by
natural persons purchased or issued after June 8, 1997 are treated as received
in exchange therefore (i.e., treated the same as obligations issued by
corporations). This change could affect the character of any loss.

     Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
encouraged to consult with their own tax advisors regarding the proper treatment
of these certificates for federal income tax purposes.

     2.   Certificates Representing Interests in Loans Other Than 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

                                      -97-
<PAGE>

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 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."

                                      -98-
<PAGE>

     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.

     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

                                      -99-
<PAGE>

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 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

                                     -100-
<PAGE>

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 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

                                     -101-
<PAGE>

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. 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).

                                     -102-
<PAGE>

     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
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.

                                     -103-
<PAGE>

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
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,

                                     -104-
<PAGE>

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 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

                                     -105-
<PAGE>

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.

     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,

                                     -106-
<PAGE>

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 measured 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.

     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

                                     -107-
<PAGE>

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 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

                                     -108-
<PAGE>

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 Regular Certificate, and reduced (but not below zero)
by payments included in the stated redemption price at maturity previously
received by the seller and by any amortized premium. Similarly, a holder who
receives a payment that is part of the stated redemption price at maturity of a
Regular Certificate will recognize gain equal to the excess, if any, of the
amount of the payment over the holder's adjusted basis in the Regular
Certificate. A Regular Certificateholder who receives a final payment that is
less than the holder's adjusted basis in the Regular Certificate will generally
recognize a loss. Except as provided in the following paragraph and as provided
under "Market Discount," any gain or loss will be capital gain or loss, provided
that the Regular Certificate is held as a "capital asset" (generally, property
held for investment) within the meaning of Code Section 1221.

     Gain from the sale or other disposition of a Regular Certificate that might
otherwise be capital gain will be treated as ordinary income to the extent that
the gain does not exceed the excess, if any, of the amount that would have been
includible in the holder's income with respect to the Regular Certificate had
income accrued on it at a rate equal to 110% of the AFR as defined in Code
Section 1274(d) determined as of the date of purchase of the Regular
Certificate, over the amount actually includible in the holder's income.

                                     -109-
<PAGE>

     The Regular Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Regular Certificate by a bank or a thrift institution to which this section
applies will be ordinary income or loss.

     The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.

     Accrued Interest Certificates. Certain of the Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between distribution dates but that ends
before each distribution date. The period between the Closing Date for Payment
Lag Certificates and their first distribution date may or may not exceed that
interval. Purchasers of Payment Lag Certificates for which the period between
the Closing Date and the first distribution date does not exceed that interval
could pay upon purchase of the Regular Certificates accrued interest in excess
of the accrued interest that would be paid if the interest paid on the
distribution date were interest accrued from distribution date to distribution
date. If a portion of the initial purchase price of a Regular Certificate is
allocable to Pre-issuance Accrued Interest and the Regular Certificate provides
for a payment of stated interest on the first payment date (and the first
payment date is within one year of the issue date) that equals or exceeds the
amount of the Pre-issuance Accrued Interest, then the Regular Certificates issue
price may be computed by subtracting from the issue price the amount of Pre-
issuance Accrued Interest, rather than as an amount payable on the Regular
Certificate. However, it is unclear under this method how the OID Regulations
treat interest on Payment Lag Certificates. Therefore, in the case of a Payment
Lag Certificate, the trust fund intends to include accrued interest in the issue
price and report interest payments made on the first distribution date as
interest to the extent the payments represent interest for the number of days
that the certificateholder has held the Payment Lag Certificate during the first
accrual period.

     Investors are encouraged to consult their own tax advisors concerning the
treatment for federal income tax purposes of Payment Lag Certificates.

     Non-Interest Expenses of the REMIC. Under the temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a portion
of the REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those Regular Certificateholders that are "pass-
through interest holders." certificateholders that are pass-through interest
holders are encouraged to consult their own tax advisors about the impact of
these rules on an investment in the Regular Certificates. See "Residual
Certificates -- Pass-Through of Non-Interest Expenses of the REMIC."

