<PAGE>
PROSPECTUS SUPPLEMENT DATED MARCH 23, 1999
(TO PROSPECTUS DATED MARCH 23, 1999)
$275,556,000
BANC ONE FINANCIAL SERVICES HOME EQUITY LOAN TRUST 1999-1,
HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1999-1
BANC ONE FINANCIAL SERVICES, INC.
SELLER
BANK ONE, INDIANA, NATIONAL ASSOCIATION
MASTER SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
o Before you decide to invest in any certificates, read this prospectus
supplement and the prospectus, especially the risk factors beginning on
page S-10 herein and on page 14 of the prospectus.
o The Class A Certificates represent interests in the trust only and will
not represent interests in or obligations of any other entity.
o This prospectus supplement may be used to offer and sell the Class A
Certificates only if accompanied by the prospectus.
o Credit enhancement will consist of excess spread, overcollateralization
and an irrevocable and unconditional certificate guaranty insurance
policy issued by Ambac Assurance Corporation. The policy will guarantee
timely payment of interest and certain payments of principal on the
Class A Certificates.
[LOGO]
o The trust will issue the following certificates which are offered hereby:
<TABLE>
<CAPTION>
INITIAL PRICE TO UNDERWRITING PROCEEDS TO
CLASS PRINCIPAL BALANCE(1) CERTIFICATE RATE PUBLIC(2) DISCOUNT DEPOSITOR(3)
- ----------------------- -------------------- ---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Class A-1.............. $185,000,000 6.06% 99.9924746% .2% 99.7924746%
Class A-2.............. $ 30,500,000 6.30% 99.9864305% .325% 99.6614305%
Class A-3.............. $ 31,938,000 6.60% 99.9832831% .375% 99.6082831%
Class A-4.............. $ 28,118,000 6.47% 99.9965568% .375% 99.6215568%
Total.................. $275,556,000 $275,531,632 $694,335 $274,837,297
</TABLE>
(1) Plus or minus 5%.
(2) Plus accrued interest, if any, from March 1, 1999.
(3) Before deducting expenses, estimated to be approximately $761,590.
The Class A Certificates represent interests in a pool consisting of fixed
rate, closed-end home equity loans. The certificates consist of four classes of
Class A Certificates offered by this prospectus supplement and one class of
Class R Certificates not offered by this prospectus supplement. Monthly
distributions on the Class A Certificates are scheduled to be paid on the 25th
day of each month or, if the 25th is not a business day, on the next business
day, beginning in April 1999.
Merrill Lynch, Pierce, Fenner & Smith Incorporated and First Chicago
Capital Markets, Inc. are acting as
underwriters for the issuance of the Class A Certificates. Delivery of the
Class A Certificates is expected to be made in
book entry form only through The Depository Trust Company, Cedelbank and the
Euroclear System on or about
March 31, 1999.
------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE
OR COMPLETE. IT IS ILLEGAL FOR ANYONE TO
TELL YOU OTHERWISE.
------------------------------
MERRILL LYNCH & CO. FIRST CHICAGO CAPITAL MARKETS, INC.
------------------------------
<PAGE>
Important notice about information in this prospectus supplement and
the accompanying prospectus
We tell you about the certificates in two separate documents that
progressively provide more detail: (a) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of certificates, including your series; and (b) this prospectus supplement,
which describes the specific terms of your series of certificates and may be
different from the information in the prospectus.
If the terms of your series of certificates vary between this
prospectus supplement and the prospectus, you should rely on the information in
this prospectus supplement.
We include cross-references in this prospectus supplement and in 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 can be found.
You can find a listing of the pages where capitalized terms used in
this prospectus supplement are defined under the caption "Index of Principal
Definitions" beginning on page S-3 in this prospectus supplement and under the
caption "Index of Principal Definitions" beginning on page 104 in the
accompanying prospectus.
This prospectus supplement and the attached prospectus may be used by
First Chicago Capital Markets, Inc. and its successors in connection with offers
and sales related to market-making transactions in the certificates offered by
this prospectus supplement and the prospectus. First Chicago Capital Markets,
Inc. may act as principal or agent in such transactions. Such sales will be made
at prices related to prevailing market prices at the time of sale.
The depositor's principal offices are located at 250 Vesey Street,
World Financial Center, North Tower, New York, New York 10281 and its telephone
number is (212) 449-1000.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY.............................................S-4
RISK FACTORS.......................................S-10
THE SELLER, SERVICER AND THE MASTER SERVICER.......S-15
General.......................................S-15
The Master Servicer...........................S-15
BANK ONE Year 2000 Readiness..................S-15
The Seller and Servicer.......................S-16
Loan Origination..........................S-16
Credit and Underwriting Guidelines........S-16
Income Verification.......................S-17
Specific Underwriting Criteria............S-18
Quality Control and Audit Procedures......S-19
Servicing and Collection Procedures.......S-20
Delinquency, Foreclosure and Loss
Experience of BOFS......................S-20
THE HOME EQUITY LOAN POOL..........................S-22
General.......................................S-22
Statistical Information.......................S-23
PREPAYMENT AND YIELD
CONSIDERATIONS..................................S-31
General.......................................S-31
General Prepayment Considerations.............S-31
Payment Delay Affects Yield...................S-32
Weighted Average Lives........................S-32
Last Scheduled Distribution Dates.............S-36
DESCRIPTION OF THE CERTIFICATES....................S-36
General.......................................S-36
Assignment of Home Equity Loans...............S-37
Payments on Home Equity Loans; Deposits to
Collection Account and Certificate Account..S-38
Priority of Distributions.....................S-39
Interest Distributions........................S-40
Principal Distributions.......................S-40
Overcollateralization Provisions..............S-42
Monthly Advances..............................S-43
Reports to Certificateholders.................S-43
Book-Entry Registration and Definitive
Certificates................................S-44
DTC and Year 2000 Compliance..................S-48
THE CERTIFICATE INSURER............................S-48
THE POLICY.........................................S-49
POOLING AND SERVICING AGREEMENT....................S-51
Collection and Other Servicing Procedures on
Home Equity Loans...........................S-51
Hazard Insurance..............................S-52
Realization Upon Defaulted Home Equity Loans..S-52
Servicing Compensation and Payment of ExpensesS-52
Evidence as to Compliance.....................S-53
Certain Matters Regarding the Depositor,
Seller and Master Servicer..................S-53
Servicer Default..............................S-54
Rights Upon a Servicer Default................S-55
Amendment.....................................S-55
Termination; Purchase of Home Equity Loans....S-55
The Trustee...................................S-56
DESCRIPTION OF THE PURCHASE AGREEMENT..............S-57
USE OF PROCEEDS....................................S-57
MATERIAL FEDERAL INCOME TAX CONSEQUENCES...........S-57
STATE TAXES........................................S-58
ERISA CONSIDERATIONS...............................S-58
Availability of Exemptions for Class A
Certificates................................S-59
Review by Benefit Plan Fiduciaries............S-59
LEGAL INVESTMENT...................................S-60
UNDERWRITING.......................................S-61
EXPERTS............................................S-62
LEGAL MATTERS......................................S-62
RATINGS............................................S-62
INDEX OF PRINCIPAL DEFINITIONS.....................S-64
ANNEX I GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES.........................A-I-1
S-3
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the Class
A Certificates, read carefully this entire document and the accompanying
prospectus.
This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
Title of Series: Banc One Home Equity Loan Asset Backed Certificates,
Series 1999-1
Trust: Banc One Financial Services Home Equity Loan Trust
1999-1
Offered Certificates: Class A-1, Class A-2, Class A-3 and Class A-4
Certificates
Non-Offered Certificates: Class R Certificates
Seller: Banc One Financial Services, Inc.
Master Servicer: Bank One, Indiana, National Association
Depositor: Merrill Lynch Mortgage Investors, Inc.
Trustee: Norwest Bank Minnesota, National Association
Certificate Insurer: Ambac Assurance Corporation
Cut-off Date: March 1, 1999
Closing Date: On or about March 31, 1999
The Trust
The trust will be formed under a pooling and servicing agreement dated as of
March 1, 1999 among the seller, the master servicer, the depositor and the
trustee. The trustee, a national banking association, will act as trustee for
the benefit of the certificateholders.
The Certificates
On the closing date, the trust will issue four classes of Class A Certificates.
The Class A Certificates are senior certificates and are being offered to you.
The trust is also issuing one class of Class R Certificates, which are
subordinate certificates and are not being offered to you.
Master Servicer
The master servicer, a national banking association, is an affiliate of the
seller. The master servicer is also an affiliate of First Chicago Capital
Markets, Inc., one of the underwriters. Under the terms of the pooling and
servicing agreement, the master servicer will have the contractual
responsibility for servicing, managing and making collections on the home equity
loans. Each calendar month, the master servicer will retain a portion of the
interest payments on the home equity loans as a fee for its services and those
of the servicer.
The master servicer expects that Banc One Financial Services, Inc. will act as
servicer of the home equity loans.
Depositor
The depositor is a Delaware corporation and a wholly-owned, limited purpose
subsidiary of Merrill Lynch Mortgage Capital Inc., which is a wholly-owned
indirect subsidiary of Merrill Lynch & Co., Inc. The depositor is also an
affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, one of the
underwriters. The depositor will acquire the home equity loans from the seller,
and will then sell them to the trust in exchange for the Class A and Class R
Certificates.
S-4
<PAGE>
Certificate Insurer
Ambac Assurance Corporation, a Wisconsin-domiciled stock insurance corporation.
See "THE CERTIFICATE INSURER" in this prospectus supplement.
Trust Fund
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o a pool of fixed rate, closed-end home equity loans, secured by first or
second liens on primarily one- to four-family residential properties;
o payments on the home equity loans received on or after March 1, 1999;
o property that secured a home equity loan and has been acquired after the
closing date by foreclosure or deed in lieu of foreclosure;
o rights of the depositor under the home equity loan purchase agreement
pursuant to which the depositor purchased the home equity loans from the
seller. Under certain circumstances, if the representations and
warranties made by the seller about the home equity loans are breached,
then the seller will be obligated to repurchase those home equity loans;
o rights of the seller under certain hazard insurance policies covering
the mortgaged properties; and
o an irrevocable and unconditional certificate guaranty insurance policy
issued by Ambac Assurance Corporation for your benefit.
No Obligor or Guarantor
The Class A Certificates do not represent the obligation of any entity other
than the trust. Except for the protection afforded by the certificate guaranty
insurance policy to the extent described in this prospectus supplement, the
Class A Certificates are not insured or guaranteed. The home equity loans are
not insured or guaranteed by any entity.
Offered Certificates
The Class A Certificates will have the initial certificate principal balances,
certificate rates and prices to the public set forth on the cover page of this
prospectus supplement. The Class A Certificates represent an undivided ownership
interest in the assets of the trust.
Denominations
You will be offered Class A Certificates for purchase in minimum denominations
of $1,000 and multiples of $1 in excess thereof.
Distribution Date
You will receive distributions on the Class A Certificates on the 25th day of
each month, beginning in April 1999. If the 25th day is not a business day, then
the distribution date will be the next business day.
Book-Entry Registration
The trust will initially issue the Class A Certificates in book-entry form. You
may elect to hold your interest in the Class A Certificates through The
Depository Trust Company in the United States, or Cedelbank or the Euroclear
System in Europe, or indirectly through participants in such systems.
You will not be entitled to receive a definitive certificate representing your
interest unless definitive certificates are issued.
See "DESCRIPTION OF THE CERTIFICATES--Book-Entry Registration and Definitive
Certificates" in this prospectus supplement and "DESCRIPTION OF THE
SECURITIES--Book-Entry Registration and Definitive Securities" in the
prospectus.
Ratings and Rating Agencies
The Class A Certificates are expected to be rated "Aaa" by Moody's Investors
Service, Inc., and "AAA" by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc.
Ratings such as the ratings obtained for the Class A Certificates address credit
risk. When evaluating credit risk, the rating agencies evaluate the likelihood
of whether or not you will receive your interest and principal payments. Credit
risk does not relate to the
S-5
<PAGE>
likelihood of prepayments on the home equity loans. Prepayments affect the
timing of your payments, such that your actual return could differ substantially
from your anticipated return on your investment.
See "RATINGS" in this prospectus supplement.
Interest Distributions
The per annum certificate rate on each class of the Class A Certificates is
fixed and is set forth on the cover page of this prospectus supplement. Interest
payments will be made to all classes of the Class A Certificates pro rata.
Interest on the Class A Certificates accrues from the first day of each calendar
month through the last day of that calendar month on the basis of a 360-day year
consisting of twelve 30-day months. You will receive interest on the
distribution date in the next calendar month. On each distribution date, to the
extent funds are available, you will be paid the following:
o interest that accrued at the related certificate rate on the related
certificate principal balance immediately prior to such distribution
date; and
o any interest that was due on a prior distribution date and not paid,
together with interest on that amount.
See "DESCRIPTION OF THE CERTIFICATES--Interest Distributions" in this prospectus
supplement.
Principal Distributions
On each distribution date, to the extent funds are available, you will be
entitled to distributions of principal in the order of priority described in
this prospectus supplement. The maximum distribution of principal to all Class A
Certificateholders on any distribution date will be equal to the sum of:
o payments of principal on the home equity loans received during the
prior calendar month, and all other amounts relating to principal on the
home equity loans; plus, the amount of any principal losses realized on
the home equity loans during the prior calendar month;
o plus, the amount of any excess receipts of interest required to be
distributed to satisfy the required level of overcollateralization. This
will increase the difference between the certificate principal balance of
the Class A Certificates and the aggregate principal balance of the home
equity loans, thereby increasing the level of overcollateralization; and
o minus, the amount of any principal collections not required to be
distributed to you. This will reduce the difference between the
certificate principal balance of the Class A Certificates and the
aggregate principal balance of the home equity loans, thereby maintaining
or decreasing the level of overcollateralization.
On each distribution date, so long as the certificate insurer has not defaulted,
principal will be distributable to the Class A Certificateholders as follows:
o first, to the Class A-4 Certificateholders, starting on the distribution
date in April 2002 in an amount equal to a fixed percentage (which will
increase over time) of the total amount distributable as principal;
o second, sequentially, to the Class A-1, Class A-2 and Class A-3
Certificateholders, in that order, until the certificate principal
balance of each such class is reduced to zero; and
o third, to the Class A-4 Certificateholders, without regard to the amount
paid pursuant to the first step, until the certificate principal balance
of such class is reduced to zero.
If there has been a default by the certificate insurer, then the Class A
Certificateholders will share distributions pro rata according to their
principal balance, irrespective of class designations.
See "DESCRIPTION OF THE CERTIFICATES--Principal Distributions" in this
prospectus supplement.
Credit Enhancement
Credit enhancement reduces the harm caused to holders of certificates by
shortfalls in payments received and losses incurred on the home equity loans.
The credit enhancement provided for the benefit of the Class A Certificates
consists of the following:
o Application of Excess Receipts of Interest. Generally, because more
interest is paid by the borrowers than is necessary to pay the accrued
S-6
<PAGE>
interest on the Class A Certificates and certain expenses of the trust,
there will be excess interest each month. Some of the excess interest may
be used to pay interest on the Class A Certificates that was previously
accrued but not paid in a prior month and some of the excess interest may
be used to reimburse holders of the Class A Certificates for losses on the
home equity loans. To the extent of any excess interest after such
applications, the trust will apply excess interest as principal payments on
the Class A Certificates, in the manner set forth herein, to create
overcollateralization until the overcollateralization amount as described
below has reached the required overcollateralization amount.
See "DESCRIPTION OF THE CERTIFICATES --Priority of Distributions" and
"--Principal Distributions" in this prospectus supplement.
o Overcollateralization. As indicated above, on each distribution date the
interest payments on the home equity loans are expected to exceed the
amount of accrued interest on the Class A Certificates, plus the amount of
any accrued and unpaid interest and any losses on the home equity loans.
This excess may be applied as principal payments to the class or classes
then entitled to principal on that distribution date until the required
level of overcollateralization is reached. Overcollateralization is the
amount by which the principal balance of the home equity loans exceeds the
principal balance of the Class A Certificates. The required amount of
overcollateralization is based on certain minimum and maximum levels of
overcollateralization and may increase and decrease over time.
See "DESCRIPTION OF THE CERTIFICATES --Overcollateralization Provisions"
in this prospectus supplement.
o Certificate Insurance Policy. The certificate insurer will issue an
unconditional and irrevocable certificate guaranty insurance policy for
your benefit. The policy will unconditionally and irrevocably guarantee the
payment of: (i) accrued and unpaid interest on the Class A Certificates;
(ii) the amount, if any, by which the principal balance of the Class A
Certificates exceeds the principal balance of the home equity loans; and
(iii) any principal amounts owed to the holders of the Class A Certificates
on the final last scheduled distribution date. The policy will not cover
certain shortfalls in interest collections as described in this prospectus
supplement. If for any reason the certificate insurer does not make the
payments required in the policy, you must rely solely on the home equity
loans for their payments of interest and principal and you may suffer a
loss.
See "THE CERTIFICATE INSURER" and "THE POLICY" in this prospectus
supplement.
Advances and Compensating Interest
The master servicer will be obligated, subject to certain limitations, to make a
monthly interest advance equal to 30 days of interest on each home equity loan
for which a monthly payment has not been received with respect to the related
collection period.
See "DESCRIPTION OF THE CERTIFICATES--Monthly Advances" in this prospectus
supplement.
The master servicer will also be obligated, up to the amount of the master
servicing fee paid to the master servicer for the related collection period, to
pay to the trust an amount equal to any interest shortfalls that resulted from
principal prepayments in full on the home equity loans during the related
collection period.
See "POOLING AND SERVICING AGREEMENT--Servicing Compensation and Payment of
Expenses" in this prospectus supplement.
S-7
<PAGE>
Home Equity Loan Data
As of March 1, 1999, there were 6,705 home equity loans secured by mortgages or
deeds of trust on residential properties and having the following
characteristics:
Aggregate Principal Balance $281,179,521.43
Average Principal Balance $41,935.80
Range of Principal Balances $5,057.11 to
$333,013.75
Average Original Principal
Balance $44,344.56
Range of Original Principal $5,202.00 to
Balances $333,896.52
Weighted Average Loan Rate 12.033%
Range of Loan Rates 8.000% to 17.500%
Weighted Average Combined
Loan-to-Value Ratio 90.59%
Range of Combined Loan-to-Value
Ratios 20.00% to 103.00%
Weighted Average Original Term
to Maturity (months) 203.45
Weighted Average Remaining Term
to Maturity (months) 184.81
Mortgaged Premises
Single-family dwellings 93.95%
Two-to-four family dwellings 1.99%
Manufactured homes 1.43%
Condominiums 1.38%
Townhouses 1.25%
Maximum Zip Code
Concentration(%) 0.30%
Geographic Concentration
(above 5% of pool)
New Jersey 11.63%
Ohio 11.28%
Arizona 9.85%
Michigan 9.22%
Indiana 7.61%
See "THE HOME EQUITY LOAN POOL" in this prospectus supplement.
Optional Termination of the Trust
At its option, the holder of the largest percentage interest of the Class R
Certificates may purchase all of the home equity loans, together with any
mortgaged properties acquired by the trustee, and thereby effect early
retirement of the certificates. Such option may be exercised on any distribution
date on which the total principal balance of the home equity loans and such
properties remaining is 5% or less of the total principal balance of the home
equity loans as of the cut-off date. If such holder does not exercise such
option, the master servicer or, if the master servicer declines, the certificate
insurer, may exercise such option. If the holder of the largest percentage
interest of the Class R Certificates or the master servicer exercises this
option, such holder or the master servicer must get the consent of the
certificate insurer if the exercise of such option would cause a draw on the
policy to occur.
See "POOLING AND SERVICING AGREEMENT--Termination; Purchase of Home Equity
Loans." and "DESCRIPTION OF THE SECURITIES--Termination" in the prospectus.
Upon receipt of the purchase price from the holder of the largest percentage
interest of the Class R Certificates, the master servicer or the certificate
insurer, as applicable, the trustee will make a final payment to the
certificateholders.
Federal Income Tax Considerations
Brown & Wood LLP, as counsel to the depositor, is of the opinion that:
o the trust will be treated as a real estate mortgage investment conduit,
or REMIC, for federal income tax purposes; and
o the Class A Certificates will be "regular interests" in the REMIC and
will be treated as debt instruments of the REMIC for federal income tax
purposes with payment terms equivalent to the terms of such certificates.
See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in this prospectus supplement and
in the prospectus for further information regarding the federal income tax
consequences of investing in the Class A Certificates.
ERISA Considerations
An employee benefit plan subject to the requirements of the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended, or ERISA, or the provisions of Section 4975 of the Internal
Revenue Code of 1986, as amended, contemplating the purchase of the Class A
Certificates should consult its counsel before making a purchase, and the
fiduciary and such legal advisors
S-8
<PAGE>
should consider whether the Class A Certificates will satisfy all of the
requirements of the "publicly offered securities" exemption described herein and
the possible application of other ERISA prohibited transaction exemptions
described herein. Although the Depositor expects that the "publicly offered
securities" exemption or the other ERISA prohibited transaction exemptions will
apply to certain purchases of the Class A Certificates by employee benefit
plans, there can be no assurance that such exemptions will apply to all
purchases of the Class A Certificates by such plans.
See "ERISA Considerations" in this prospectus supplement.
Legal Investment Considerations
Because the pool of home equity loans includes second-lien mortgages, the Class
A Certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984, as amended.
See "LEGAL INVESTMENT" in this prospectus supplement.
S-9
<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following factors (as well as the factors set forth under "RISK FACTORS" in the
prospectus) in connection with their purchase of the Class A Certificates.
Prepayments Affect All of the home equity loans may be prepaid
Timing and Rates of Return in whole or in part at any time. A majority of
the home equity loans (by principal balance as
of March 1, 1999) are subject to prepayment
penalties. Home equity loans, such as the home
equity loans included in the trust, have been
originated in significant volume only during
the past few years and neither the seller nor
the depositor is aware of any publicly
available studies or statistics on the rate of
prepayment of such loans. Generally, home
equity loans are not viewed by borrowers as
permanent financing; therefore, the home equity
loans may experience a higher rate of
prepayment than traditional mortgage loans. The
trust's prepayment experience may be effected
by a wide variety of factors, including general
economic conditions, interest rates, the
availability of alternative financing
(including alternative financing provided by
the seller) and homeowner mobility. Prepayments
on the home equity loans will result in earlier
distributions of principal on your
certificates.
See "PREPAYMENT AND YIELD CONSIDERATIONS--
General Prepayment Considerations" in this
prospectus supplement.
All of the home equity loans contain
"due-on-sale" provisions requiring the borrower
to prepay the home equity loan in full when the
mortgaged property is sold. The master servicer
will be required to enforce such provisions
unless enforcement is not permitted by
applicable law or the master servicer permits
the purchaser of the related mortgaged property
to assume the home equity loan. Enforcement of
"due-on-sale" provisions results in the trust
receiving proceeds on a home equity loan earlier
than it otherwise would.
All of the home equity loans compute
interest based on a simple interest method. This
means that interest is computed and charged to
the borrower on the outstanding balance of the
loan based on the number of days elapsed between
the date through which interest was last paid on
the loan through receipt of the borrower's most
current payment. The portions of each monthly
payment that are allocated to interest and
principal are adjusted based on the actual
amount of interest charged on such basis. This
means that the amount of each monthly payment
applied to the payment of principal and interest
will vary each month depending on when the
monthly payment is received. As a result, the
amount distributed to you as principal will vary
depending on the timing of the payments made on
the home equity loans.
Since amounts received on a home equity
loan are distributed on the next following
distribution date, the rate at which the amounts
described above are paid on the home equity
loans will affect the payment rate on the Class
A Certificates. If the timing and amount of such
payment is not as anticipated, your rate of
return will differ from your anticipated rate of
return.
If you are purchasing the certificates at a
discount, you should consider the risk that if
principal payments on the home equity loans
occur at a rate slower than you expected, your
rate of return may be lower than you expected.
If you are purchasing the certificates at a
premium, you should consider the risk that if
principal payments on the home equity loans
occur at a rate faster than you expected, your
rate of return may be lower than you expected.
S-10
<PAGE>
Underwriting Standards The seller's underwriting standards
May Affect Performance generally are less stringent than those of
Fannie Mae or Freddie Mac. For example, a
borrower's past credit history may not preclude
the seller from purchasing or originating a
home equity loan; however, it will reduce the
size, and consequently, the combined
loan-to-value ratio of the home equity loan
that the seller is willing to originate or
purchase. As a result of this approach to
underwriting, the home equity loans may
experience higher rates of delinquencies,
defaults and foreclosures than home equity
loans underwritten in accordance with Fannie
Mae or Freddie Mac's guidelines. If losses
occur and the certificate insurer fails to
perform its obligations under the certificate
guaranty insurance policy, you may experience a
loss.
Geographic Concentration To the extent that specific geographic
May Affect Performance regions have experienced or may experience
weaker economic conditions or greater rates of
decline in real estate values than the United
States generally, a concentration of the home
equity loans in those regions may be expected
to exacerbate all of the risks relating to the
home equity loans. The seller and the depositor
can neither quantify the impact of any recent
property value declines on the home equity
loans nor predict whether, to what extent or
for how long such declines may continue.
The concentration of home equity loans by
state, representing more than 5% of the total
principal balance of the home equity loans as of
March 1, 1999, is as follows:
State Home equity loans
----- -----------------
New Jersey 11.63%
Ohio 11.28%
Arizona 9.85%
Michigan 9.22%
Indiana 7.61%
Documents Maintained by The seller is required to maintain
Seller and Not by Trustee possession of the documentation relating to each
home equity loan, other than (i) the promissory
note, (ii) the mortgage or deed of trust and
(iii) the assignment of the mortgage or deed of
trust, all of which will be delivered to the
trustee. The assignment of a mortgage or deed
of trust for each home equity loan will be
delivered to the trustee in recordable form but
will not be recorded to show the transfer of
the related mortgage or deed of trust to the
trust unless an assignment event occurs.
An assignment event will occur on the day
following (i) the occurrence and continuance of
a servicer default, (ii) the reduction of the
master servicer's long-term unsecured senior
debt rating below "Baa2" by Moody's or "BBB" by
Standard & Poor's, (iii) 30 days after the
request of the certificate insurer, if in the
judgment of the certificate insurer, it deems
such action necessary to protect its interest or
(iv) with respect to a particular mortgage loan,
the occurrence of a foreclosure proceeding or
the insolvency of the related borrower.
Within 90 days of the occurrence of an
assignment event, the seller is required to
deliver the remaining home equity loan documents
to the trustee, and to either cause the
assignment of each mortgage or deed of trust to
be recorded or to deliver to the trustee and the
certificate insurer an opinion of counsel
acceptable to the certificate insurer to the
effect that recordation of such assignments is
not necessary in order to perfect the interests
of the trust in such mortgages or deeds of
trust. Prior to delivery of the remaining home
equity loan documents to the trustee and the
recording of the assignments, the home equity
loans and any related proceeds may be subject to
the claims of creditors or to sale to a third
party, and may also be subject to claims of a
receiver or conservator appointed in the event
of the insolvency of the
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seller. Claims by any of these parties, even if
unsuccessful, could result in delays in
distributions to you. If these claims were
successful, then you will experience losses to
the extent that the certificate insurer fails
to perform its obligations under the
certificate guaranty insurance policy.
Priority of Liens As of March 1, 1999, approximately 37.97%
of the home equity loans (by principal balance)
are secured by second-lien mortgages or deeds
of trust. For home equity loans in the trust
secured by second-lien mortgages, the master
servicer or servicer may consent under certain
circumstances to a new first priority lien
regardless of the principal amount of such new
lien.
Home equity loans that are secured by
second-lien mortgages or deeds of trust will
receive proceeds from the sale of the related
mortgaged property only after any first-lien
mortgages and prior statutory liens have been
paid. If the remaining proceeds are insufficient
to satisfy the home equity loans in the trust
and the certificate insurer fails to perform its
obligations under the certificate guaranty
insurance policy, then:
o there will be a delay in distributions to
you while a deficiency judgment against
the borrower is sought; and
o you may incur a loss if a deficiency
judgment cannot be obtained or collected
upon.
Risks Posed by High Combined Approximately 22.54% of the home equity
Loan-To-Value Ratios loans (by principal balance as of March 1, 1999)
had combined loan-to-value ratios at
origination between and including 100.01% and
103.00%. Based on the appraised value or
purchase price of the related mortgaged
property at the time of origination of such a
home equity loan with a combined loan-to-value
ratio in excess of 100%, the value or price of
the related mortgaged property was less than
the sum of the principal balance of the home
equity loan and the principal balance of any
related senior mortgage. Home equity loans with
high combined loan-to-value ratios, in
particular those home equity loans with
original combined loan-to-value ratios in
excess of 100%, will be more sensitive to
declining property values than those loans with
lower combined loan-to-value ratios and may
present a greater risk of loss upon
liquidation.
Delay In Receipt of Substantial delays could be encountered in
Liquidation Proceeds; connection with the liquidation of delinquent
Liquidation Proceeds home equity loans. Further, liquidation expenses
May Be Less Than Home such as legal fees, real estate taxes and
Equity Loan Balance maintenance and preservation expenses will
reduce the portion of liquidation proceeds
payable to you. In addition, there may be
certain instances where based upon the
relevant costs associated with the foreclosure
process, the master servicer or servicer will
decide not to foreclose on the loan. If a
mortgaged property fails to provide adequate
security for the home equity loan, you will
incur a loss on your investment if the
certificate insurer fails to perform its
obligations under the certificate guaranty
insurance policy.
Other Legal Considerations Federal and state laws, public policy and
general principles of equity relating to the
protection of consumers, unfair and deceptive
practices and debt collection practices:
o regulate interest rates and other
charges on home equity loans;
o require certain disclosures to
borrowers;
o require licensing of the seller
and the other originators; and
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o regulate generally the origination,
servicing and collection process for the
home equity loans.
Depending on the specific facts and
circumstances involved, violations may limit the
ability of the trust to collect on the home
equity loans and may entitle the borrower to a
refund of amounts previously paid. Violations
could also result in damages and administrative
enforcement against the seller or the master
servicer.
The seller has represented that all
applicable federal and state laws were complied
with in connection with the origination of the
home equity loans. If there is a material and
adverse breach of such representation, the
seller will be obligated to repurchase any
affected home equity loan or to substitute a new
home equity loan for such affected home equity
loan.
See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS" in the prospectus.
Limitation and Reduction and Credit enhancement will be provided for the
Substitution of Credit Class A Certificates by the application of
Enhancement excess interest, overcollateralization and the
certificate guaranty insurance policy. None of
the depositor, the seller, the master servicer,
the trustee, the certificate insurer or any of
their respective affiliates will have any
obligation to replace or supplement such credit
enhancement, or to take any other action to
maintain any rating of the Class A
Certificates.
Insolvency of the Seller; The sale of the home equity loans from the
Reclassification of Sale as seller to the depositor will be treated by the
a Loan seller, the depositor and the trust as a sale of
the home equity loans. The seller will warrant
that the transfer is a sale of its interest in
the home equity loans. The depositor will
warrant that the transfer of the home equity
loans is a sale of its interest in the home
equity loans to the trust. In the event of an
insolvency of the seller, it is possible that a
receiver or conservator for, or a creditor of,
the seller would argue that the transaction
between the seller and the depositor was a
pledge of the home equity loans in connection
with a borrowing by the seller rather than a
true sale. Such an attempt, even if
unsuccessful, could result in delays in
distributions to you.
Limited Obligations The Class A Certificates will not represent
an interest in, or obligation of, the depositor,
the seller, the master servicer, the trustee or
any of their respective affiliates. The only
obligations of the foregoing entities with
respect to the Class A Certificates or any home
equity loan will be the obligations of the
depositor and of the seller pursuant to certain
limited representations and warranties made with
respect to the home equity loans and of the
master servicer with respect to its servicing
obligations under the pooling and servicing
agreement (including the limited obligation to
make certain monthly advances). Except for the
protection afforded by the certificate guaranty
insurance policy to the extent described in this
prospectus supplement, neither the Class A
Certificates nor the underlying home equity
loans will be guaranteed or insured by any
governmental agency or instrumentality, or by
the depositor, the master servicer, the seller,
the trustee or any of their respective
affiliates.
Limited Liquidity Prior to their issuance there has been no
market for the Class A Certificates and
there can be no assurance that one will develop
or, if it does develop, that it will provide
certificate owners with liquidity or will
continue for the lives of the Class A
Certificates. The underwriters intend, but are
not obligated, to make a market in the Class A
Certificates.
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Difficulty in Pledging Since transactions in the Class A
Certificates can be effected only through The
Depository Trust Company, Cedelbank or
Euroclear, their participants and indirect
participants, the ability of the owner of a
Class A Certificate to pledge a Class A
Certificate to persons or entities that do not
participate in The Depository Trust Company,
Cedelbank or Euroclear systems, or otherwise to
take actions in respect of such Certificates,
may be limited due to lack of a physical
certificate representing such Certificates.
See "DESCRIPTION OF THE CERTIFICATES-Book-
Entry Registration and Definitive Certificates"
in this Prospectus Supplement.
Potential Delays in Receipt Owners of Class A Certificates may
of Distributions experience some delay in their receipt of
distributions of interest and principal on the
Class A Certificates since such distributions
will be forwarded by the trustee to The
Depository Trust Company and The Depository
Trust Company will credit such distributions to
the accounts of its participants which will
thereafter credit them to the accounts of
Certificate owners either directly or indirectly
through indirect participants.
See "DESCRIPTION OF THE CERTIFICATES-
Book-Entry Registration and Definitive
Certificates" in this Prospectus Supplement.
Credit Ratings Relate to The ratings of the Class A Certificates
Credit Risk Only will depend primarily on an assessment by
Standard & Poor's and Moody's Investors Service,
Inc. of the home equity loans and upon the
financial strength of the certificate
insurer. Any future reduction in a rating
assigned to the financial strength of the
certificate insurer may result in a
corresponding reduction in the rating of the
Class A Certificates. There is no assurance that
the ratings will remain in place for any given
period of time or that the ratings will not be
lowered or withdrawn by the rating agencies. In
general, the ratings address the likelihood that
you will receive distributions of principal and
interest and do not address the likelihood of
prepayments on the home equity loans or the
possibility that you might realize a lower than
anticipated yield.
Year 2000 Readiness Solving the Year 2000 problem is a top
priority for the corporate parent of the
master servicer and the servicer. The Year 2000
issue is being addressed by either modifying,
retiring or replacing existing software
applications and systems or installing vendor
upgrades. A plan has been developed and is being
followed to ensure that the modifications,
replacements and upgrades are implemented and
thoroughly tested on a timely basis. However,
the actual results could differ materially from
those in the plan.
See "THE SELLER, SERVICER AND THE MASTER
SERVICER--BANK ONE Year 2000 Readiness" in this
Prospectus Supplement.
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THE SELLER, SERVICER AND THE MASTER SERVICER
General
The information set forth in this section has been provided by Banc One
Financial Services, Inc. ("BOFS", in its capacity as seller, the "Seller" and,
in its capacity as servicer, the "Servicer") and Bank One, Indiana, National
Association (the "Master Servicer"). None of Merrill Lynch Mortgage Investors,
Inc. (the "Depositor"), the Underwriters, Norwest Bank Minnesota, National
Association (the "Trustee"), the Certificate Insurer, or any of their respective
affiliates has made or will make any representation as to the accuracy or
completeness of the information provided by BOFS and the Master Servicer.
The Master Servicer
Bank One, Indiana, National Association, a national banking
association, is a subsidiary of BANK ONE CORPORATION ("BANK ONE"). BANK ONE is
the fifth-largest bank holding company in the United States with over $261
billion in assets as of December 31, 1998. BANK ONE is a registered multi-bank
holding company organized in 1998 under the laws of the State of Delaware to
effect the merger, effective October 2, 1998, of First Chicago NBD Corporation
with BANC ONE CORPORATION.
The following unaudited financial information regarding the Master
Servicer was calculated on the basis of regulatory accounting principles and not
on the basis of generally accepted accounting principles, is based on the Master
Servicer's Consolidated Report of Condition as of December 31, 1998 (the "Call
Report") and is qualified in its entirety by detailed information included in
such Call Report. As of December 31, 1998, the Master Servicer had total assets
of approximately $8.556 billion, total deposits of approximately $5.830 billion
and total equity capital of approximately $0.609 billion.
The principal executive offices of the Master Servicer are located at
111 Monument Circle, Indianapolis, IN 46277, and its telephone number is (317)
321-3000.
BANK ONE Year 2000 Readiness
BANK ONE, like most other companies, utilizes computer programs which
process transactions based on using two digits for the year of the transaction
rather than a full four digits. Programs processing Year 2000 transactions using
only the last two digits "00" for the year may read the dates as 1900, not 2000.
This can lead to significant processing inaccuracies or render systems
inoperable.
Solving the Year 2000 problem is a top priority for BANK ONE. A focused
comprehensive effort addresses every area of BANK ONE to ensure products and
services are able to accurately process dates within and between the 20th and
21st centuries, including leap year calculations. The Year 2000 issue is being
addressed by either modifying, retiring or replacing existing software
applications and systems or installing vendor upgrades.
A plan has been developed and is being followed to ensure that the
modifications, replacements and upgrades are implemented and thoroughly tested
on a timely basis. As of December 31, 1998, 84 percent of all software
applications have been tested and returned to production. BANK ONE expects all
applications, systems and equipment to be Year 2000-ready by June 30, 1999.
BANK ONE utilizes some software provided by outside suppliers which
must also become Year 2000 ready on a timely basis. BANK ONE is actively
monitoring the progress of outside suppliers. However, there is no guarantee
that the software of other suppliers on which BANK ONE's information systems
rely will be converted on a timely basis, or that failure to convert would not
have a material adverse effect on BANK ONE's operations. Appropriate actions
will be taken if a vendor's readiness does not meet BANK ONE's expectations.
Year 2000 costs and the date on which the Year 2000 modifications are
expected to be completed are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the
availability of certain resources, third party modifications and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
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might cause material difference include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties.
The Seller and Servicer
BOFS was incorporated under the laws of the State of Indiana on
December 30, 1971. BOFS is a subsidiary of Finance One Corporation, which, in
turn, is a wholly-owned subsidiary of BANK ONE.