                                     -110-
<PAGE>

     Treatment of Realized Losses. Although not entirely clear, it appears that
holders of Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of the certificates becoming wholly or partially worthless, and that,
in general, holders of certificates that are not corporations should be allowed
to deduct as a short-term capital loss any loss sustained during the taxable
year on account of the certificates becoming wholly worthless. Although the
matter is unclear, non-corporate holders of certificates may be allowed a bad
debt deduction at the time that the principal balance of a certificate is
reduced to reflect realized losses resulting from any liquidated mortgage loans.
The IRS, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all mortgage
loans remaining in the related trust fund have been liquidated or the
certificates of the related series have been otherwise retired. Potential
investors and Holders of the certificates are encouraged to consult their own
tax advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to their certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income.

     Non-U.S. Persons. Generally, payments of interest, including any payment
with respect to accrued OID, on the Regular Certificates to a Regular
Certificateholder who is not a U.S. Person and is not engaged in a trade or
business within the United States will not be subject to federal withholding tax
if the Regular Certificateholder complies with certain identification
requirements, including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that the Regular
Certificateholder is a foreign person and providing the name and address of the
Regular Certificateholder. If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued OID, the holder may be subject to a 30% withholding tax, subject to
reduction under any applicable tax treaty.

     Further, it appears that a Regular Certificate would not be included in the
estate of a non-resident alien individual and would not be subject to United
States estate taxes. However, Certificateholders who are non-resident alien
individuals are encouraged to consult their tax advisors concerning this
question.

     It is recommended that Regular Certificateholders who are not U.S. Persons
and persons related to them not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders not
acquire any Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.

     As previously mentioned, the New Withholding Regulations were published in
the Federal Register on October 14, 1997 and generally will be effective for
payments made after December 31, 2000, subject to certain transition rules. The
discussion set forth above does not take the new withholding regulations into
account. Prospective Non-U.S. Persons who own Regular Certificates are strongly
encouraged to consult their own tax advisor with respect to the New Withholding
Regulations.

                                     -111-
<PAGE>

     Information Reporting and Backup Withholding. The master servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a Regular Certificateholder at any time
during the year, any information deemed appropriate to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make the information available to beneficial owners or financial
intermediaries that hold the Regular Certificates on behalf of beneficial
owners. If a holder, beneficial owner, financial intermediary or other recipient
of a payment on behalf of a beneficial owner fails to supply a certified
taxpayer identification number or if the Secretary of the Treasury determines
that the person has not reported all interest and dividend income required to be
shown on its federal income tax return, 31% backup withholding may be required
with respect to any payments. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against a recipient's
federal income tax liability. In addition, prospective investors are encouraged
to consult their tax advisors with respect to the New Withholding Regulations.

b.   Residual Certificates

     Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See " -- Prohibited
Transactions and Other Taxes." Instead, each original holder of a Residual
Certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which it owns any Residual Certificates. The taxable income of the REMIC
for each day will be determined by allocating the taxable income of the REMIC
for each calendar quarter ratably to each day in the quarter. An original
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding Residual Certificates that the holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the holders of Residual Certificates without
regard to the timing or amounts of cash distributions by the REMIC. Ordinary
income derived from Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the certificates or as debt
instruments issued by the REMIC.

     A Residual Certificateholder may be required to include taxable income from
the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate that sort of mismatching
of income and cash distributions (that is, "phantom income"). This mismatching
may be caused by the use of certain required tax accounting methods by the
REMIC, variations in the prepayment rate of the underlying mortgage loans and
certain other factors. Depending upon the structure of a particular transaction,
the aforementioned factors may 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.

                                     -112-
<PAGE>

     A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that the Residual Certificateholder owns the Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce or increase the income of a subsequent holder of a
Residual Certificate that purchased the Residual Certificate at a price greater
than or less than the adjusted basis the Residual Certificate would have in the
hands of an original Residual Certificateholder. See " -- Sale or Exchange of
Residual Certificates." It is not clear, however, whether these adjustments will
in fact be permitted or required and, if so, how they would be made. The REMIC
Regulations do not provide for these adjustments.