As of December 31, 1998, BOFS had assets totaling over $3.87 billion
and total equity of $271 million. As of December 31, 1998, BOFS had 1,757 total
full-time equivalent employees located at one of the following locations:
Indianapolis, Indiana Headquarters; Phoenix, Arizona Service Center; or one of
its retail or wholesale origination branches.
Loan Origination
BOFS originates and purchases first, second, and other junior lien
mortgage loans on residential dwellings nationwide through both its retail and
wholesale business channels. BOFS specializes in mortgage loans that do not
conform to the underwriting standards of Fannie Mae or Freddie Mac, particularly
with regard to an applicant's credit history. Substantially all of the simple
interest mortgage loans originated or purchased by BOFS are retained and
serviced by BOFS, while a portion are sold in pools to other financial
institutions. BOFS originates or acquires mortgage loans primarily on suburban
and urban single-family homes in major metropolitan areas.
At December 31, 1998, BOFS conducted mortgage loan origination
operations from 117 retail branch locations and 3 wholesale origination sites in
44 states including: Arizona, California, Connecticut, Colorado, Delaware,
Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana,
Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina,
South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West
Virginia, Wisconsin, and Wyoming.
The retail application and approval process for mortgage loans is
generally conducted by telephone. BOFS obtains potential customers through
either direct mail solicitations or on a referral basis from other affiliates of
BANK ONE. Loan officers are trained to structure mortgage loans that enable the
applicant to reduce total finance charges, lower monthly payments and/or shorten
the payment period.
BOFS also purchases mortgage loans from independent mortgage bankers
and others. Prior to funding, wholesale mortgage loans are re-underwritten using
BOFS wholesale underwriting guidelines. Entities participating in this program
generally must satisfy certain requirements established by BOFS pertaining to
experience, size of business and various licenses and approvals. Substantially
all of the precomputed mortgage loans purchased by BOFS are sub-serviced by a
third party.
If an existing borrower indicates that he plans on refinancing a BOFS
mortgage loan, BOFS may refinance such mortgage loan. If the mortgage loan is
one of the Home Equity Loans, this would result in a prepayment of such Home
Equity Loan.
The dollar amounts of mortgage loans originated or purchased by BOFS
during the years ended December 31, 1996, 1997, and 1998 were $1,137.0,
$2,008.4, and $2,870.0 million, respectively.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines
customarily and currently employed by BOFS with respect to mortgage loans, which
it purchases or originates. Each mortgage loan is centrally underwritten
according to these guidelines. BOFS believes its guidelines are consistent with
those generally utilized by most home equity and sub-prime lenders. The
underwriting process is intended to assess both the applicant's ability to repay
and the adequacy of the value of collateral securing the mortgage loan.
BOFS generally originates or purchases mortgage loans, which either
fully amortize over a period not to exceed 360 months for first liens and 180
months for second or more junior liens (fixed rate or variable rate) or
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provide for amortization over a 360 month period with a "balloon" payment
required at the maturity date. The actual maturity date will generally range
between fifteen and thirty years after origination. The mortgage loan amounts
generally range from a minimum of $5,000 to a maximum of $300,000, depending on
credit risk. The appraised value of a mortgaged property generally can not
exceed $500,000.
The properties used for collateral to secure the mortgage loans are
residential (including second homes), single family and two-to-four family
dwellings, condominiums, townhouses or manufactured housing. Each property
proposed as security for a mortgage loan must be appraised not more than twelve
months prior to the date of such mortgage loan.
A credit report by an independent credit reporting agency is required
reflecting the applicant's complete credit history. The credit report should
reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies, divorce actions and similar adverse
credit events that can be discovered through a search of public records. A new
credit report is required if a mortgage loan is not originated within 60 days
from the application date.
For all first lien mortgage loans and for all second or more junior
lien mortgage loans with balances in excess of $50,000, BOFS requires that a
full appraisal of the property used as collateral has been performed in
connection with either the origination or the purchase of that mortgage loan.
Appraisals of substantially all of the properties are completed on standard
Fannie Mae forms. Each such appraisal includes, among other things, an
inspection of the exterior of the subject property, photographs of two or more
different views of the property and data from sales within the preceding 12
months of similar properties within the same general location as the subject
property. BOFS will accept a drive-by appraisal with pictures on either a second
or more junior lien mortgage loan with a balance of $50,000 or less.
Certain laws protect mortgage loan applicants by offering them a period
of time after loan closing documents are signed, termed the rescission period,
during which the applicant has the right to cancel the mortgage loan. The
rescission period must have expired prior to the funding of the mortgage loan
and may not be waived by the applicant except as permitted by law.
BOFS requires title insurance coverage issued by an approved American
Land Title Association title insurance company for all first lien mortgages and
for all second or more junior lien mortgages in excess of $50,000. Title
searches are performed on second or more junior lien mortgages with balances
less than $50,000. BOFS and its assignees are generally named as the insured.
Title insurance policies indicate the lien position of the mortgage loan and
protect BOFS against loss if the title or lien position is not as indicated. The
applicant is also required to secure hazard and, in certain instances, flood
insurance in an amount sufficient to cover the new mortgage loan and any senior
mortgage. If the applicant does not obtain or maintain hazard and/or flood
insurance with sufficient coverage, BOFS, to the extent permitted by the terms
of the mortgage loan and applicable law, has the right to obtain such insurance
coverage and charge the applicant for the costs of obtaining such coverage.
Income Verification
BOFS offers applicants Full Documentation, Lite Documentation, or No
Documentation programs. Under the Full Documentation program, income is verified
through various means, including, but not limited to, applicant interviews,
written verification, review of paycheck stubs, tax returns, and other similar
documents, and the applicant's demonstration of sufficient levels of disposable
income to satisfy debt repayment requirements. The following further specifies
the Full Documentation program verification methods used by BOFS.
o Employment: A loan applicant must provide most recent paycheck stubs
covering at least one month, preferably showing year-to-date income and the most
recent year's W2. If the required documentation cannot be provided a VOE
(Verification of Employment) is required to be completed. A VOE is required if
the applicant receives a handwritten paycheck or to verify bonus, commission, or
overtime income.
o Self-employed: Federal tax returns for at least the most recent two
years (with schedules) signed by the applicant are required from self-employed
applicants. A self-employed applicant must also provide two years completed and
signed partnership or corporate tax returns (with schedules), if applicable, and
year-to-date
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completed financial statements, including balance sheet and profit and loss
statements. BOFS's underwriters, in the exercise of their judgment, may also
request year-to-date bank statements to verify cash flow.
o Rental Income: Rental income must be documented by completed personal
federal tax returns, including Schedule E, for the most recent two years. If
ownership of a property has been for less than one year or federal tax returns
do not recognize the income, the applicant must provide copies of the signed
lease agreement and a completed VOM (Verification of Mortgage).
o Social Security and Veteran's Compensation: Compensation from the
Social Security Administration or the Department of Veterans Affairs must be
supported by an awards letter from the appropriate agency. Applicants must also
provide one of the following: previous year's federal tax form 1099; most recent
bank statement verifying direct deposit from the United States' Treasury
Department; or photocopy of recent check.
o Pension and Annuity Income: Income must be supported by an annuity
letter or similar award document describing all details of income. The applicant
must also provide one of the following: federal tax form 1099; most recent bank
statement verifying deposit by income source; or current month's paycheck stub
or statement.
o Alimony: An applicant must submit to BOFS a copy of the complete
divorce decree and one of the following: most recent federal tax form 1040
reflecting alimony received; three months of bank statements reflecting deposit
of the alimony; or three consecutive months of canceled checks verifying receipt
of the alimony.
o Child Support: Child support income must be documented by a copy of
the complete divorce decree and a monthly statement from the local courthouse.
If the child support is not paid through the court, the applicant must provide
three months of bank statements reflecting deposit of the child support or three
consecutive months of canceled checks verifying receipt of the child support.
Under the Lite Documentation program, BOFS does not require review of
an applicant's paycheck stubs. Under the No Documentation program, BOFS does not
verify an applicant's income or assets.
Specific Underwriting Criteria
Although BOFS's underwriting guidelines change from time to time, the
following summarizes the underwriting guidelines used with respect to the Home
Equity Loans except as described below. In February 1998 BOFS's guidelines were
modified such that applicants and mortgage loans are characterized by specific
FICO Score ranges instead of by FICO Scores and other credit bureau report
factors. Home Equity Loans originated or purchased during or after February 1998
comprise 40.82% of the Cut-off Date Pool Principal Balance. In June 1998 BOFS's
guidelines were modified such that applicants and mortgage loans are slotted
automatically in BOFS's computer system by FICO Score ranges into credit grades.
Because the FICO Scores for all the Home Equity Loans appearing below in "THE
HOME EQUITY LOAN POOL" were updated as of January 31, 1999, the FICO Scores
presented in that section may not necessarily reflect the FICO Scores determined
at the time of origination of the Home Equity Loans. Furthermore, from time to
time exceptions are made to the underwriting guidelines and it is possible that
exceptions may have been made for a substantial number of the Home Equity Loans
based on compensating factors. However, BOFS believes that such exceptions did
not materially impact the credit decision on any particular Home Equity Loan.
Management permits deviations from the specific criteria to reflect local
economic trends and real estate valuations, as well as other mitigating factors
specific to each applicant and/or each portfolio acquired. All such deviations
are monitored and regularly reviewed by BOFS's Credit Committee. BOFS strives to
maintain the overall integrity of its credit and underwriting policies and
simultaneously provide its lending officers with the flexibility to consider the
specific circumstances of the mortgage loan application or purchase.
Under the underwriting guidelines, the mortgage loans in each credit
grade will generally have the FICO Scores, acceptable delinquency experience,
maximum Combined Loan-to-Value Ratio and maximum debt-to-income ratio listed set
forth below. "FICO Scores" are statistical credit scores obtained by many
mortgage lenders in connection with the loan application to help assess a
borrower's creditworthiness. FICO Scores are generated by models developed by a
third party and are made available to lenders through three national credit
bureaus. Neither the Seller nor the Depositor makes any representation or
warranty that a particular FICO Score should be relied upon as a basis for an
expectation that the related applicant will repay the Home Equity Loan according
to its terms.
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<TABLE>
<CAPTION>
Grade A Grade B Grade C Grade D
<S> <C> <C> <C> <C>
Consumer Credit History (FICO Score)............ 620+ 580+ 540+ (less than)540
Maximum Past Due
One 30 day delinquency in last 12 months.... yes yes yes yes
Two 30 day delinquency in last 12 months.... no yes yes yes
Three 30 day delinquency in last 12 months
or one 60 day delinquency in last 12 months no no yes yes
No 120 day delinquency in last 12 months and
not in foreclosure in last 12 months...... no no no yes
Maximum Combined Loan-to-Value Ratio*
First lien.................................. 103% 103% 90% 80%
Second or more junior lien.................. 103% 90% 80% 70%
Maximum Debt-to-Income Ratio
First lien.................................. 60% 55% 55% 55%
Second or more junior lien.................. 55% 55% 55% 55%
</TABLE>
* Maximum Combined Loan-to-Value includes processing and closing fees.
BOFS's credit policy states that downward adjustments are made to
maximum Combined Loan-to-Value Ratios to compensate for different property types
and credit factors. In addition, BOFS charges a higher interest rate for
mortgage loans in lower alphabetical credit grades and may also charge higher
interest rates for mortgage loans in the same credit grade based on other credit
factors.
Quality Control and Audit Procedures
BOFS's quality control and audit procedures consist of post-funding
examinations at the operational level and through independent verification by
the Quality Assurance group. Examinations are performed on a sample of all
mortgage loan applications whether originated or purchased by BOFS, and include
review of legal documentation, credit documentation, and underwriting. Those
items reviewed specifically include the following items:
o Legal Documentation: The mortgage note, mortgage, deed of trust,
Truth-in-Lending disclosures, Real Estate Settlement Procedures Act and Equal
Credit Opportunity Act documents, title abstract, affidavits, riders, and all
other documents required by statutory law are reviewed for existence, accuracy
and proper signatures.
o Credit Documentation: All credit verifications (such as verification
of mortgage, verification of employment and verification of income), credit
applications, and credit reports are reviewed for existence, accuracy and proper
signatures as appropriate based on credit policy.
o Underwriting: A verification that all mortgage loan conditions
required by the Underwriting Department have been satisfied.
Some mortgage loans are reviewed for compliance with BOFS's credit
underwriting guidelines. This second review process is applied to 100% of the
denied mortgage loan applications and between 5% and 10% of approved mortgage
loans. In addition, documentation examinations are performed on 100% of all
mortgage loans originated or purchased. Reports with major exceptions noted are
distributed to the senior management team of BOFS for review and pursuit of
action plans.
Due diligence examinations are performed on national vendors that
provide appraisal services for BOFS. Furthermore, retail and wholesale mortgage
loans are randomly selected for an appraisal audit. Appraisers not conforming to
BOFS's guidelines are removed from BOFS's acceptable appraiser list.
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Servicing and Collection Procedures
The following is a description of the servicing policies and procedures
customarily and currently employed by BOFS with respect to the mortgage loans
that it services. BOFS intends to service the Home Equity Loans in accordance
with these policies and procedures and in accordance with the Agreement. BOFS
revises such policies and procedures from time to time, based upon its business
judgment, in connection with changes in economic conditions, its mortgage loan
portfolio and applicable laws and regulations.
Servicing of the mortgage loans includes, but is not limited to,
post-closing review, lien perfection, payment processing, and customer service.
Servicing of its mortgage loan portfolio is generally conducted through its
principal office in Indianapolis, Indiana; however, customer service operations
are located in Phoenix, Arizona. Collections and liquidations are managed
through offices located in Indianapolis, Indiana, and Phoenix, Arizona.
Borrowers are billed monthly in advance of the date on which mortgage
loan payments are due. BOFS's collection policy emphasizes working with
borrowers in default in an effort to bring payments current and to avoid
foreclosures. Delinquent accounts are divided into groups of accounts of 0-29,
30-59, 60-89, and 90 or more days past due. If timely payment is not received,
collection procedures are generally initiated within 10 days after the due date.
Initial collection procedures involve contacting the borrower by phone. When an
account becomes 30 days delinquent, it is assigned to a higher level collector
experienced in default accounts in Indianapolis. Thereafter, all accounts
delinquent for 90 days or more are worked by pre-foreclosure specialists in
Indianapolis.
Prior to submitting an account for foreclosure, a 30 day right-to-cure
notice is sent by certified mail to the borrower. If the mortgage loan is not
cured, the Collection Department attempts personal contact with the borrower to
determine that all avenues of resolution have been considered. Accounts
delinquent for 90 or more days are actively supervised by the Vice President of
Collections.
If foreclosure is necessary, BOFS's Collection Department supervises
and monitors all related procedures (including bankruptcy proceedings) conducted
by its foreclosure attorney. If title to the mortgaged property is taken in the
name of the mortgagee, the BOFS's Real Estate Owned area attempts to ensure that
the property is preserved and protected. After review and analysis, a
disposition strategy is developed and the property is marketed for sale.
Delinquency, Foreclosure and Loss Experience of BOFS
The delinquency experience table below sets forth, as of December 31,
1998, 1997 and 1996, certain information relating to the delinquency experience
(including imminent foreclosures, foreclosures in progress and bankruptcies) of
the combined portfolios of (i) mortgage loans owned and serviced by BOFS (the
"Serviced Portfolio") and (ii) mortgage loans owned by BOFS but sub-serviced by
Advanta Mortgage Corp (the "Sub-Serviced Portfolio"). The delinquency experience
of BOFS with respect to the Serviced Portfolio only may be different, and in
some cases higher, than the delinquency experience presented in the first table.
For example, 6.17% of the loans (by principal balance) in the combined Serviced
and Sub-Serviced Portfolios were 30 or more days delinquent as of December 31,
1998 compared to 6.84% of the loans (by principal balance) in the Serviced
Portfolio as of December 31, 1998.
The information in the loss experience table below reflects the
historical loss experience of the combined Serviced Portfolio and Sub-Serviced
Portfolio. As a result, the loss experience in the loss experience table below
may be different, and in some cases understate the loss experience of BOFS with
respect to the Serviced Portfolio only. BOFS does not have available separate
loss information for the Serviced Portfolio and for the Sub-Serviced Portfolio.
The indicated periods of delinquency are based on the number of days
past due on a contractual basis. The delinquency, foreclosure and loss
experience shown below may be affected by the increase in size of, and the
relative lack of seasoning of, a substantial portion of the portfolio. There can
be no assurance that the delinquency and loss experience on the Home Equity
Loans will be consistent with the historical information provided below.
S-20
<PAGE>
Delinquency Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------- ---------------------------------- ------------------------------------
Percent Percent Percent
Number Percent of Number Percent of Number Percent of
of of Dollar Dollar of of Dollar Dollar of of Dollar Dollar
Loans Loans Amount Amount Loans Loans Amount Amount Loans Loans Amount Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Loans....... 71,103 $3,639,941 53,573 $2,261,026 31,229 $1,250,691
====== ========== ====== ========== ====== ==========
Delinquency
(1)(2)(3)(4)
30-59 days........ 2,176 3.06% $ 99,797 2.74% 1,195 2.23% $ 53,202 2.35% 373 1.19% $ 15,258 1.22%
60-89 days........ 671 0.94 29,643 0.81 255 0.48 12,202 0.54 68 0.22 2,922 0.23
90 or more days... 2,001 2.81 95,219 2.62 907 1.69 40,678 1.80 254 0.81 9,225 0.74
------ ---- ---------- ---- ------ ---- ---------- ---- ------ ---- ---------- ----
Delinquency.... 4,848 6.82% $ 224,659 6.17% 2,357 4.40% $ 106,082 4.69% 695 2.23% $ 27,405 2.19%
====== ==== ========== ==== ====== ==== ========== ==== ====== ==== ========== ====
Real Estate
Owned............. 446 $ 19,438 130 $ 6,141 38 $ 1,434
</TABLE>
=================
(1) The delinquency percentage represents the number and principal balance of
mortgage loans with payments contractually past due.
(2) Includes properties in foreclosure and mortgage loans for which the
mortgagor is in bankruptcy.
(3) The total period of delinquency is based on the number of days payments are
contractually past due.
(4) As of December 31, 1998, of the 48,692 mortgage loans in the Serviced
Portfolio, 1,635 mortgage loans, having an aggregate principal amount of
$69,670, or 2.95% by aggregate principal balance of the mortgage loans in
the Serviced Portfolio, were 30 to 59 days delinquent, 524 mortgage loans,
having an aggregate principal balance of $20,422, or 0.87%, were 60 to 89
days delinquent and 1,644 mortgage loans, having an aggregate principal
balance of $71,374, or 3.02%, were 90 or more days delinquent.
<TABLE>
<CAPTION>
Loss Experience
(Dollars in Thousands)
As of December 31,
----------------------------------------------------------------------
1998 1997 1996
------------------ --------------------- ----------------------
<S> <C> <C> <C>
Average Amount Outstanding (1)(5)... $ 2,907,746 $ 1,856,040 $ 844,242
Gross Charge-offs (2)(6)............ $ 19,962 $ 8,773 $ 2,070
Recoveries (3)...................... 393 382 481
------------------ --------------------- ----------------------
Net Charge-offs (4)(6)........... $ 19,569 $ 8,391 $ 1,589
================== ===================== ======================
Net Losses as a Percentage of
Average Amount Outstanding....... 0.67% 0.45% 0.19%
</TABLE>
(1) "Average Amount Outstanding" during the period is the arithmetic average of
the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Charge-offs" are amounts which have been determined uncollectible
for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Charge-offs" represent "Gross Charge-offs" minus "Recoveries."