     Taxable Income of the REMIC Attributable to Residual Interests. Taxable
Income of the REMIC Attributable to Residual Interests. The taxable income of
the REMIC will reflect a netting of the income from the mortgage loans and the
REMIC's other assets and the deductions allowed to the REMIC for interest and
OID on the Regular Certificates and, except as described under " -- Regular
Certificates -- Non-Interest Expenses of the REMIC," other expenses. REMIC
taxable income is generally determined in the same manner as the taxable income
of an individual using the accrual method of accounting, except that the
limitations on deductibility of investment interest expense and expenses for the
production of income do not apply, all bad loans will be deductible as business
bad debts, and the limitation on the deductibility of interest and expenses
related to tax-exempt income is more restrictive than with respect to
individual. The REMIC's gross income includes interest, original issue discount
income, and market discount income, if any, on the mortgage loans, as well as,
income earned from temporary investments on reverse assets, reduced by the
amortization of any premium on the mortgage loans. In addition, a Residual
Certificateholder will recognize additional income due to the allocation of
realized losses to the Regular Certificates due to defaults, delinquencies and
realized losses on the mortgage loans. The timing of the inclusion of the income
by Residual Certificateholders may differ from the time the actual loss is
allocated to the Regular Certificates. The REMIC's deductions include interest
and original issue discount expense on the Regular Certificates, servicing fees
on the mortgage loans, other administrative expenses of the REMIC and realized
losses on the mortgage loans. The requirement that Residual Certificateholders
report their pro rata share of taxable income or net loss of the REMIC will
continue until there are no certificates of any class of the related series
outstanding.

     For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the Regular Certificates and the Residual Certificates, or, if a class of
certificates is not sold initially, its fair market value. The aggregate basis
will be allocated among the mortgage loans and other assets of the REMIC in
proportion to their respective fair market value. A mortgage loan will be deemed
to have been 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

                                     -113-
<PAGE>

Certificates. The REMIC expects to elect under Code Section 171 to amortize any
premium on the mortgage loans. Premium on any mortgage loan to which the
election applies would be amortized under a constant yield method. It is not
clear whether the yield of a mortgage loan would be calculated for this purpose
based on scheduled payments or taking account of the Prepayment Assumption.
Additionally, the election would not apply to the yield with respect to any
underlying mortgage loan originated on or before September 27, 1985. Instead,
premium with respect to that mortgage loan would be allocated among the
principal payments on the mortgage loan and would be deductible by the REMIC as
those payments become due.

     The REMIC will be allowed a deduction for interest and OID on the Regular
Certificates. The amount and method of accrual of OID will be calculated for
this purpose in the same manner as described above with respect to Regular
Certificates except that the 0.25% per annum de minimis rule and adjustments for
subsequent holders will not apply.

     A Residual Certificateholder will not be permitted to amortize the cost of
the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the Residual Certificates will be added to the issue
price of the Regular Certificates in determining the REMIC's initial basis in
its assets. See " -- Sale or Exchange of Residual Certificates." For a
discussion of possible adjustments to income of a subsequent holder of a
Residual Certificate to reflect any difference between the actual cost of the
Residual Certificate to the holder and the adjusted basis the Residual
Certificate would have in the hands of an original Residual Certificateholder,
see " -- Allocation of the Income of the REMIC to the Residual Certificates."

     Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. The net loss would be
allocated among the Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any Residual Certificate will
not be deductible by the holder to the extent that the net loss exceeds the
holder's adjusted basis in the Residual Certificate. Any net loss that is not
currently deductible due to this limitation may only be used by the Residual
Certificateholder to offset its share of the REMIC's taxable income in future
periods, but not otherwise. The ability of Residual Certificateholders that are
individuals or closely held corporations to deduct net losses may be subject to
additional limitations under the Code.

     Mark to Market Rules. A Residual Certificate acquired after January 3, 1995
cannot be marked-to-market.

     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

                                     -114-
<PAGE>

accruing to each certificateholder on that day. In general terms, a single class
REMIC is one that either would qualify, under existing Treasury regulations, as
a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to a grantor trust and is structured with the
principal purpose of avoiding the single class REMIC rules. The applicable
prospectus supplement may apportion expenses to the Regular Certificates, but if
it does not, then the expenses of the REMIC will be allocated to holders of the
related Residual Certificates in their entirety and not to holders of the
related Regular Certificates.