(5) The Average Amount Outstanding does not include real estate owned balances.
(6) Gross and Net Charge-offs include real estate owned Charge-offs.
The information above should not be considered as a basis for assessing
the likelihood, amount or severity of delinquencies, foreclosures or losses on
the Home Equity Loans and no assurances can be given that the delinquency,
foreclosure and loss experience presented in the tables above will be indicative
of such experience on the Home Equity Loans. The statistics shown above
represent the respective delinquency and foreclosure experiences only at the
dates presented, whereas the aggregate delinquency, foreclosure and loss
experience on the Home Equity Loans will depend on the results obtained over the
life of the Trust. It should be noted that if the residential real estate market
should experience an overall decline in property values, the actual rates of
delinquencies, foreclosures and losses could be higher than those previously
experienced by BOFS. In addition, adverse economic conditions may affect the
timely payment by borrowers of scheduled payments of principal and interest on
the Home Equity Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Home Equity Loans.
S-21
<PAGE>
THE HOME EQUITY LOAN POOL
General
The description herein of the home equity loans (the "Home Equity
Loans") comprising part of the property of the Trust (the "Trust Fund")
describes the pool (the "Home Equity Loan Pool") as of the opening of business
on the Cut-off Date. The Home Equity Loan Pool will consist of approximately
6,705 Home Equity Loans having an aggregate principal balance as of the Cut-off
Date (the "Cut-off Date Pool Principal Balance") of approximately
$281,179,521.43, after application of payments of principal received before the
Cut-off Date and subject to a permitted variance of plus or minus 5%. All of the
Home Equity Loans are fixed rate, closed-end home equity loans secured by
mortgages or deeds of trust or other similar security instruments (the
"Mortgages") creating first or second liens on residential real properties (the
"Mortgaged Properties") and are evidenced by promissory notes (the "Mortgage
Notes"). The "Loan Rate" of each Home Equity Loan is the per annum interest rate
required to be paid by the borrower under the terms of the related Mortgage
Note.
The "Principal Balance" of any Home Equity Loan (other than a
Liquidated Home Equity Loan which has a Principal Balance of zero) on any date
of determination is equal to the balance thereof on the Cut-off Date, minus all
collections applied in reduction of such balance in accordance with the related
Mortgage Note.
The Depositor will acquire the Home Equity Loans to be included in the
Home Equity Loan Pool from the Seller on the Closing Date pursuant to the
Agreement, and will simultaneously convey the Home Equity Loans to the Trust.
All of the Home Equity Loans will be master serviced by the Master Servicer. The
Home Equity Loans will have been originated or acquired by the Seller in
accordance with the underwriting criteria described herein. See "THE SELLER,
SERVICER AND THE MASTER SERVICER--Credit and Underwriting Guidelines," "--Income
Verification" and "--Specific Underwriting Criteria."
Each Home Equity Loan was selected by the Seller for inclusion in the
Trust from among those home equity loans that met the following criteria as of
the Cut-off Date: (i) no Home Equity Loan was more than 30 days delinquent and
(ii) no Home Equity Loan had a Combined Loan-to-Value Ratio at origination of
more than 103%. The Seller believes that no adverse selection procedures were
employed in making such selection.
As of the Cut-off Date, the weighted average original term to stated
maturity of the Home Equity Loans was approximately 203.45 months. As of the
Cut-off Date, the weighted average remaining term to stated maturity of the Home
Equity Loans was approximately 184.81 months and the latest scheduled maturity
date of any Home Equity Loan is November 15, 2028.
The minimum and maximum debt-to-income ratios of the Home Equity Loans
as of the Cut-off Date were approximately 4.70% and 82.61%, respectively, and
the weighted average debt-to-income ratio of the Home Equity Loans was
approximately 41.21%.
With respect to each Home Equity Loan, the "Combined Loan-to-Value
Ratio" generally will be the ratio, expressed as a percentage, the numerator of
which is the Home Equity Loan's Principal Balance plus the principal balance of
any related senior mortgage loan as of the date of origination of such Home
Equity Loan, and the denominator of which is the lesser of (i) the appraised
value of the Mortgaged Property used by the Seller or the originator to
underwrite the Home Equity Loan and (ii) the purchase price for the Mortgaged
Property if the Mortgaged Property was purchased within twelve months of the
time of origination of the Home Equity Loan. With respect to each Home Equity
Loan, the "Junior Lien Ratio" generally will be the ratio, expressed as a
percentage, the numerator of which is the Home Equity Loan's Principal Balance,
and the denominator of which is the Home Equity Loan's Principal Balance plus
the principal balance of any related senior mortgage loan as of the date of
origination of such Home Equity Loan.
The Home Equity Loans were originated or purchased between March 1989
and October 1998 in the ordinary course of the Seller's business. The weighted
average Combined Loan-to-Value Ratio of the Home Equity Loans at origination was
approximately 90.59% (by Cut-off Date Pool Principal Balance). The weighted
average Junior Lien Ratio for Home Equity Loans in a junior lien position was
27.31% (by Cut-off Date Pool Principal Balance). As of the Cut-off Date,
approximately 62.03%, and 37.97% of the Home Equity Loans (in each case, by
Cut-off Date Pool Principal Balance) are secured by first liens and second
liens, respectively.
S-22
<PAGE>
As of the Cut-off Date, the scheduled Principal Balances ranged from
approximately $5,057.11 to approximately $333,013.75; the average Principal
Balance was approximately $41,935.80; the Loan Rates ranged from approximately
8.000% to 17.500%; and the weighted average Loan Rate was approximately 12.033%.
Approximately 97.98% of the Home Equity Loans (by Cut-off Date Pool
Principal Balance) are secured by properties which are owner occupied.
Substantially all of the Home Equity Loans were originated under the Seller's
Full Documentation program.
All of the Home Equity Loans (by Cut-off Date Pool Principal Balance)
accrue interest on a "simple interest" basis pursuant to which interest is
computed and charged to the mortgagor on the outstanding Principal Balance of
the related Home Equity Loan based on the number of days elapsed between the
date through which interest was last paid on the Home Equity Loan through the
date of receipt of the mortgagor's most current payment. Accordingly, portions
of each monthly payment that are allocated to interest and principal are
adjusted based on the actual amount of interest charged on such basis.
Statistical Information
Set forth below is certain summary statistical information regarding
the Home Equity Loans expected to be included in the Trust as of the Closing
Date. All such information is given as of the Cut-off Date (except as otherwise
indicated). All percentages of the Home Equity Loans are approximate percentages
by Cut-off Date Pool Principal Balance (except as otherwise indicated). Totals
may not sum to 100% due to rounding. Unless otherwise specified, all principal
balances of the Home Equity Loans are aggregate unpaid principal balance of the
Home Equity Loans as of the Cut-off Date and are rounded to the nearest dollar.
Prior to the Closing Date, certain home equity loans that were selected
to be included in the Trust may be removed as a result of incomplete
documentation or otherwise, if the Depositor or the Seller deems such removal
necessary or appropriate. Other home equity loans may be substituted by the
Seller for the loans that are removed. As a result, certain characteristics of
the Home Equity Loans included the Trust on the Closing Date may vary from the
characteristics set forth below as of the Cut-off Date. The Depositor believes
that the information set forth herein will be substantially representative of
the characteristics of the Home Equity Loan Pool to be included in the Trust as
it will be constituted on the Closing Date.
S-23
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Percent of
Number of Cut-off Date Cut-off
State Home Equity Loans Principal Balance Date Pool Balance
------ ----------------- ----------------- -----------------
<S> <C> <C> <C>
Alabama...................................... 1 $ 46,335.43 0.02%
Arizona...................................... 750 27,690,718.39 9.85
California................................... 195 9,367,627.29 3.33
Colorado..................................... 209 8,016,130.21 2.85
Connecticut.................................. 14 764,753.90 0.27
Delaware..................................... 30 1,260,064.91 0.45
Florida...................................... 277 11,641,060.31 4.14
Georgia...................................... 231 10,582,163.82 3.76
Hawaii....................................... 1 27,273.97 0.01
Idaho........................................ 13 357,924.32 0.13
Illinois..................................... 313 11,297,476.86 4.02
Indiana...................................... 553 21,388,494.34 7.61
Kansas....................................... 36 1,500,757.73 0.53
Kentucky..................................... 206 8,748,253.50 3.11
Louisiana.................................... 15 817,288.68 0.29
Massachusetts................................ 13 498,475.28 0.18
Maryland..................................... 243 10,060,891.34 3.58
Maine........................................ 1 20,273.34 0.01
Michigan..................................... 613 25,920,277.88 9.22
Minnesota.................................... 45 1,205,075.33 0.43
Missouri..................................... 158 6,043,068.61 2.15
Mississippi.................................. 11 408,719.89 0.15
Montana...................................... 1 84,762.26 0.03
North Carolina............................... 140 6,684,961.74 2.38
Nebraska..................................... 4 192,942.86 0.07
New Jersey................................... 682 32,712,336.32 11.63
New Mexico................................... 9 366,230.66 0.13
Nevada....................................... 57 2,487,724.34 0.88
New York..................................... 80 4,052,602.57 1.44
Ohio......................................... 699 31,714,551.52 11.28
Oklahoma..................................... 62 2,968,540.37 1.06
Oregon....................................... 36 1,443,849.00 0.51
Pennsylvania................................. 198 7,688,860.92 2.73
Rhode Island................................. 9 324,925.63 0.12
South Carolina............................... 70 3,442,892.05 1.22
Tennessee.................................... 224 10,077,622.94 3.58
Texas........................................ 57 1,867,041.22 0.66
Utah......................................... 153 5,684,948.80 2.02
Virginia..................................... 48 1,710,816.75 0.61
Washington................................... 91 3,301,179.24 1.17
Wisconsin.................................... 89 4,092,638.34 1.46
West Virginia................................ 68 2,616,988.57 0.93
------ --------------- ------
Total...................... 6,705 $281,179,521.43 100.00%
====== =============== ======
</TABLE>
S-24
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Range of Cut-off Date Home Equity Principal Cut-off
Principal Balances($) Loans Balance Date Pool Balance
-------------------------------------- ------------ ---------------- -----------------
<S> <C> <C> <C>
5,000.01 to 20,000.00........ 1,825 $ 26,240,267.25 9.33%
20,000.01 to 40,000.00........ 2,406 67,962,124.93 24.17
40,000.01 to 60,000.00........ 1,105 54,288,376.54 19.31
60,000.01 to 80,000.00........ 546 37,848,765.43 13.46
80,000.01 to 100,000.00........ 345 30,688,951.94 10.91
100,000.01 to 120,000.00........ 208 22,787,722.51 8.10
120,000.01 to 140,000.00........ 121 15,641,497.82 5.56
140,000.01 to 160,000.00........ 73 10,839,841.04 3.86
160,000.01 to 180,000.00........ 35 5,903,675.94 2.10
180,000.01 to 200,000.00........ 16 3,010,873.16 1.07
200,000.01 to 220,000.00........ 14 2,880,078.08 1.02
220,000.01 and Greater........ 11 3,087,346.79 1.10
------- ---------------- ------
Total.................. 6,705 $ 281,179,521.43 100.00%
======= ================ ======
</TABLE>
The minimum and maximum current principal balances of the Home Equity
Loans as of the Cut-off Date were approximately $5,057.11 and $333,013.75,
respectively, and the average current principal balance was approximately
$41,935.80.
ORIGINAL PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Range of Original Home Equity Principal Cut-off
Principal Balances($) Loans Balance Date Pool Balance
-------------------------------------- ------------ ---------------- -----------------
<S> <C> <C> <C>
5,000.01 to 20,000.00........ 1,617 $ 22,441,258.33 7.98%
20,000.01 to 40,000.00........ 2,418 64,824,834.54 23.05
40,000.01 to 60,000.00........ 1,152 53,174,055.50 18.91
60,000.01 to 80,000.00........ 621 40,475,684.85 14.39
80,000.01 to 100,000.00......... 377 32,214,266.56 11.46
100,000.01 to 120,000.00......... 220 23,243,000.86 8.27
120,000.01 to 140,000.00......... 133 16,678,042.49 5.93
140,000.01 to 160,000.00......... 78 11,274,781.60 4.01
160,000.01 to 180,000.00......... 46 7,523,961.74 2.68
180,000.01 to 200,000.00......... 18 3,362,210.09 1.20
200,000.01 to 220,000.00......... 12 2,466,447.62 0.88
220,000.01 and Greater........ 13 3,500,977.25 1.25
----- --------------- ------
Total.................. 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
The minimum and maximum original principal balances of the Home Equity
Loans as of the Cut-off Date were approximately $5,202.00 and $333,896.52,
respectively, and the average original principal balance was approximately
$44,344.56.
S-25
<PAGE>
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Range of Original Terms Home Equity Principal Cut-off
to Maturity (Months) Loans Balance Date Pool Balance
--------------------------------- ------------ ---------------- -----------------
<S> <C> <C> <C>
61 to 120..................... 1,594 $ 39,489,421.75 14.04%
121 to 180..................... 4,139 164,805,046.29 58.61
181 to 240..................... 485 34,079,523.49 12.12
241 to 300..................... 77 6,393,386.86 2.27
301 to 360..................... 410 36,412,143.04 12.95
----- --------------- ------
Total....................... 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
The minimum and maximum Original Terms to Maturity of the Home Equity
Loans as of the Cut-off Date were approximately 72 months and 360 months,
respectively, and the weighted average Original Term to Maturity was
approximately 203.45 months.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
Range of Remaining Terms Number of Cut-off Date Percent of
Range of Remaining Terms Home Equity Principal Cut-off
to Maturity (Months) Loans Balance Date Pool Balance
- ---------------------------------- ------------ ------------------- -----------------
<S> <C> <C> <C>
1 to 60.................. 11 $ 238,665.96 0.08%
61 to 120.................. 1,709 44,267,388.25 15.74
121 to 180.................. 4,017 159,980,086.61 56.90
181 to 240.................. 483 34,111,982.04 12.13
241 to 300.................. 75 6,169,255.53 2.19
301 to 357.................. 410 36,412,143.04 12.95
----- --------------- ------
Total..................... 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
The minimum and maximum Remaining Terms to Maturity of the Home Equity
Loans as of the Cut-off Date were approximately 60 months and 357 months,
respectively, and the weighted average Remaining Term to Maturity was
approximately 184.81 months.
S-26
<PAGE>
SEASONING
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Range of Seasoning Home Equity Principal Cut-off
(Months) Loans Balance Date Pool Balance
- --------------------------------- ----------- --------------- -----------------
<S> <C> <C> <C>
0 to 12.................... 2,458 $115,810,979.17 41.19%
13 to 24.................... 2,237 87,077,901.86 30.97
25 to 36.................... 1,405 53,468,485.66 19.02
37 to 48.................... 342 14,142,808.10 5.03
49 to 60.................... 194 8,039,026.75 2.86
61 to 72.................... 22 881,451.73 0.31
73 to 84.................... 31 1,139,737.09 0.41
85 to 96.................... 12 533,263.06 0.19
97 and Greater......... 4 85,868.01 0.03
----- --------------- ------
Total..................... 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
The minimum and maximum seasonings of the Home Equity Loans as of the
Cut-off Date were approximately 3 months and 119 months, respectively, and the
weighted average seasoning was approximately 18.64 months.
FICO SCORE(1)
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Home Equity Principal Cut-off
Range of FICO Scores Loans Balance Date Pool Balance
- --------------------------------- ----------- ----------------- -----------------
<S> <C> <C> <C>
Less than 501.............. 162 $ 5,576,320.37 1.98%
501 to 550.............. 725 28,976,435.65 10.31
551 to 600.............. 1,281 52,048,774.34 18.51
601 to 650.............. 1,790 74,661,664.58 26.55
651 to 700.............. 1,673 73,202,616.94 26.03
701 to 750.............. 843 36,645,309.38 13.03
751 and Greater...... 231 10,068,400.17 3.58
----- --------------- ------
Total.................... 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
- --------------
(1) The FICO Scores of the Home Equity Loans were updated on
January 31, 1999 and accordingly do not represent
the FICO Scores of the Home Equity Loans at origination.
The minimum and maximum FICO Scores of the Home Equity Loans as of the
Cut-off Date were approximately 420 and 818, respectively, and the weighted
average FICO Score was approximately 634.
S-27
<PAGE>
OCCUPANCY STATUS (1)
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Home Equity Principal Cut-off
Occupancy Status Loans Balance Date Pool Balance
- --------------------------------- ----------- --------------- -----------------
<S> <C> <C> <C>
Owner occupied................... 6,550 $275,504,953.29 97.98%
Non-owner occupied............... 128 4,389,822.99 1.56
Secondary........................ 27 1,284,745.15 0.46
----- --------------- ------
Total..................... 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
- --------------
(1) Based upon representation by the borrowers at the time of origination.
LIEN POSITION
<TABLE>
<CAPTION>
Number of Cut-of Date Percent of
Home Equity Principal Cut-off
Lien Position Loans Balance Date Pool Balance
- -------------------------------- ----------- --------------- -----------------
<S> <C> <C> <C>
First........................... 2,634 $174,428,335.41 62.03%
Second.......................... 4,071 106,751,186.02 37.97
----- --------------- ------
Total.................... 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
MORTGAGED PROPERTY TYPE
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Home Equity Principal Cut-off
Mortgaged Property Type Loans Balance Date Pool Balance
- -------------------------------- ----------- ------------ -----------------
<S> <C> <C> <C>
Single Family................... 6,264 $264,167,401.79 93.95%
2-4 Family...................... 110 5,595,886.89 1.99
Manufactured Home............... 96 4,026,591.92 1.43
Condominium..................... 126 3,888,561.77 1.38
Townhouse....................... 109 3,501,079.06 1.25
----- --------------- ------
Total.................... 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
S-28
<PAGE>
COMBINED LOAN-TO-VALUE RATIO
AT ORIGINATION
<TABLE>
<CAPTION>
Range of Combined Number of Cut-off Date Percent of
Loan-to-Value Ratios Home Equity Principal Cut-off
at Origination(%) Loans Balance Date Pool Balance
- ------------------------------------- ----------- ------------ -----------------
<S> <C> <C> <C>
Less than 30.01.......... 42 $ 992,861.59 0.35%
30.01 to 40.00.......... 55 1,584,534.05 0.56
40.01 to 50.00.......... 70 2,810,463.87 1.00
50.01 to 60.00.......... 121 4,432,539.10 1.58
60.01 to 70.00.......... 254 9,777,305.72 3.48
70.01 to 80.00.......... 716 35,375,549.36 12.58
80.01 to 90.00.......... 1,085 50,035,307.11 17.79
90.01 to 95.00.......... 824 36,925,075.41 13.13
95.01 to 100.00.......... 2,001 75,858,715.98 26.98
100.01 to 103.00.......... 1,537 63,387,169.24 22.54
----- --------------- ------
Total.............. 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios of the Home
Equity Loans at origination were approximately 20.00% and 103.00%, respectively,
and the weighted average Combined Loan-to-Value Ratio was approximately 90.59%.
METHOD OF ORIGINATION
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Home Equity Principal Cut-off
Method of Origination Loans Balance Date Pool Balance
- -------------------------------- ----------- ------------ -----------------
<S> <C> <C> <C>
Retail.......................... 4,477 $193,876,906.46 68.95%
Wholesale....................... 2,228 87,302,614.97 31.05
----- --------------- ------
Total.................. 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
S-29
<PAGE>
JUNIOR LIEN RATIO (1)
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Home Equity Principal Cut-off
Range of Junior Lien Ratios (%) Loans Balance Date Pool Balance
- ------------------------------------- ----------- ----------------- -----------------
<S> <C> <C> <C>
Less than 10.01............... 197 $ 2,290,330.54 2.15%
10.01 to 15.00............... 691 11,629,099.81 10.89
15.01 to 20.00............... 911 19,914,036.77 18.65
20.01 to 25.00............... 746 19,945,758.08 18.68
25.01 to 30.00............... 577 17,732,348.85 16.61
30.01 to 35.00............... 382 12,824,759.54 12.01
35.01 to 40.00............... 248 8,818,536.87 8.26
40.01 to 45.00............... 133 5,007,280.51 4.69
45.01 to 50.00............... 71 2,982,641.77 2.79
50.01 to 55.00............... 39 1,695,216.94 1.59
55.01 to 60.00............... 21 875,211.87 0.82
60.01 to 65.00............... 13 563,193.93 0.53
65.01 to 70.00............... 11 623,861.09 0.58
70.01 to 75.00............... 13 721,194.66 0.68
75.01 to 80.00............... 9 425,531.94 0.40
80.01 and Greater......... 9 702,182.85 0.66
----- --------------- ------
Total.................... 4,071 $106,751,186.02 100.00%
===== =============== ======
</TABLE>
- --------------
(1) The Junior Lien Ratio of a Home Equity Loan is the ratio, expressed as
a percentage, the numerator of which is the Home Equity Loan's
Principal Balance, and the denominator of which is the Home Equity
Loan's Principal Balance plus the principal balance of any related
senior mortgage loan as of the date of origination of such Home Equity
Loan.
The weighted average Junior Lien Ratio was approximately 27.31%.
LOAN RATE
<TABLE>
<CAPTION>
Number of Cut-off Date Percent of
Home Equity Principal Cut-off
Range of Loan Rates(%) Loans Balance Date Pool Balance
- --------------------------------- ----------- ----------------- -----------------
<S> <C> <C> <C>
8.00 to 8.99.............. 137 $ 9,914,265.46 3.53%
9.00 to 9.99.............. 442 30,877,335.12 10.98
10.00 to 10.99.............. 722 45,462,406.75 16.17
11.00 to 11.99.............. 948 50,353,618.15 17.91
12.00 to 12.99.............. 1,564 62,728,394.59 22.31
13.00 to 13.99.............. 1,594 46,787,010.89 16.64
14.00 to 14.99.............. 912 26,362,319.55 9.38
15.00 to 15.99.............. 326 7,359,899.16 2.62
16.00 to 16.99.............. 54 1,268,484.07 0.45
17.00 to 17.50.............. 6 65,787.69 0.02
----- --------------- ------
Total................... 6,705 $281,179,521.43 100.00%
===== =============== ======
</TABLE>
The minimum and maximum Loan Rates of the Home Equity Loans as of the
Cut-off Date were approximately 8.00% and 17.50%, respectively, and the weighted
average Loan Rate was approximately 12.03%.
S-30
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
General
The rate of principal payments on the Class A Certificates, the
aggregate amount of distributions on the Class A Certificates and the yield to
maturity of the Class A Certificates will be related to the rate and timing of
payments of principal on the Home Equity Loans. The rate of principal payments
on the Home Equity Loans will in turn be affected by a number of factors,
including the amortization schedules of the Home Equity Loans, by the rate of
principal prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Home Equity Loans due to defaults, casualties,
condemnations and repurchases by the Seller) and by the terms of the related
Mortgage Notes and Mortgages. A majority of the Home Equity Loans (by Cut-off
Date Pool Principal Balance) are subject to prepayment penalties. In addition,
all of the Home Equity Loans contain "due-on-sale" clauses.
General Prepayment Considerations
Prepayments, liquidations and repurchases of the Home Equity Loans will
result in distributions in respect of principal to the Holders of the Class A
Certificates then entitled to receive such distributions that otherwise would be
distributed over the remaining terms of the Home Equity Loans. See "YIELD
CONSIDERATIONS" in the Prospectus. Since the rate of payment of principal on the
Home Equity Loans will depend on future events and a variety of factors (as
described more fully herein and in the Prospectus under "YIELD CONSIDERATIONS"),
no assurance can be given as to such rate or the rate of principal prepayments.
The extent to which the yield to maturity of the Class A Certificates may vary
from the anticipated yield will depend upon the degree to which such
Certificates are purchased at a discount or premium and the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
repurchases of the Home Equity Loans. Further, in the case of Class A
Certificates purchased at a discount, an investor should consider the risk that
a slower than anticipated rate of principal payments on the Home Equity Loans
could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of Class A Certificates purchased at a
premium, an investor should consider the risk that a faster than anticipated
rate of principal payments could result in an actual yield to such investor that
is lower than the anticipated yield. In general, the earlier a prepayment of
principal on the Home Equity Loans, the greater will be the effect on the yield
to maturity of an investor in the Class A Certificates. As a result, the effect
on an investor's yield of principal payments occurring on the Home Equity Loans
at a rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of the Class A Certificates would not
be fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
It is highly unlikely that the Home Equity Loans will prepay at any
constant rate until maturity or that all of the Home Equity Loans will prepay at
the same rate. Moreover, the timing of prepayments on the Home Equity Loans may
significantly affect the actual yield to maturity on the Class A Certificates,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation.
The rate of prepayment on the Home Equity Loans cannot be predicted.
Home equity loans such as the Home Equity Loans have been originated in
significant volume only during the past few years and neither the Depositor nor
the Seller is aware of any publicly available studies or statistics on the rate
of prepayment of such home equity loans. Generally, home equity loans are not
viewed by borrowers as permanent financing. Accordingly, the Home Equity Loans
may experience a higher rate of prepayment than traditional first mortgage
loans. The prepayment experience of the Trust with respect to the Home Equity
Loans may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility and changes affecting the deductibility for
federal income tax purposes of interest payments on home equity loans. Other
factors affecting prepayment of home equity loans include changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
related mortgaged properties and servicing decisions. All of the Home Equity
Loans contain "due-on-sale" provisions and the Master Servicer is required by
the Agreement to enforce such provisions unless such enforcement is not
permitted by applicable law. The enforcement of a "due-on-sale" provision will
have the same effect as a prepayment of the related Home Equity Loan. If
prevailing mortgage rates fall significantly below the Loan Rates on the Home
Equity Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Loan Rates on the Home Equity Loans, the rate of prepayment on the Home Equity
Loans would be expected to decrease. There can be no certainty as to the rate of
prepayments
S-31
<PAGE>
on the Home Equity Loans during any period or over the life of the Certificates.
See "YIELD CONSIDERATIONS" in the Prospectus.
In general, defaults on home equity loans are expected to occur with
greater frequency in their early years. In addition, defaults on the Home Equity
Loans will be affected by the general economic condition of the region of the
country in which the related Mortgaged Properties are located. The risk of
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other facts, increasing unemployment or falling property values. See "YIELD
CONSIDERATIONS" and "RISK FACTORS" in the Prospectus.
If an existing borrower indicates that he plans on refinancing a Home
Equity Loan, the Master Servicer may permit the Home Equity Loan to be
refinanced. Any such refinancing would result in the prepayment of the Home
Equity Loan. Any such prepayments would be passed through to holders of the
Class A Certificates and may affect the weighted average lives of the Class A
Certificates.
In addition to the foregoing factors, the use of Distributable Excess
Spread to pay principal of the Class A Certificates to the extent required by
the Agreement will result in the acceleration of the Class or Classes of Class A
Certificates then entitled to principal, relative to the amortization of the
Home Equity Loans in the early months of the transaction. This acceleration
feature will create overcollateralization which results from the excess of the
total principal balance of the Home Equity Loans over the total certificate
principal balance of the Class A Certificates. Once the required level of
overcollateralization is reached, the acceleration feature will cease, unless
needed to maintain the required level of overcollateralization. See "DESCRIPTION
OF THE CERTIFICATES--Overcollateralization Provisions" herein.
Because the Certificate Rate on each Class of Class A Certificates is
fixed, such rates will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the Class A Certificates were to rise, the market value of the Class
A Certificates may decline.
Payment Delay Affects Yield
The effective yield to the Certificateholders of each Class of the
Class A Certificates will be lower than the yield otherwise produced by the
Certificate Rate for each such Class and the purchase price of such Certificates
because distributions will not be payable to the Certificateholders of the Class
A Certificates until the Distribution Date following the month of accrual
(without any additional distribution of interest or earnings thereon in respect
of such delay).
Weighted Average Lives
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average lives of the
Class A Certificates will be influenced by the rate at which principal on the
Home Equity Loans is paid, which may be in the form of scheduled payments or
prepayments (including prepayments of principal by the borrower), and the timing
thereof. The weighted average life of the Class A Certificates will also be
affected by the amount and timing of delinquencies and defaults on the Home
Equity Loans and the recoveries, if any, on defaulted Home Equity Loans and
foreclosed properties.
The prepayment model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of home equity
loans for the life of such home equity loans. The model assumes a constant
prepayment rate ("CPR") of 30% per annum of the then outstanding principal
balance of such home equity loans for the life of the home equity loans. The
Prepayment Assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of home equity loans, including the Home Equity Loans.
The tables following the next paragraph indicate the percentage of the
initial principal balance of each Class of Class A Certificates that would be
outstanding after each of the dates shown at various percentages of the
Prepayment Assumption and the corresponding weighted average life. The tables
are based on the following assumptions (the "Modeling Assumptions"): (i) the
Home Equity Loan Pool consists of Home Equity Loans with
S-32
<PAGE>
the characteristics set forth in the table below, (ii) distributions on the
Class A Certificates are made on the 25th day of each month, commencing in April
1999, (iii) the Home Equity Loans prepay at the percentages of the Prepayment
Assumption indicated, (iv) no defaults or delinquencies occur in the payment by
borrowers of principal and interest on the Home Equity Loans, (v) none of the
Depositor, the Seller, the holder of the largest percentage interest of the
Class R Certificates, the Master Servicer or any other person purchases from the
Trust Fund any Home Equity Loan pursuant to any obligation or option under the
Agreement, except as indicated in footnote three in the tables, (vi) scheduled
monthly payments on the Home Equity Loans are received on the first day of each
month commencing in March 1999, and are computed prior to giving effect to any
prepayments received in the prior month, (vii) prepayments representing payment
in full of individual Home Equity Loans are received on the last day of each
month commencing in March 1999, and include 30 days of interest thereon, (viii)
the Class A Certificates of each Class have the respective initial principal
balances as set forth herein, (ix) the Certificate Rates for the Class A-1,
Class A-2, Class A-3 and Class A-4 Certificates are 6.06%, 6.30%, 6.60% and
6.47%, respectively, (x) the Closing Date for the Class A Certificates is March
31, 1999 and (xi) the overcollateralization levels are set initially as
specified in the Agreement, and thereafter increase or decrease in accordance
with the provisions of the Agreement.
HYPOTHETICAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
Number of
Home Equity Original Term to Remaining Term to
Pool Number Loans Principal Balance Loan Rate Maturity (Months) Maturity (Months)
----------- ----------- ----------------- --------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
1 1,720 $ 44,506,054.21 12.270% 121 95
2 4,017 $159,980,086.61 12.308% 180 161
3 483 $ 34,111,982.04 11.387% 239 225
4 75 $ 6,169,255.53 11.701% 298 287
5 410 $ 36,412,143.04 11.192% 360 345
------ ---------------
Totals 6,705 $281,179,521.43
====== ===============
</TABLE>
There will be discrepancies between the characteristics of the actual
Home Equity Loans and the characteristics assumed in preparing the tables. Any
such discrepancy may have an effect upon the percentages of the initial
principal balance outstanding (and the weighted average life) of each Class of
Class A Certificates set forth in the tables. In addition, since the actual Home
Equity Loans will have characteristics that differ from those assumed in
preparing the tables set forth below, the Class A Certificates may mature
earlier or later than indicated by the tables. Variations in the prepayment
experience and the balance of the Home Equity Loans that prepay may increase or
decrease the percentages of initial principal balances (and weighted average
lives) shown in the following tables. Such variations may occur even if the
average prepayment experience of all such Home Equity Loans equals any of the
specified CPR percentages.
S-33
<PAGE>
<TABLE>
<CAPTION>
Class A-1 Certificates Class A-2 Certificates
at the following CPR percentages at the following CPR percentages
Distribution Date 0% 15% 25% 30% 35% 45% 50% 0% 15% 25% 30% 35% 45% 50%
- ------------------ --- --- --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100 100 100 100 100 100 100 100 100 100 100 100 100 100
March 25, 2000.... 87 65 51 44 37 23 15 100 100 100 100 100 100 100
March 25, 2001.... 82 42 20 10 0 0 0 100 100 100 100 100 0 0
March 25, 2002.... 75 23 0 0 0 0 0 100 100 100 44 0 0 0
March 25, 2003.... 68 10 0 0 0 0 0 100 100 27 0 0 0 0
March 25, 2004.... 61 0 0 0 0 0 0 100 96 0 0 0 0 0
March 25, 2005.... 52 0 0 0 0 0 0 100 50 0 0 0 0 0
March 25, 2006.... 43 0 0 0 0 0 0 100 14 0 0 0 0 0
March 25, 2007.... 36 0 0 0 0 0 0 100 1 0 0 0 0 0
March 25, 2008.... 30 0 0 0 0 0 0 100 0 0 0 0 0 0
March 25, 2009.... 23 0 0 0 0 0 0 100 0 0 0 0 0 0
March 25, 2010.... 16 0 0 0 0 0 0 100 0 0 0 0 0 0
March 25, 2011.... 7 0 0 0 0 0 0 100 0 0 0 0 0 0
March 25, 2012.... 0 0 0 0 0 0 0 75 0 0 0 0 0 0
March 25, 2013.... 0 0 0 0 0 0 0 39 0 0 0 0 0 0
March 25, 2014.... 0 0 0 0 0 0 0 28 0 0 0 0 0 0
March 25, 2015.... 0 0 0 0 0 0 0 16 0 0 0 0 0 0
March 25, 2016.... 0 0 0 0 0 0 0 3 0 0 0 0 0 0
March 25, 2017.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2018.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2019.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2020.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2021.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2022.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2023.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2024.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2025.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2026.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2027.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2028.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2029.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted
Average Life
(years(1)(2)...... 6.33 1.92 1.21 1.00 0.86 0.65 0.58 14.12 6.16 3.70 3.00 2.44 1.75 1.52
Weighted
Average Life
(years)(1)(3)..... 6.33 1.92 1.21 1.00 0.86 0.65 0.58 14.12 6.16 3.70 3.00 2.44 1.75 1.52
</TABLE>
- -------------
(1) The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of such Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial principal balance of such Certificate and dividing the results by
12.
(2) Assumes the holder of the largest percentage interest of the Class R
Certificates exercises its option to purchase the Home Equity Loans when
the aggregate principal balance of the Home Equity Loans remaining is 5% or
less of the Cut-off Date Pool Principal Balance. See "POOLING AND SERVICING
AGREEMENT--Termination; Purchase of Home Equity Loans" herein.
(3) Assumes that the Class A Certificates remain outstanding to their maturity
date.
S-34
<PAGE>
<TABLE>
<CAPTION>
Class A-3 Certificates Class A-4 Certificates
at the following CPR percentages at the following CPR percentages
Distribution Date 0% 15% 25% 30% 35% 45% 50% 0% 15% 25% 30% 35% 45% 50%
- ----------------- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100 100 100 100 100 100 100 100 100 100 100 100 100 100
March 25, 2000.... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
March 25, 2001.... 100 100 100 100 100 98 55 100 100 100 100 100 100 100
March 25, 2002.... 100 100 100 100 96 24 0 100 100 100 100 100 100 95
March 25, 2003.... 100 100 100 79 43 0 0 97 90 86 83 81 66 42
March 25, 2004.... 100 100 77 39 12 0 0 94 81 73 69 65 0 0
March 25, 2005.... 100 100 50 22 3 0 0 88 67 55 49 41 0 0
March 25, 2006.... 100 100 34 13 0 0 0 78 52 37 29 0 0 0
March 25, 2007.... 100 100 33 0 0 0 0 52 22 11 0 0 0 0
March 25, 2008.... 100 84 0 0 0 0 0 37 10 0 0 0 0 0
March 25, 2009.... 100 66 0 0 0 0 0 25 4 0 0 0 0 0
March 25, 2010.... 100 48 0 0 0 0 0 15 1 0 0 0 0 0
March 25, 2011.... 100 0 0 0 0 0 0 8 0 0 0 0 0 0
March 25, 2012.... 100 0 0 0 0 0 0 3 0 0 0 0 0 0
March 25, 2013.... 100 0 0 0 0 0 0 1 0 0 0 0 0 0
March 25, 2014.... 100 0 0 0 0 0 0 1 0 0 0 0 0 0
March 25, 2015.... 100 0 0 0 0 0 0 1 0 0 0 0 0 0
March 25, 2016.... 100 0 0 0 0 0 0 1 0 0 0 0 0 0
March 25, 2017.... 88 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2018.... 75 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2019.... 70 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2020.... 64 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2021.... 57 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2022.... 49 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2023.... 40 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2024.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2025.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2026.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2027.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2028.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
March 25, 2029.... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted
Average Life
(years)(1)(2)..... 22.01 10.60 6.45 5.05 4.03 2.59 2.08 8.52 6.76 6.10 5.70 5.26 4.21 3.71
Weighted
Average Life
(years)(1)(3)..... 22.65 11.09 6.93 5.35 4.08 2.59 2.08 8.52 6.76 6.14 5.89 5.63 4.57 4.03
</TABLE>
- -------------
(1) The weighted average life of a Class A Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance of such Certificate to the related
Distribution Date, (b) adding the results and (c) dividing the sum by the
initial principal balance of such Certificate and dividing the results by
12.
(2) Assumes the holder of the largest percentage interest of the Class R
Certificates exercises its option to purchase the Home Equity Loans when
the aggregate principal balance of the Home Equity Loans remaining is 5% or
less of the Cut-off Date Pool Principal Balance. See "POOLING AND SERVICING
AGREEMENT--Termination; Purchase of Home Equity Loans" herein.
(3) Assumes that the Class A Certificates remain outstanding to their maturity
date.
The above tables have been prepared based on the assumptions described
above (including the assumptions regarding the characteristics and performance
of the Home Equity Loans, which may differ from the actual characteristics and
performance thereof) and should be read in conjunction therewith.
S-35
<PAGE>
Last Scheduled Distribution Dates
The last scheduled distribution date (the "Last Scheduled Distribution
Date") for each Class of Class A Certificates will be the following:
Class Distribution Date in
----- --------------------
A-1 January 2012
A-2 May 2016
A-3 July 2026
A-4 May 2026
The Last Scheduled Distribution Date for each Class of Class A
Certificates has been calculated on the basis of the Modeling Assumptions and
the assumptions that there are no prepayments and Distributable Excess Spread is
not used to make accelerated payments of principal to the holders of the Class A
Certificates. Since the rate of distributions in reduction of the principal
balance of each Class of Class A Certificates will depend on the rate of payment
(including prepayments) of the Home Equity Loans, the principal balance of each
such Class could be reduced to zero significantly earlier or later than the
related Last Scheduled Distribution Date. The rate of payments on the Home
Equity 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 Home Equity
Loans.