     In the case of individuals, or trusts, estates or other persons that
compute their income in the same manner as individuals, who own an interest in a
Regular Certificate or a Residual Certificate directly or through a pass-through
interest holder that is required to pass miscellaneous itemized deductions
through to its owners or beneficiaries (e.g. a partnership, an S corporation or
a grantor trust), the trust expenses will be deductible under Code Section 67
only to the extent that those expenses, plus other "miscellaneous itemized
deductions" of the individual, exceed 2% of the individual's adjusted gross
income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the lesser
of 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by Residual Certificateholders who are subject to the limitations of
either Code Section 67 or Code Section 68 may be substantial. Further, holders,
other than corporations, that are subject to the alternative minimum tax may not
deduct miscellaneous itemized deductions in determining their alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS the holder's allocable share, if any, of the
REMIC's non-interest expenses. The term "pass-through interest holder" generally
refers to individuals, entities taxed as individuals and certain pass-through
entities, but does not include real estate investment trusts. Residual
Certificateholders that are pass-through interest holders are encouraged to
consult their own tax advisors about the impact of these rules on an investment
in the Residual Certificates.

     Excess Inclusions. A portion of the income on a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
generally will be subject to federal income tax in all events. Thus, for
example, an excess inclusion may not be offset by any unrelated losses,
deductions or loss carryovers of a Residual Certificateholder; will be treated
as "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

                                     -115-
<PAGE>

of the Residual Certificateholder for that calendar quarter from its Residual
Certificate over the sum of the "daily accruals" for all days during the
calendar quarter on which the Residual Certificateholder holds the Residual
Certificate. For this purpose, the daily accruals with respect to a Residual
Certificate are determined by allocating to each day in the calendar quarter its
ratable portion of the product of the "adjusted issue price" of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purpose, the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate, increased by the amount of daily accruals for all prior quarters,
and decreased (but not below zero) by the aggregate amount of payments made on
the Residual Certificate before the beginning of the same quarter. The "federal
long-term rate" is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.

     In the case of any Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to the Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of the trust in
proportion to the dividends received by the shareholders from the trust, and any
amount so allocated will be treated as an excess inclusion with respect to a
Residual Certificate as if held directly by the shareholder. Regulated
investment companies, common trust funds and certain cooperatives are subject to
similar rules.

     Payments. Any distribution made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in the
Residual Certificate. To the extent a distribution exceeds the adjusted basis,
it will be treated as gain from the sale of the Residual Certificate.

     Sale or Exchange of Residual Certificates. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the Residual Certificate, except that the recognition of loss may be
limited under the "wash sale" rules. A holder's adjusted basis in a Residual
Certificate generally equals the cost of the Residual Certificate to the
Residual Certificateholder, increased by the taxable income of the REMIC that
was included in the income of the Residual Certificateholder with respect to the
Residual Certificate, and decreased (but not below zero) by the net losses that
have been allowed as deductions to the Residual 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

                                     -116-
<PAGE>

residual interest in another REMIC or similar interest in a "taxable mortgage
pool" (as defined in Code Section 7701(i)) during the period beginning six
months before, and ending six months after, the date of the sale, the sale will
be subject to the "wash sale" rules of Code Section 1091. In that event, any
loss realized by the Residual Certificateholder on the sale will not be
deductible, but, instead, will increase the Residual Certificateholder's
adjusted basis in the newly acquired asset.

Prohibited Transactions and Other Taxes

     The Code imposes a Prohibited Transactions Tax on REMICs equal to 100
percent of the net income derived from "prohibited transactions" and prohibits
deducting any loss with respect to prohibited transactions. In general, subject
to certain specified exceptions, a prohibited transaction means the disposition
of a mortgage loan, the receipt of income from a source other than a mortgage
loan or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the mortgage loans for temporary investment pending distribution on the
certificates. It is not anticipated that the trust fund for any series of
certificates will engage in any prohibited transactions in which it would
recognize a material amount of net income.

     In addition, certain contributions to a trust fund as to which an election
has been made to treat the trust fund as a REMIC made after the day on which the
trust fund issues all of its interest could result in the imposition of a
Contributions Tax on the trust fund equal to 100% of the value of the
contributed property. No trust fund for any series of certificates will accept
contributions that would subject it to a Contributions Tax.