DESCRIPTION OF THE CERTIFICATES
General
The Banc One Home Equity Loan Asset Backed Certificates, Series 1999-1
(the "Certificates") will consist of four classes of senior certificates (each,
a "Class"), the Class A-1 Certificates, the Class A-2 Certificates, the Class
A-3 Certificates and the Class A-4 Certificates (collectively, the "Class A
Certificates") and one Class of subordinate certificates (the "Class R
Certificates"). The Certificates will be issued pursuant to a pooling and
servicing agreement (the "Agreement"), dated as of March 1, 1999, among the
Seller, the Depositor, the Master Servicer and the Trustee. Only the Class A
Certificates are offered hereby.
The Class A Certificates will be issued in denominations of $1,000 and
multiples of $1 in excess thereof and will evidence specified undivided
interests in the Trust. The property of the Trust will include, to the extent
provided in the Agreement: (i) the Home Equity Loans; (ii) payments on the Home
Equity Loans received on or after the Cut-Off Date; (iii) Mortgaged Properties
relating to the Home Equity Loans that are acquired by foreclosure or deed in
lieu of foreclosure; (iv) the Collection Account and the Certificate Account and
funds on deposit therein (excluding net earnings thereon); (v) rights under
certain hazard insurance policies, if any, covering the Mortgaged Properties and
rights under a blanket hazard insurance policy obtained by the Master Servicer
as protection against coverage lapses in such individual hazard insurance
policies; and (vi) an assignment of the Depositor's rights under the home equity
loan purchase agreement (the "Purchase Agreement"). In addition, the Depositor
has caused the Certificate Insurer to issue an irrevocable and unconditional
certificate guaranty insurance policy (the "Policy") for the benefit of the
holders of the Class A Certificates, pursuant to which the Certificate Insurer
will guarantee certain payments to the Class A Certificateholders as described
herein. The Policy will also be included in the property of the Trust.
Definitive Certificates will be transferable and exchangeable at the corporate
trust office of the Trustee, which will initially act as Certificate Registrar.
See "--Book-Entry Certificates and Definitive Certificates" below. No service
charge will be made for any registration of exchange or transfer of Class A
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
The principal balance of any Class of Class A Certificates on any
Distribution Date is equal to the principal balance of such Class of Class A
Certificates on the Closing Date minus the aggregate of amounts actually
distributed as principal to the holders thereof. On any date, the "Certificate
Principal Balance" is the aggregate of the principal balances of all Classes of
Class A Certificates.
S-36
<PAGE>
Only the Class A Certificates are being offered hereby. Each Class of
Class A Certificates represents the right to receive payments of interest at the
Certificate Rate for such Class and payments of principal as described below.
The "Percentage Interest" represented by a Class A Certificate of a
Class as of any date of determination will be equal to the percentage obtained
by dividing the denomination of such Certificate by the aggregate principal
balance of all Certificates of such Class as of the Cut-Off Date.
Assignment of Home Equity Loans
On the Closing Date the Depositor will transfer to the Trust all of its
right, title and interest in and to each Home Equity Loan, the related Mortgage
Notes, Mortgages and other related documents (collectively, the "Related
Documents"), including all payments received on each such Home Equity Loan on or
after the Cut-Off Date. The Trustee, concurrently with such transfer, will
deliver the Certificates to the Depositor. Each Home Equity Loan transferred to
the Trust will be identified on a schedule (the "Home Equity Loan Schedule")
delivered to the Trustee pursuant to the Agreement. Such schedule will include
information such as the Principal Balance of each Home Equity Loan as of the
Cut-Off Date, its Loan Rate as well as other information.
The terms of the Agreement provide that the Seller will maintain
possession of the documentation relating to each Home Equity Loan (the "Mortgage
File"), other than the Mortgage Note, the Mortgage and an assignment of the
Mortgage. No later than the Closing Date, the Seller is required to deliver to
the Trustee the Mortgage Note, the Mortgage (or a certified copy of the
Mortgage) and an assignment of the Mortgage in recordable form.
Within 45 days of the date of delivery thereof, the Trustee will review
the Home Equity Loans and the Related Documents delivered to it pursuant to the
Agreement and if any Home Equity Loan or Related Document delivered to it is
found to be defective in any material respect and such defect is not cured
within 135 days following notification thereof to the Seller by the Trustee, the
Seller will be obligated to either (i) substitute for such Home Equity Loan an
Eligible Substitute Home Equity Loan; provided, however, such substitution is
permitted only within two years of the Closing Date and may not be made unless
an opinion of counsel is provided to the effect that such substitution will not
disqualify the Trust as a REMIC or result in a prohibited transaction tax under
the Code or (ii) purchase such Home Equity Loan at a price (the "Purchase
Price") equal to the outstanding Principal Balance of such Home Equity Loan as
of the date of purchase, plus all accrued and unpaid interest thereon, computed
at the Loan Rate, plus the amount of any unreimbursed Servicing Advances made by
the Master Servicer. The obligation of the Seller to repurchase or substitute
for a Defective Home Equity Loan is the sole remedy regarding any defects in the
Home Equity Loans and Related Documents available to the Trustee or the
Certificateholders. Within 90 days of the occurrence of an Assignment Event, the
Seller, at its own expense, is required to (i) except with respect to an
Assignment Event described in clause (iv) of the definition thereof, deliver the
remainder of each Mortgage File to the Trustee and (ii) either cause the
assignment of each Mortgage to be recorded, at its expense, or to deliver to the
Trustee and the Certificate Insurer an opinion of counsel acceptable to the
Certificate Insurer to the effect that recordation of such assignments is not
necessary in order to perfect the interests of the Trust in such Mortgages.
Any Home Equity Loan required to be purchased by the Seller because of
defective documentation or a material breach of representation or warranty as
described below is referred to as a "Defective Home Equity Loan".
An "Assignment Event" will occur on the day following either (i) the
occurrence and continuance of a Servicer Default, (ii) the reduction of the
Master Servicer's long-term unsecured senior debt rating below "Baa2" by Moody's
or "BBB+" by Standard & Poor's, (iii) 30 days after the request of the
Certificate Insurer, if in the judgment of the Certificate Insurer, it deems
such action necessary to protect its interest or (iv) with respect to a
particular Home Equity Loan, the occurrence of a foreclosure proceeding or the
insolvency of the related mortgagor.
In connection with the substitution of an Eligible Substitute Home
Equity Loan, the Seller will be required to deposit in the Collection Account an
amount (the "Substitution Adjustment Amount") equal to the excess of the
Principal Balance of the related Defective Home Equity Loan over the Principal
Balance of such Eligible Substitute Home Equity Loan.
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An "Eligible Substitute Home Equity Loan" is a home equity loan
substituted by the Seller for a Defective Home Equity Loan which must, on the
date of such substitution, (i) have an outstanding Principal Balance (or in the
case of a substitution of more than one Home Equity Loan for a Defective Home
Equity Loan, an aggregate Principal Balance), not in excess of, and not more
than 5% less than, the Principal Balance of the Defective Home Equity Loan; (ii)
have a Loan Rate not less than the Loan Rate of the Defective Home Equity Loan
and not more than 1% in excess of the Loan Rate of such Defective Home Equity
Loan; (iii) have a mortgage of the same or higher level of priority as the
mortgage relating to the Defective Home Equity Loan; (iv) have a remaining term
to maturity not more than six months earlier and not later than the remaining
term to maturity of the Defective Home Equity Loan; (v) have a Combined
Loan-to-Value Ratio the same or lower than the Combined Loan-to-Value Ratio of
the Defective Home Equity Loan; (vi) have a credit score the same or higher than
the credit score of the Defective Home Equity Loan; (vii) comply with each
representation and warranty as to the Home Equity Loans set forth in the
Agreement (deemed to be made as of the date of substitution); and (viii) satisfy
certain other conditions specified in the Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Home Equity Loan (e.g., Cut-Off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent and warrant,
on the Closing Date, that, among other things: (i) at the time of transfer to
the Depositor, the Seller has transferred or assigned all of its right, title
and interest in each Home Equity Loan and the Related Documents, free of any
lien; and (ii) each Home Equity Loan complied, at the time of origination, in
all material respects with applicable state and federal laws. Upon discovery of
a breach of any such representation and warranty which materially and adversely
affects the interests of the Certificateholders or the Certificate Insurer in
the related Home Equity Loan and Related Documents, the Seller will have a
period of 90 days after discovery or notice of the breach to effect a cure. If
the breach cannot be cured within the 90-day period, the Seller will be
obligated to (i) substitute for such Defective Home Equity Loan an Eligible
Substitute Home Equity Loan or (ii) purchase such Defective Home Equity Loan
from the Trust. The same procedure and limitations that are set forth above for
the substitution or purchase of Defective Home Equity Loans as a result of
deficient documentation relating thereto will apply to the substitution or
purchase of a Defective Home Equity Loan as a result of a breach of a
representation or warranty in the Agreement that materially and adversely
affects the interests of the Certificateholders or the Certificate Insurer.
Pursuant to the Agreement, the Master Servicer will be responsible for
the servicing of the Home Equity Loans as more fully set forth below.
Payments on Home Equity Loans; Deposits to Collection Account and Certificate
Account
The Master Servicer shall establish and maintain in the name of the
Trustee a separate trust account (the "Collection Account") for the benefit of
the holders of the Certificates. Within two Business Days (as defined in the
Agreement) of receipt by the Master Servicer of amounts in respect of the Home
Equity Loans (excluding amounts representing the Servicing Fee, reimbursement
for Monthly Advances, Servicing Advances and Nonrecoverable Advances and
insurance proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items), the Master Servicer will deposit such amounts in the
Collection Account. Notwithstanding the foregoing, for as long as Bank One,
Indiana, National Association remains the Master Servicer under the Agreement
and maintains a short-term unsecured debt rating of at least "A-1" by Standard &
Poor's and "P-1" by Moody's, the Master Servicer need not deposit collections
into the Collection Account upon receipt but may use for its own benefit all
such collections until two Business Days preceding the related Distribution
Date. A "Distribution Date" is the 25th day of each month, or if such day is not
a Business Date, then the next succeeding Business Day, commencing in April
1999. While such ratings are maintained, on or prior to the second Business Day
preceding each Distribution Date, the Master Servicer will deposit in the
Collection Account amounts which are to be included in the Available Funds for
the related Distribution Date. Amounts so deposited may be invested in Eligible
Investments maturing not later than one Business Day prior to the date on which
the amount on deposit therein is required to be deposited in the Certificate
Account or on such Distribution Date if approved by the Rating Agencies and the
Certificate Insurer. Not later than 2:00 p.m., New York time, on the Business
Day immediately prior to each Distribution Date, the Master Servicer will
transfer from the Collection Account for deposit into a separate trust account
(the "Certificate Account") established in the name of the Trustee the Available
Funds for such Distribution Date.
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With respect to each Distribution Date, the "Available Funds" will be
the sum of:
(i) payments of principal and interest on the Home Equity Loans
received with respect to the related Collection Period (net of amounts
representing the Master Servicing Fee with respect to each Home Equity
Loan and reimbursement for related Monthly Advances, Servicing Advances
and Nonrecoverable Advances);
(ii) Liquidation Proceeds and Insurance Proceeds (each as defined
in the Prospectus) with respect to the Home Equity Loans received
during the related Collection Period (net of amounts applied to the
restoration or repair of Mortgaged Properties);
(iii) the Purchase Price for any repurchased Defective Home Equity
Loans and any related Substitution Adjustment Amounts received for such
Distribution Date; and
(iv) payments from the Master Servicer received for such
Distribution Date in connection with (a) Monthly Advances, (b)
Compensating Interest and (c) the termination of the Trust as provided
in the Agreement.
Investments that qualify as "Eligible Investments" are specified in the
Agreement and are limited to investments which meet the criteria of the Rating
Agencies from time to time as being consistent with their then current ratings
of the Class A Certificates.
Priority of Distributions
On each Distribution Date the Trustee shall withdraw from the
Certificate Account (a) all Available Funds then on deposit and (b) the amount
of any Insured Payment under the Policy, and make the following disbursements
and transfers as described below (except that amounts paid under the Policy
shall only be available for distribution to Class A Certificateholders):
(i) to the Trustee, the Trustee fee for such Distribution Date and
to the Certificate Insurer, the amount owing to the Certificate Insurer
under the Insurance Agreement for the premium;
(ii) to the Master Servicer, the amount of any accrued and unpaid
Master Servicing Fee;
(iii) concurrently, to the holders of each Class of Class A
Certificates pro rata, interest at the applicable Certificate Rate that
accrued during the related Interest Period on the related principal
balance of such Class immediately prior to such Distribution Date, less
(A) such Class's pro rata share of any shortfalls in interest due to
the application of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (a "Relief Act Shortfall") and less (B) such Class's pro
rata share of the excess, if any, of the aggregate shortfalls in
interest due to Principal Prepayments in Full received during the
related Collection Period over the Compensating Interest received by
the Trustee for the related Collection Period (the "Prepayment Interest
Shortfall");
(iv) concurrently, to the holders of each Class of Class A
Certificates pro rata, any unpaid shortfalls in interest on such Class
that were required to be paid on prior Distribution Dates pursuant to
clause (iii) (for each Class, the "Unpaid Interest Shortfall"), with
interest thereon (to the extent permitted by applicable law) at the
applicable Certificate Rate that accrued during the related Interest
Period;
(v) to the holders of the Class A Certificates in reduction of
their principal balances, an aggregate amount equal to the Formula
Principal Distribution Amount (but not in excess of the aggregate
amount, if any, necessary to be distributed on such Distribution Date
so that the Overcollateralization Amount equals the Required
Overcollateralization Amount), such amount to be allocated among the
Class A Certificates as follows:
(A) to the Class A-4 Certificates, up to the Priority Amount
for such Distribution Date;
(B) sequentially, to the Class A-1, Class A-2 and Class A-3
Certificates, in that order, until the principal balance of each
such Class has been reduced to zero; and
(C) to the Class A-4 Certificates, without regard to the
Priority Amount for such Distribution Date, until the principal
balance for such Class has been reduced to zero.
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(vi) to the Certificate Insurer, any amount owing to it under the
Insurance Agreement for reimbursement of prior draws made on the
Policy;
(vii) to the Master Servicer, the amount of any Nonrecoverable
Advances not previously reimbursed;
(viii) sequentially, to the holders of the Class A-1, Class A-2,
Class A-3 and Class A-4 Certificates, in that order, until the
principal balance of each such Class has been reduced to zero, an
amount equal to the Distributable Excess Spread;
(ix) to the Certificate Insurer, any other amounts owing to it
under the Insurance Agreement;
(x) concurrently, to the holders of each Class of Class A
Certificates pro rata, any Prepayment Interest Shortfall for such
Distribution Date and any Prepayment Interest Shortfalls that were not
paid on prior Distribution Dates pursuant to this clause (x), with
interest thereon (to the extent permitted by applicable law) at the
applicable Certificate Rate; and
(xi) to the holder of the Class R Certificate, any remaining
amount.
Notwithstanding the foregoing, on any Distribution Date during the
continuance of a default by the Certificate Insurer, the Formula Principal
Distribution Amount and any Distributable Excess Spread for such Distribution
Date will be distributed to each outstanding Class of Class A Certificates on a
pro rata basis in accordance with the principal balance of each such Class
immediately prior to such Distribution Date instead of in accordance with the
priorities set forth above.
Interest Distributions
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "--Priority of
Distributions," interest will be distributed to each Class of Class A
Certificates in an amount equal to the sum of (i) interest at the applicable
Certificate Rate that accrued during the related Interest Period on the related
principal balance of such Class immediately prior to such Distribution Date less
such Class's pro rata share of any Relief Act Shortfall and Prepayment Interest
Shortfall, (ii) any Unpaid Interest Shortfall for such Class and (iii) interest
on such Unpaid Interest Shortfall (to the extent permitted by applicable law) at
the applicable Certificate Rate that accrued during the related Interest Period.
On each Distribution Date, the accrued interest for each Class of Class
A Certificates will be distributed on an equal priority and any shortfall in the
amount required to be distributed as interest thereon to each such Class will be
allocated between such Classes pro rata based on the amount which would have
been distributed to each such Class in the absence of such shortfall.
The "Interest Period" means, with respect to each Distribution Date and
the Class A Certificates, the period from the first day of the calendar month
preceding the month of such Distribution Date through the last day of such
calendar month. Interest on the Class A Certificates in respect of any
Distribution Date will accrue during the related Interest Period on the basis of
a 360-day year consisting of twelve 30-day months.
Principal Distributions
On each Distribution Date, to the extent of funds available therefor,
in accordance with the priorities described above under "--Priority of
Distributions," principal will be distributed to the holders of Class A
Certificates then entitled to distributions of principal in an amount (but not
in excess of the Certificate Principal Balance of the Class A Certificates or in
excess of the aggregate amount, if any, necessary to be distributed on such
Distribution Date so that the Overcollateralization Amount equals the Required
Overcollateralization Amount) equal to the sum of (i) the Formula Principal
Distribution Amount for such Distribution Date and (ii) the Distributable Excess
Spread for such Distribution Date.
The "Formula Principal Distribution Amount" means, as to any
Distribution Date, the sum of the Principal Distributable Amount and any Unpaid
Principal Shortfall for such Distribution Date.
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The "Principal Distributable Amount" means, with respect to any
Distribution Date, an amount equal to the sum of the following amounts (without
duplication) with respect to the immediately preceding Collection Period of:
(i) each payment of principal on a Home Equity Loan received by
the Master Servicer during such Collection Period, including all full
and partial principal prepayments;
(ii) the Principal Balance as of the end of the immediately
preceding Collection Period of each Home Equity Loan that became a
Liquidated Home Equity Loan for the first time during such Collection
Period;
(iii) all Insurance Proceeds on a Home Equity Loan received by the
Master Servicer during such Collection Period that are not part of
Liquidation Proceeds and were applied to principal of the related Home
Equity Loan;
(iv) the portion of the Purchase Price allocable to principal of
all repurchased Defective Home Equity Loans with respect to such
Collection Period; and
(v) any Substitution Adjustment Amounts deposited by the Seller in
the Collection Account with respect to the substitution of an Eligible
Substitute Home Equity Loan during such Collection Period.
The "Collection Period" with respect to any Distribution Date is the
calendar month preceding the month in which such Distribution Date occurs.
The "Excess Spread" means, with respect to any Distribution Date, the
excess, if any, of (a) the Available Funds and the amount of any draws under the
Policy for such Distribution Date, over (b) the portion thereof required to be
distributed on such Distribution Date pursuant to clauses (i) through (vii) as
set forth under the heading "--Priority of Distributions".
The "Distributable Excess Spread" means, with respect to any
Distribution Date, the amount, if any, of the Excess Spread necessary to be
distributed on such Distribution Date so that the Overcollateralization Amount
equals the Required Overcollateralization Amount (after giving effect to the
distribution of the Formula Principal Distribution Amount on such Distribution
Date).
The application of Excess Spread as described above is intended to
create overcollateralization to provide a source of additional cashflow to cover
net losses realized in respect of Liquidated Home Equity Loans. A draw on the
Policy in respect of principal will not be made until the Certificate Principal
Balance exceeds the aggregate Principal Balance of the Home Equity Loans. See
"THE POLICY" herein. Accordingly, there may be Distribution Dates on which Class
A Certificateholders receive little or no distributions in respect of principal.
The "Unpaid Principal Shortfall" means, with respect to any
Distribution Date, the amount, if any, by which the Certificate Principal
Balance as of the immediately preceding Distribution Date (after giving effect
to the distribution of the Formula Principal Distribution Amount, any
Distributable Excess Spread and any draws under the Policy applied on such
preceding Distribution Date) exceeds the aggregate Principal Balance of the Home
Equity Loans at the end of the second preceding Collection Period.
The "Priority Amount" means, for any Distribution Date, the product of
(i) the Priority Percentage for such Distribution Date and (ii) the Class A-4
Pro Rata Principal Amount for such Distribution Date. In no event will the
Priority Amount for any Distribution Date exceed the principal balance of the
Class A-4 Certificates immediately prior to such Distribution Date.
The "Priority Percentage" for each Distribution Date will be the
percentage indicated below:
Distribution Dates Occurring in Priority Percentage
------------------------------- -------------------
April 1999 through March 2002 0%
April 2002 through March 2004 45%
April 2004 through March 2005 80%
April 2005 through March 2006 100%
April 2006 and thereafter 300%
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The "Class A-4 Pro Rata Principal Amount" for any Distribution Date
will be an amount equal to the product of (i) a fraction, the numerator of which
is the principal balance of the Class A-4 Certificates immediately prior to such
Distribution Date and the denominator of which is the Certificate Principal
Balance immediately prior to such Distribution Date, and (ii) the Formula
Principal Distribution Amount for such Distribution Date.
If the required level of overcollateralization is reduced below the
then existing amount of overcollateralization (as described below) or if the
required level of overcollateralization is satisfied on any Distribution Date,
the amount of the Formula Principal Distribution Amount and Excess Spread
required to be distributed to the holders of the Class A Certificates on such
Distribution Date will be correspondingly reduced by the amount of such
reduction or by the amount necessary such that the overcollateralization will
not exceed the required level of overcollateralization after giving effect to
the distribution in respect of principal to be made on such Distribution Date.
See "--Overcollateralization Provisions" below.
On each Distribution Date, to the extent that net losses realized in
respect of Liquidated Home Equity Loans are not covered by the application of
Available Funds as described above, the amount of overcollateralization, if any,
will be reduced.
A "Liquidated Home Equity Loan" with respect to any Distribution Date
is a Home Equity Loan with respect to which the Master Servicer has determined,
in accordance with the servicing procedures specified in the Agreement, as of
the end of the preceding Collection Period, that all Liquidation Proceeds which
it expects to recover with respect to such Home Equity Loan have been recovered.
Overcollateralization Provisions
"Overcollateralization Amount" means, with respect to any Distribution
Date, the excess, if any, of (i) the aggregate Principal Balances of the Home
Equity Loans at the end of the related Collection Period over (ii) the
Certificate Principal Balance as of such Distribution Date (after giving effect
to the distribution of principal on such Distribution Date).
"Required Overcollateralization Amount", means, with respect to any
Distribution Date, the amount specified in the Agreement.
In general, the Agreement requires that, on each Distribution Date, the
Distributable Excess Spread will be applied on such Distribution Date as an
accelerated payment of principal on the Class or Classes of Class A Certificates
then entitled to principal distributions in accordance with the priorities
specified under "--Priority of Distributions" above. This has the effect of
accelerating the amortization of the Class A Certificates relative to the
amortization of the Home Equity Loans. Such overcollateralization will be
available to absorb any net losses on Liquidated Home Equity Loans that are not
covered by the application of Available Funds as described in "--Priority of
Distributions" above.
As of the Closing Date, the Cut-off Date Pool Principal Balance will
exceed the initial Certificate Principal Balance by approximately $5,623,521.43.
After the Closing Date, overcollateralization generally will increase only as a
result of the distribution to the Class A Certificateholders of Distributable
Excess Spread.
The required level of overcollateralization will be satisfied as of
each Distribution Date when the Overcollateralization Amount equals or exceeds
the Required Overcollateralization Amount. Thereafter, the level of
overcollateralization necessary to satisfy the required level of
overcollateralization may be increased or decreased from time to time based on
the loss and delinquency experience of the Home Equity Loans in accordance with
the provisions of the Agreement. In addition, the Required Overcollateralization
Amount may be decreased, at the sole discretion of the Certificate Insurer, as
low as zero, which would have the effect of reducing the amortization of the
Class A Certificates below what it otherwise would have been.
Monthly Advances
Not later than two Business Days prior to each Distribution Date, the
Master Servicer will remit to the Trustee for deposit in the Certificate Account
as part of the Available Funds an amount (the "Monthly Advance"), to be
distributed on the related Distribution Date, equal to the sum of 30 days of
interest on each Home Equity Loan
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for which a monthly payment has not been received by the Master Servicer with
respect to the related Collection Period (net of the Master Servicing Fee).
Except as provided below, such obligation of the Master Servicer continues with
respect to each Home Equity Loan until such Home Equity Loan becomes a
Liquidated Home Equity Loan.
In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, the cost of (i) the preservation, restoration and protection
of the Mortgaged Properties, (ii) any enforcement or judicial proceedings,
including foreclosures, and (iii) the management and liquidation of Mortgaged
Properties acquired in satisfaction of the related Mortgage. Each such
expenditure will constitute a "Servicing Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Home Equity Loan, including
Liquidation Proceeds, released mortgaged property proceeds, Insurance Proceeds
and such other amounts as may be collected by the Master Servicer from the
related borrower or otherwise relating to the Home Equity Loan in respect of
which such unreimbursed amounts are owed. The Master Servicer's right to
reimbursement for Monthly Advances shall be limited to late collections of
interest on any Home Equity Loan and to Liquidation Proceeds and Insurance
Proceeds on the related Home Equity Loan. The Master Servicer's right to such
reimbursements is prior to the rights of Certificateholders.
Notwithstanding the foregoing, the Master Servicer is not required to
make any Monthly Advance or Servicing Advance if in the good faith judgment and
sole discretion of the Master Servicer, the Master Servicer determines that such
advance will not be ultimately recoverable from collections received from the
related borrower in respect of the related Home Equity Loan or other recoveries
in respect of such Home Equity Loan. However, if any Servicing Advance or
Monthly Advance made by the Master Servicer is determined by the Master Servicer
to be nonrecoverable from such sources, such amounts may be reimbursed to the
Master Servicer out of Available Funds in accordance with the priorities
specified in "--Priority of Distributions" above. A Monthly Advance or Servicer
Advance that the Master Servicer (or its delegate) determines to be
nonrecoverable is referred to as a "Nonrecoverable Advance".
Reports to Certificateholders
Concurrently with each distribution to the Certificateholders, the
Trustee will forward each Certificateholder a statement prepared by the Master
Servicer setting forth among other items with respect to each Distribution Date:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on such Distribution Date;
(ii) the amount of distribution set forth in paragraph (i) above
in respect of interest and the amount thereof in respect of any Unpaid
Interest Shortfalls, and the amount of any Unpaid Interest Shortfalls
remaining;
(iii) the amount of distribution set forth in paragraph (i) above
in respect of principal and the amount thereof in respect of the Unpaid
Principal Shortfall, and any remaining Unpaid Principal Shortfall;
(iv) the amount applied as a distribution of Distributable Excess
Spread on the Certificates;
(v) the amount paid under the Policy for such Distribution Date in
respect of the interest to each Class of Certificates;
(vi) the Master Servicing Fee;
(vii) the aggregate Principal Balance of the Home Equity Loans as
of the close of business on the last day of the preceding Collection
Period;
(viii) the Certificate Principal Balance after giving effect to
payments allocated to principal above;
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(ix) the amount of overcollateralization as of the close of
business on the Distribution Date, after giving effect to distributions
of principal on such Distribution Date;
(x) the number and aggregate Principal Balances of the Home Equity
Loans as to which the minimum monthly payment is delinquent for 30-59
days, 60-89 days and 90 or more days, respectively, as of the end of
the preceding Collection Period;
(xi) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure;
(xii) the aggregate amount of prepayments received on the Home
Equity Loans during the previous Collection Period; and
(xiii) the weighted average Loan Rate on the Home Equity Loans as
of the first day of the month prior to the Distribution Date.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person, if requested in writing by such Person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
Book-Entry Registration and Definitive Certificates
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Offered Certificates ("Certificate Owners") will hold their Class A
Certificates through The Depository Trust Company ("DTC") in the United States,
or Cedelbank ("Cedelbank") or Euroclear System ("Euroclear") (in Europe) if they
are participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates which equal the aggregate principal balance of the Class A
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank N.A. will act as depositary for Cedelbank
and The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Class A Principal
Balances of $1,000 and in multiples of $1 in excess thereof. Except as described
below, no person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such Certificate
(a "Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the Class A
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will not
be Certificateholders as that term is used in the Agreement. Certificate Owners
are only permitted to exercise their rights indirectly through Participants and
DTC.
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 (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedelbank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Class A Certificates.
Participants and indirect participants with whom Certificate Owners have
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accounts with respect to Class A Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Class A Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Offered Certificates,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of Class
A Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in
Cedelbank or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank Participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank Participant (as defined below) or Euroclear Participant (as defined
below) to a DTC Participant will be received with value on the DTC settlement
date but will be available in the relevant Cedelbank or Euroclear cash account
only as of the business day following settlement in DTC. For information with
respect to tax documentation procedures relating to the Certificates, see
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus and "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedelbank Participants and Euroclear Participants will occur
in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedelbank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC 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 DTC and DTC
participants as in effect from time to time.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participating
organizations ("Cedelbank Participants") and facilitates the clearance and
settlement of securities transactions between Cedelbank Participants through
electronic book-entry changes in accounts of Cedelbank Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in Cedelbank in any of 28 currencies, including United States dollars.
Cedelbank provides to its Cedelbank Participants, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Cedelbank interfaces
with domestic markets in several countries. As a professional depository,
Cedelbank is subject to regulation by the Luxembourg Monetary Institute.
Cedelbank participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect
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access to Cedelbank is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Cedelbank Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such 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 such 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 such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through Cedelbank or Euroclear will be credited to the cash
accounts of Cedelbank Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. Because DTC can only act 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 such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Agreement only at the direction
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of one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry Certificates.
Cedelbank or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Agreement on
behalf of a Cedelbank Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Class A Certificates which conflict with actions taken with respect to other
Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC 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, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of a Servicer Default (as defined
herein), beneficial owners having Percentage Interests aggregating not less than
51% of the aggregate Certificate Principal Balance of the Book-Entry
Certificates advise the Trustee and DTC through the Financial Intermediaries and
the DTC participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
participants of DTC, Cedelbank and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Depositor, the Seller, the Master Servicer, the Certificate
Insurer nor the Trustee will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Certificates held by Cede & Co., as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
DTC and Year 2000 Compliance
DTC management is aware that some computer applications, systems, and
the like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information of the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to: (i) impress upon them the importance of such services
being year 2000 compliant; and (ii) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services. In
addition, DTC is in the process of developing such contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind.
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THE CERTIFICATE INSURER
The following information has been supplied by Ambac Assurance
Corporation (the "Certificate Insurer") for inclusion in this Prospectus
Supplement. No representation is made by the Seller, the Depositor, the Master
Servicer, the Trustee, the Underwriters or any of their respective affiliates as
to the accuracy or completeness of such information.
The Certificate Insurer is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. The
Certificate Insurer primarily insures newly-issued municipal and structured
finance obligations. The Certificate Insurer is a wholly-owned subsidiary of
Ambac Financial Group, Inc. (formerly AMBAC Inc.), a 100% publicly-held company.
Moody's, Standard & Poor's and Fitch IBCA, Inc. have each assigned a triple-A
financial strength rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and
its subsidiaries as of December 31, 1997 and December 31, 1996 and for the three
years ended December 31, 1997, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of Ambac
Financial Group, Inc. (which was filed with the Securities and Exchange
Commission (the "Commission") on March 31, 1998, Commission File No. 1-10777)
and the unaudited consolidated financial statements of the Certificate Insurer
and its subsidiaries as of September 30, 1998 and for the periods ending
September 30, 1998 and September 30, 1997, included in the Quarterly Report on
Form 10-Q of Ambac Financial Group, Inc. for the period ended September 30, 1998
(which was filed with the Commission on November 13, 1998) are hereby
incorporated by reference into this Prospectus Supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated herein by
reference shall be modified or superseded for the purposes of this Prospectus
Supplement to the extent that a statement contained herein by reference herein
also modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by Ambac Financial Group, Inc. with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Class A
Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1995, December 31, 1996, December 31, 1997 and
September 30, 1998, respectively, in conformity with generally accepted
accounting principles.
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Ambac Assurance Corporation
CONSOLIDATED CAPITALIZATION TABLE
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, December 31, September 30,
1995 1996 1997 1998
------------ ------------ ------------ -------------
(unaudited)
------------
<S> <C> <C> <C> <C>
Unearned Premiums......................... $ 906 $ 995 $ 1,184 $ 1,260
Other Liabilities......................... 295 259 562 803
----------- ---------- ----------- -----------
Total Liabilities......................... $ 1,201 $ 1,254 $ 1,746 $ 2,063
----------- ---------- ----------- -----------
Stockholder's equity (1)
Common Stock............................ $ 82 $ 82 $ 82 $ 82
Additional paid-in-capital.............. 481 515 521 527
Accumulated other comprehensive income.. 87 66 118 167
Retained earnings....................... 907 992 1,180 1,341
----------- ---------- ----------- -----------
Total stockholder's equity................ $ 1,557 $ 1,655 $ 1,901 $ 2,117
----------- ---------- ----------- -----------
Total liabilities and stockholder's equity $ 2,758 $ 2,909 $ 3,647 $ 4,180
=========== ========== =========== ===========
</TABLE>
- ---------------------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in
accordance with the Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" adopted by the Certificate Insurer
effective January 1, 1998. As this new standard only requires
additional information in the financial statements, it does not affect
the Certificate Insurer's financial position or results of operations.
For additional financial information concerning the Certificate
Insurer, see the audited and unaudited financial statements of the Certificate
Insurer incorporated by reference herein. Copies of the financial statements of
the Certificate Insurer incorporated herein by reference and copies of the
Certificate Insurer's annual statement for the year ended December 31, 1997
prepared in accordance with statutory accounting standards are available,
without charge, from the Certificate Insurer. The address of the Certificate
Insurer's administrative offices and its telephone number are One State Street
Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the Class A
Certificates or the advisability of investing in the Class A Certificates and
makes no representation regarding, nor has it participated in the preparation
of, this Prospectus Supplement other than the information supplied by the
Certificate Insurer and presented under the headings "THE POLICY" and "THE
CERTIFICATE INSURER" and in the financial statements incorporated herein by
reference.
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The ratings of the Certificate Insurer are not recommendations to buy,
sell or hold the Class A Certificates, and such ratings may be subject to
revision or withdrawal at any time by the rating agencies. Any downward revision
or withdrawal of any of the above ratings may have an adverse effect on the
market price of the Class A Certificates. The Certificate Insurer does not
guaranty the market price of the Class A Certificates nor does it guaranty that
the ratings on the Class A Certificates will not be revised or withdrawn.
THE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. The
information in this section regarding the Policy has been supplied by the
Certificate Insurer for inclusion herein. Only the Class A Certificates will be
entitled to the benefit of the Policy to be issued by the Certificate Insurer.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Policy, has agreed unconditionally and
irrevocably to pay to the Trustee for the benefit of the related Holders of the
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Insured Obligations, that portion of the Insured Amounts which shall become Due
for Payment but shall be unpaid by reason of Nonpayment.
The Certificate Insurer will make such payments to the Trustee from its
own funds on the later of (a) three Business Days following delivery of the
Notice to the Certificate Insurer of Nonpayment or (b) the Business Day on which
the Insured Amounts are Due for Payment. The Certificate Insurer shall be
subrogated to all the Holders' rights to payment on the Insured Obligations to
the extent of the insurance disbursements so made. Once payments of the Insured
Amounts have been made to the Trustee, the Certificate Insurer shall have no
further obligation in respect of such Insured Amounts. Payment of Insured
Amounts shall be made only at the time set forth in the Policy and no
accelerated payment of Insured Amounts shall be made regardless of any
acceleration of any of the Class A Certificates, unless such acceleration is at
the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Trustee
for withholding taxes, if any (including interest and penalties in respect of
any such liability), any prepayment penalty or other accelerated payment which
at any time may become due on or with respect to any Insured Obligation, other
than at the sole option of the Certificate Insurer, nor against any risk other
than Nonpayment, including failure of the Trustee to make any payment due to the
Holders of the Insured Obligations. The Policy does not cover, and Insured
Amounts do not include, any Prepayment Interest Shortfalls or shortfalls due to
the application of the Relief Act.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the third Business Day following receipt on a Business Day
of a certified copy of the order requiring the return of a preference payment,
and such other documentation as is reasonably required by the Certificate
Insurer, such documentation being in a form satisfactory to the Certificate
Insurer, provided that if such documents are received after 12:00 noon, New York
City time on such Business Day, they will be deemed to be received on the
following Business Day.
Insured Payments due under the Policy unless otherwise stated therein
will be disbursed by the Certificate Insurer to the Trustee on behalf of the
Holders by wire transfer of immediately available funds in the amount of the
Insured Payment.
The Certificate Insurer's obligation under the Policy will be
discharged to the extent that funds are received by the Trustee for distribution
to the Holders, whether or not such funds are properly distributed by the
Trustee.
As used in the Policy, the following terms have the following meanings:
"Deficiency Amount" means the excess, if any, of Required Payments over
the Net Available Distribution Amount for such Distribution Date.
"Due for Payment" means with respect to an Insured Amount, the
Distribution Date on which Insured Amounts are due or, with respect to an
Insured Payment which is a Preference Amount, the Business Day on which the
required documentation referred to above has been received by the Certificate
Insurer.
"Holder" means any person who is the registered owner or beneficial
owner of any Insured Obligation.
"Insured Amounts" means, with respect to any Distribution Date, the
Deficiency Amount for such Distribution Date.
"Insured Obligations" means the Class A Certificates.
"Insured Payments" means the aggregate amount paid by the Certificate
Insurer to the Trustee in respect of (i) Insured Amounts for a Distribution Date
and (ii) Preference Amounts for any given Business Day.
"Net Available Distribution Amount" means, with respect to any
Distribution Date, the Available Funds on deposit in the Certificate Account to
be distributed on such Distribution Date, less the aggregate amount applied to
the payment of the Trustee fee, the premium on the Policy and any accrued and
unpaid Master Servicing Fee on such Distribution Date.
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"Nonpayment" means, with respect to any Distribution Date, a Deficiency
Amount owing in respect of such Distribution Date.
"Notice" means the notice sent in writing by telecopy, substantially in
the form of Exhibit A attached to the Policy, from the Trustee specifying the
Insured Amount that is due and owing on the applicable Distribution Date.