     In addition, a trust fund as to which an election has been made to treat
the trust fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means income from foreclosure property
other than qualifying income for a real estate investment trust.

     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.

                                     -117-
<PAGE>

Liquidation and Termination

     If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which the adoption is deemed to occur, and
sells all of its assets, other than cash, within a 90-day period beginning on
that date, the REMIC will not be subject to any Prohibited Transactions Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash, other than the amounts retained to meet claims, to
holders of Regular and Residual Certificates within the 90-day period.

     The REMIC will terminate shortly following the retirement of the Regular
Certificates. If a Residual Certificateholder's adjusted basis in the Residual
Certificate exceeds the amount of cash distributed to the Residual
Certificateholder in final liquidation of its interest, then it would appear
that the Residual Certificateholder would be entitled to a loss equal to the
amount of the excess. It is unclear whether the loss, if allowed, will be a
capital loss or an ordinary loss.

Administrative Matters

     Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the Residual
Certificateholders will be treated as the partners if there is more than one
holder of the Residual Certificate. Certain information will be furnished
quarterly to each Residual Certificateholder who held a Residual Certificate on
any day in the previous calendar quarter.

     Each Residual Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the Residual
Certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC level. The REMIC does not intend to register as a tax
shelter pursuant to Code Section 6111 because it is not anticipated that the
REMIC will have a net loss for any of 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."

                                     -118-
<PAGE>

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 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.

                                     -119-
<PAGE>

     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. An "electing large
partnership" is taxable on excess inclusion income as if all of its partners
were disqualified organizations. For these purposes, an "electing large
partnership" means any partnership having more than 100 members during the
preceding tax year, other than some service partnerships and commodity pools,
which elects to apply simplified reporting provisions under the Code.

     To comply with these rules, the pooling and servicing agreement will
provide that no record or beneficial ownership interest in a Residual
Certificate may be purchased, transferred or sold, directly or indirectly,
without the express written consent of the master servicer. The master servicer
will grant consent to a proposed transfer only if it receives an affidavit from
the proposed transferee to the effect that it is not a disqualified organization
and is not acquiring the Residual Certificate as a nominee or agent for a
disqualified organization and a covenant by the proposed transferee to the
effect that the proposed transferee agrees to be bound by and to abide by the
transfer restrictions applicable to the Residual Certificate.

     Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a "U.S. Person," as defined in the following 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

                                     -120-
<PAGE>

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.

     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.

                                     -121-
<PAGE>

                             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
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.

                                     -122-
<PAGE>

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 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

                                     -123-
<PAGE>

          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
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.

                                     -124-
<PAGE>

     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.

     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;

                                     -125-
<PAGE>

     .    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

     .    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,

                                     -126-
<PAGE>

     .    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 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.

                                     -127-
<PAGE>

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, 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

                                     -128-
<PAGE>

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 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;

                                     -129-
<PAGE>

     .    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.

     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.

                                     -130-
<PAGE>

                             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.

     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

                                     -131-
<PAGE>

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.

                                     -132-
<PAGE>

                               GLOSSARY OF TERMS


     1986 Act -- The Tax Reform Act of 1986.

     Amortizable Bond Premium Regulations -- Final regulations issued by the IRS
on December 30, 1997 which deal with amortizable bond premium.

     Asset Conservation Act -- The Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, which took effect on September 30,
1996.

     Available Funds -- The amount on deposit in the related Certificate Account
on the distribution date, net of related fees and expenses payable by the
related trust fund, other than amounts to be held in the Certificate Account for
distribution on future distribution dates.

     CERCLA-- The Comprehensive Environmental Response, Compensation and
Liability Act of 1980, under which the Environmental Protection Agency may
impose a lien on property where the Environmental Protection Agency has incurred
clean-up costs.

     Certificate Account -- An account established and maintained by the master
servicer in the name of the trustee for the benefit of the holders of each
series of certificates, for the disbursement of payments on the mortgage loans
evidenced by each series of certificates.

     Code -- The Internal Revenue Code of 1986, as amended.

     Contingent Regulations -- Final regulations issued by the IRS in June 1996
governing the calculation of OID on instruments having contingent interest
payments.

     Contributions Tax -- A tax on a trust fund equal to 100% of the value of
the contributed property.

     Deferred Interest -- Interest deferred due to negative amortization.

     DIDMCA -- The Depository Institutions Deregulation and Monetary Control Act
of 1980.

     DOL -- The U.S. Department of Labor.

     Eleventh District -- The Eleventh Federal Home Loan Bank District.

     ERISA -- The Employee Retirement Income Security Act of 1974, as amended.

     Exchange Act -- The Securities Exchange Act of 1934, as amended.

                                     -133-
<PAGE>

     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.

                                     -134-
<PAGE>

     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.

                                     -135-
<PAGE>

     Restricted Group -- Any one or more of the seller, the underwriter, the
trustee, the master servicer, any servicer, any insurer with respect to the
mortgage loans, any obligor with respect to mortgage loans included in the trust
fund constituting more than five percent of the aggregate unamortized principal
balance of the assets in the trust fund, or any affiliate of those parties.

     Retained Interest -- For a Mortgage Asset, the amount or percentage
specified in the related prospectus supplement which is not sold by the
depositor or seller of the Mortgage Asset and, therefore, is not included in the
trust for the related series.

     Securities Act -- The Securities Act of 1933, as amended.

     Single Family Certificates -- Certificates that represent interests in a
mortgage pool consisting of mortgage loans representing loans for single family
homes.

     SMMEA -- The Secondary Mortgage Market Enhancement Act of 1984.

     Stripped Arm Obligations --  OID on certificates attributable to adjustable
rate mortgage loans.

     Stripped Bond Certificates -- A class of certificates that represents the
right to principal and interest, or principal only, on all or a portion of the
mortgage loans.

     Stripped Coupon Certificates -- A class of certificates that represents the
right to some or all of the interest on all or a portion of the mortgage loans,
including mortgage loans underlying a Stripped Bond Certificate.

     Subsequent mortgage loans -- Additional mortgage loans purchased by the
depositor after the date on which the related certificates are issued.

     Super-Premium Certificates -- Regular Certificates  issued at prices
significantly exceeding their principal amounts or notional principal balances.

     U.S. Person -- a person who is;

       .  a citizen or resident of the United States,

       .  a corporation or a partnership, including an entity treated as a
          corporation or partnership for U.S. federal income tax purposes, which
          is organized in or created under the laws of the United States or any
          State thereof or the District of Columbia, unless in the case of a
          partnership, Treasury Regulations provide otherwise,

                                     -136-
<PAGE>

       .  an estate the income of which, from sources outside the United States,
          is includible in gross income for federal income tax purposes
          regardless of its connection with the conduct of a trade or business
          within the United States,

       .  a trust if a court within the United States is able to exercise
          primary supervision over the administration of the trust and one or
          more United States persons have authority to control all substantial
          decisions of the trust, or

       .  a trust that can elect to be treated as a U.S. Person.

     Underwriter Exemptions -- Administrative exemptions, granted by the DOL to
certain underwriters, from certain of the prohibited transaction rules of ERISA
and the related excise tax provisions of Section 4975 of the Code with respect
to the initial purchase, the holding and the subsequent resale by Plans of
certificates in pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of such
exemptions.

                                     -137-
<PAGE>


                 [LOGO OF FIRST HORIZON HOME LOAN CORPORATION]

                          (Seller and Master Servicer)

                First Horizon Mortgage Pass-Through Trust 2000-5
                                    (Issuer)

                                  $181,719,100
                                 (Approximate)

               Mortgage Pass-Through Certificates, Series 2000-5

                         -----------------------------

                             PROSPECTUS SUPPLEMENT

                         -----------------------------

                         Banc of America Securities LLC

                     First Tennessee Securities Corporation

   Dealers will deliver  a prospectus supplement and  prospectus when acting
      as underwriters  of  the  certificates and  with  respect  to their
         unsold allotments or subscriptions.  In addition, all dealers
            selling the certificates will  be required to deliver a
               prospectus   supplement   and  prospectus   until
                  February 19, 2001.

                               November 21, 2000


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