"Preference Amount" means any amount previously distributed to a Holder
of a Class A Certificate that is recovered as a voidable preference by a trustee
in bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.), as
amended from time to time, in accordance with a final non-appealable order of a
court having competent jurisdiction.
"Required Payments" means, with respect to the Class A Certificates,
the sum of (i) for any Distribution Date, the aggregate amount of interest at
the applicable Certificate Rate that accrued during the related Interest Period
on the related principal balance of each Class of Class A Certificates
immediately prior to such Distribution Date (less each Class's pro rata share of
any Relief Act Shortfall and Prepayment Interest Shortfall) plus any Unpaid
Interest Shortfall for each Class of Class A Certificates, (ii) for any
Distribution Date (other than the Distribution Date in July 2026), the amount,
if any, by which the Certificate Principal Balance as of such Distribution Date
(after giving effect to all distributions of principal on the Class A
Certificates on such Distribution Date) exceeds the aggregate Principal Balance
of the Home Equity Loans as of end of the related Collection Period; and (iii)
on the Distribution Date in July 2026, an amount equal to the Certificate
Principal Balance as of such Distribution Date (after giving effect to all
distributions of principal on the Class A Certificates on such Distribution
Date).
Any notice under the Policy may be made at the address listed below for
the Certificate Insurer.
The notice address of the Certificate Insurer is One State Street
Plaza, New York, New York 10004 Attention: General Counsel, or such other
address as the Certificate Insurer shall specify to the Trustee in writing. The
Policy is being issued under and pursuant to, and will be construed under; the
laws of the State of New York, without giving effect to the conflict of laws
principles thereof.
THE INSURANCE PROVIDED BY THE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Policy is not cancelable for any reason. The premium on the Policy
is not refundable for any reason.
POOLING AND SERVICING AGREEMENT
Collection and Other Servicing Procedures on Home Equity Loans
The Master Servicer will make reasonable efforts to collect all
payments called for under the Home Equity Loans and will, consistent with the
Agreement, follow such collection procedures as it follows from time to time
with respect to the home equity loans in its servicing portfolio comparable to
the Home Equity Loans. Consistent with the above, the Master Servicer may in its
discretion waive any late payment charge or any assumption or other fee or
charge that may be collected in the ordinary course of servicing the Home Equity
Loans.
Initially, the Master Servicer expects BOFS to perform the servicing of
the Home Equity Loans and to perform all of the duties of the Master Servicer,
as permitted by the Agreement,. See "--Certain Matters Regarding the Depositor,
Seller and Master Servicer" below.
With respect to the Home Equity Loans, the Master Servicer may arrange
with a borrower a schedule for the payment of interest due and unpaid for a
period, provided that any such arrangement is consistent with the Master
Servicer's or the Servicer's policies with respect to the home equity mortgage
loans it owns or services. With respect to Home Equity Loans that are junior in
priority to a first lien on a Mortgaged Property, the Master Servicer has the
power under certain circumstances to consent to a new mortgage lien on such
Mortgaged Property having priority over such Home Equity Loan in connection with
the refinancing of such first lien.
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Hazard Insurance
Under the terms of the Home Equity Loans, each obligor is required to
maintain for the related Mortgaged Property a hazard insurance policy which
contains a standard mortgagee's clause and which insures against loss by fire
and by hazards included within the term "extended coverage." Any amounts
collected by the Master Servicer under any such policies (other than amounts to
be applied to the restoration or repair of the Mortgaged Property or to be
released to the obligor in accordance with customary mortgage servicing
procedures) will be deposited in the Collection Account, subject to retention by
the Master Servicer to the extent such amounts constitute servicing compensation
or to withdrawal pursuant to the Agreement.
After the origination of a home equity loan, the Servicer will not
monitor whether or not the obligor maintains a hazard insurance policy or flood
insurance for the related Mortgaged Property. The Agreement provides that as
protection against coverage lapses in the individual hazard insurance policies
(not including flood insurance policies), the Master Servicer will obtain and
maintain a blanket policy insuring against fire and hazard losses on all of the
Home Equity Loans. The blanket policy may not in all cases insure against losses
resulting from floods. To the extent that such blanket policy names the Master
Servicer and the Servicer as named insured parties and their designee as loss
payee, and provides coverage in an amount not less than the aggregate unpaid
principal balance of the Home Equity Loans without coinsurance, then the Master
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
Realization Upon Defaulted Home Equity Loans
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership Mortgaged Properties securing such of the Home Equity Loans as come
into default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing activities,
provided the Master Servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of default on a
related senior mortgage loan or restoration of any property unless, in its sole
judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Certificateholders.
Servicing Compensation and Payment of Expenses
With respect to each Collection Period, the Master Servicer will
receive from interest payments in respect of the Home Equity Loans a portion of
such interest payments as a servicing fee (the "Master Servicing Fee"). The
Master Servicing Fee will be computed monthly and will be equal to 0.50% per
annum (the "Master Servicing Fee Rate") on the aggregate Principal Balance of
the Home Equity Loans as of the first day of the Collection Period preceding
each Distribution Date. All assumption fees, prepayment fees, late payment
charges for such Collection Period and other fees and charges, to the extent
collected from borrowers, will be retained by the Master Servicer as additional
servicing compensation.
The Master Servicing Fee will include the fee payable to the Servicer
for its servicing activities related to the Home Equity Loans.
The Master Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Home Equity Loan,
including Liquidation Proceeds, released mortgaged property proceeds, Insurance
Proceeds and such other amounts as may be collected by the Master Servicer from
the related Mortgagor or otherwise relating to the Home Equity Loan in respect
of which such unreimbursed amounts are owed. The Master Servicer's right to
reimbursement for unreimbursed Monthly Advances shall be limited to late
collections of interest on any Home Equity Loan and to Liquidation Proceeds and
Insurance Proceeds on the related Home Equity Loan. The Master Servicer's right
to such reimbursements is prior to the rights of Certificateholders. However, if
any Servicing Advance or Monthly Advance is determined by the Master Servicer to
be non-recoverable from such sources, and therefore a Nonrecoverable Advance,
the amount of such Nonrecoverable Advance may be reimbursed to the Master
Servicer from other amounts on deposit in the Collection Account.
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Not later than two Business Days prior to each Distribution Date, the
Master Servicer is required to remit to the Trustee for deposit in the
Certificate Account, without any right of reimbursement, an amount
("Compensating Interest") to be distributed on such Distribution Date equal to,
with respect to those Home Equity Loans for which a Principal Prepayment in Full
was received during the related Collection Period, the lesser of (a) the excess,
if any, of 30 days of interest on the Principal Balance of each such Home Equity
Loan at the Loan Rate, minus the Master Servicing Fee for such Home Equity Loan,
over the interest collections actually received by the Master Servicer from the
related borrowers in connection with such Principal Prepayments in Full, and (b)
the aggregate Master Servicing Fee received by the Master Servicer for the
related Collection Period. A "Principal Prepayment in Full" occurs with respect
to a Home Equity Loan when a borrower pays the remaining Principal Balance of
such Home Equity Loan prior to the final due date for such Home Equity Loan.
The Master Servicing Fee will not be reduced to cover shortfalls in
interest collections resulting from partial prepayments on the Home Equity Loans
or the application of the Relief Act.
Evidence as to Compliance
The Agreement provides for delivery on or before May 31st of each year,
beginning in 2000, to the Trustee, the Depositor, the Certificate Insurer and
the Rating Agencies of an annual statement signed by an officer of the Master
Servicer to the effect that the Master Servicer has fulfilled its material
obligations under the Agreement throughout the preceding fiscal year, except as
specified in such statement.
On or before May 31st of each year, beginning in 2000, the Master
Servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the Master
Servicer or the Depositor) to the Trustee, the Depositor, the Certificate
Insurer and the Rating Agencies to the effect that such firm has examined
certain documents and the records relating to servicing of the Home Equity Loans
under the Uniform Single Attestation Program for Mortgage Bankers and such
firm's conclusion with respect thereto.
Certain Matters Regarding the Depositor, Seller and Master Servicer
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law as evidenced by an opinion of counsel delivered
to the Certificate Insurer or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Trustee; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the
Certificates; and (c) such proposed successor servicer is reasonably acceptable
to the Certificate Insurer. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
The Master Servicer may perform any of its duties and obligations under
the Agreement through one or more servicers or delegates, which may be
affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations. Initially,
the Master Servicer expects BOFS to act as the Servicer with respect to the Home
Equity Loans.
The Agreement provides that the Master Servicer will indemnify the
Trust and the Trustee from and against, among other things, any loss, liability,
expense, damage or injury suffered or sustained as a result of the Master
Servicer's willful misconduct, bad faith or gross negligence in connection with
the servicing and administration of the Home Equity Loans. The Agreement
provides that neither the Depositor, the Seller nor the Master Servicer nor
their affiliates, directors, officers, employees or agents will be under any
other liability to the Trust, the Trustee, the Certificateholders or any other
person for any action taken or for refraining from taking any action pursuant to
the Agreement. However, neither the Depositor, the Seller nor the Master
Servicer will be protected against any liability which would otherwise be
imposed by reason of willful misconduct, bad faith or gross negligence of the
Depositor, the Seller or the Master Servicer, as the case may be, in the
performance of its duties
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under the Agreement or by reason of reckless disregard of its obligations
thereunder. In addition, the Agreement provides that the Master Servicer will
not be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its servicing responsibilities under the Agreement.
The Master Servicer and any director or officer or employee or agent of the
Master Servicer shall be indemnified by the Trust against a loss, liability or
expense incurred in connection with any legal action relating to the Agreement
or the Certificates, other than any loss, liability or expense related to any
specific Home Equity Loan or Home Equity Loans (except as any such loss,
liability or expense would otherwise be reimbursable pursuant to the Agreement)
and any loss, liability or expense incurred by reason of its willful
misfeasance, bad faith or negligence in the performance of its duties under the
Agreement or by reason of its reckless disregard of obligations and duties under
the Agreement. The Master Servicer may, in its sole discretion, undertake any
such legal action which it may deem necessary or desirable with respect to the
Agreement and the rights and duties of the parties thereto and the interest of
the Certificateholders thereunder.
Any corporation or other entity into which the Master Servicer may be
merged or consolidated, or any corporation or other entity resulting from any
merger, conversion or consolidation to which the Master Servicer shall be a
party, or any corporation or other entity succeeding to the business of the
Master Servicer shall be the successor of the Master Servicer under the
Agreement, without the execution or filing of any paper or any further act on
the part of any of the parties to the Agreement, anything in the Agreement to
the contrary notwithstanding.
Servicer Default
"Servicer Default" will consist of: (i) (A) any failure by the Master
Servicer to make any required Monthly Advance or (B) any other failure of the
Master Servicer to deposit in the Collection Account or Certificate Account any
deposit required to be made under the Agreement, which failure continues
unremedied for two Business Days after the giving of written notice of such
failure to the Master Servicer by the Trustee, or to the Master Servicer and the
Trustee by the Certificate Insurer or Certificateholders holding Certificates
evidencing a Percentage Interest in the Trust of at least 25%; (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any
other of its covenants or agreements in the Agreement which continues unremedied
for 30 days after the giving of written notice of such failure to the Master
Servicer by the Trustee, or to the Master Servicer and the Trustee by the
Certificate Insurer or any Certificateholders holding Certificates evidencing a
Percentage Interest in the Trust of at least 25%; (iii) any failure by the
Master Servicer to make any required Servicing Advance, which failure continues
unremedied for a period of 30 days after the giving of written notice of such
failure to the Master Servicer by the Trustee, or to the Master Servicer and the
Trustee by the Certificate Insurer or any Certificateholders holding
Certificates evidencing a Percentage Interest in the Trust of at least 25%; (iv)
certain events of insolvency, receivership, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to the Master Servicer
and certain actions by the Master Servicer indicating insolvency, reorganization
or inability to pay its obligations (an "Insolvency Event"); and (v) the loss
and delinquency performance of the Home Equity Loans exceeding certain levels
specified in the Agreement.
Rights Upon a Servicer Default
So long as a Servicer Default remains unremedied, either the Trustee,
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, with the consent of the Certificate Insurer,
or the Certificate Insurer may terminate all of the rights and obligations of
the Master Servicer under the Agreement and in and to the Home Equity Loans.
Upon the termination of the Master Servicer, the Trustee has agreed to succeed
the Master Servicer or appoint another entity as successor Master Servicer in
accordance with the Agreement. The Trustee, as successor to the Master Servicer,
will be obligated to make Monthly Advances and Servicing Advances and certain
other advances unless it determines reasonably and in good faith that such
advances would not be recoverable. In the event that the Trustee would be
obligated to succeed the Master Servicer but is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution or other mortgage loan or
home equity loan servicer with all licenses and permits required to perform its
obligations under the Agreement and having a net worth of at least $50,000,000
and acceptable to the Certificate Insurer to act as successor to the Master
Servicer under the Agreement. Pending such appointment, the Trustee will be
obligated to act in such capacity unless prohibited by law. Such successor will
be entitled to receive the same compensation that the Master Servicer would
otherwise have received (or such lesser compensation as the Trustee and such
successor may agree). A receiver or conservator for the Master Servicer may
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be empowered to prevent the termination and replacement of the Master Servicer
if the only Event of Default that has occurred is an Insolvency Event.
Amendment
The Agreement may be amended from time to time by the Seller, the
Master Servicer, the Depositor and the Trustee and with the consent of the
Certificate Insurer, but without the consent of the Certificateholders, to cure
any ambiguity, to correct or supplement any provisions therein which may be
inconsistent with any other provisions of the Agreement, to add to the duties of
the Depositor or the Master Servicer to comply with any requirements imposed by
the Internal Revenue Code or any regulation thereunder, or to add or amend any
provisions of the Agreement as required by the Rating Agencies in order to
maintain or improve any rating of the Class A Certificates (it being understood
that, after obtaining the ratings in effect on the Closing Date, neither the
Depositor, the Seller, the Trustee, the Certificate Insurer nor the Master
Servicer is obligated to obtain, maintain, or improve any such rating) or to add
any other provisions with respect to matters or questions arising under the
Agreement which shall not be inconsistent with the provisions of the Agreement,
provided that such action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any Certificateholder or the
Certificate Insurer; provided, that any such amendment will not be deemed to
materially and adversely affect the Certificateholders and no such opinion will
be required to be delivered if the person requesting such amendment obtains a
letter from the Rating Agencies stating that such amendment would not result in
a downgrading of the then current rating of the Class A Certificates. The
Agreement may also be amended from time to time by the Seller, the Master
Servicer, the Depositor, and the Trustee, with the consent of Certificateholders
evidencing at least 51% of the Percentage Interests of each Class affected
thereby (or 51% of the Percentage Interests of all Classes if all Classes are
affected) and the Certificate Insurer for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the
Agreement or of modifying in any manner the rights of the Certificateholders,
provided that no such amendment will (i) reduce in any manner the amount of, or
delay the timing of, collections of payments on the Certificates or
distributions or payments under the Policy which are required to be made on any
Certificate without the consent of the Certificateholder or (ii) reduce the
aforesaid percentage required to consent to any such amendment, without the
consent of the holders of all Class A Certificates then outstanding.
Notwithstanding the foregoing, the provisions of the Agreement relating to
overcollateralization may be modified such that the required
overcollateralization may be reduced or eliminated by the Certificate Insurer
without the consent of the Certificateholders so long as an Insurer Default does
not exist.
Termination; Purchase of Home Equity Loans
The Trust will terminate on the Distribution Date following the later
of (A) payment in full of all amounts owing to the Certificate Insurer unless
the Certificate Insurer shall otherwise consent and (B) the earliest of (i) the
Distribution Date on which the Certificate Principal Balance has been reduced to
zero, (ii) the final payment or other liquidation of the last Home Equity Loan
in the Trust, (iii) the optional purchase by the Class R Certificateholder, the
Master Servicer, or the Certificate Insurer of the Home Equity Loans, as
described below, and (iv) the Distribution Date on which a draw on the Policy
will be applied to pay the outstanding Certificate Principal Balance.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation and to the consent of the Certificate Insurer if the
termination would result in any draw under the Policy, the Class R
Certificateholder may, at its option, terminate the Agreement on any date on
which the aggregate Principal Balance of the Home Equity Loans is 5% or less of
the Cut-Off Date Pool Principal Balance by purchasing, on the next succeeding
Distribution Date, all of the outstanding Home Equity Loans at a price equal to
the outstanding aggregate Principal Balance of the Home Equity Loans (subject to
reduction as provided in the Agreement if the purchase price is based in part on
the appraised value of any REO Property included in the Trust and such appraised
value is less than the Principal Balance of the related Home Equity Loan) and
accrued and unpaid interest thereon at the weighted average of the Loan Rates
through the end of the Collection Period preceding the final Distribution Date
together with all amounts due and owing to the Certificate Insurer and any
amounts owed to the Master Servicer (such amount, the "Termination Price"). If
the Termination Price is reduced because it is based in part on the appraised
value of REO Property in the Trust and the Certificate Insurer fails to perform
its obligation under the Policy, the Termination Price to be distributed to
Certificateholders on the final Distribution Date may be insufficient to pay the
outstanding principal balance of each Class A Certificate and accrued and unpaid
interest thereon. To the extent the Class R Certificateholder does not exercise
its option to terminate the Agreement as described above, the Master Servicer or
the Certificate Insurer shall have the right to terminate the Agreement at the
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Termination Price. Any such purchase shall be accomplished by deposit into the
Certificate Account of the purchase price specified above.
The Trustee
Norwest Bank Minnesota, National Association, a national banking
association, has been named Trustee pursuant to the Agreement. In accordance
with the Agreement, following the termination of the Master Servicer, the
Trustee has agreed to succeed the Master Servicer or appoint another entity as
successor Master Servicer in accordance with the Agreement. As successor to the
Master Servicer, the Trustee will be entitled to compensation as Master Servicer
as provided in the Agreement.
The Trustee may have normal banking relationships with the Depositor,
the Seller and the Master Servicer.
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer and the Master Servicer. The Depositor and, in certain instances, the
Master Servicer may also remove the Trustee if the Trustee ceases to be eligible
to continue as such under the Agreement or if the Trustee becomes insolvent.
Upon becoming aware of such circumstances, the Depositor will be obligated to
appoint a successor Trustee, as approved by the Certificate Insurer and the
Master Servicer (such Master Servicer approval not to be unreasonably withheld).
Any resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, have made written requests upon the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for 60 days has
neglected or refused to institute any such proceeding. The Trustee will be under
no obligation to exercise any of the trusts or powers vested in it by the
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred therein or
thereby.
The Trustee has undertaken a company-wide initiative to address the
Year 2000 issue. The Trustee does not believe that the Year 2000 issue will
materially affect its ability to perform its functions on behalf of the Trust or
have a material financial impact on the Trust. However, there can be no
guarantee that the systems of other companies on which the Trustee's systems
rely will be timely converted or that a failure to convert by another company or
a conversion that is incompatible with the Trustee's systems will not have a
material adverse effect on the Trust.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will
be purchased by the Depositor from the Seller pursuant to the home equity loan
purchase agreement to be entered into between the Depositor, as purchaser of the
Home Equity Loans, and the Seller, as seller of the Home Equity Loans (the
"Purchase Agreement"). Under the Purchase Agreement, the Seller will agree to
transfer the Home Equity Loans to the Depositor. Pursuant to the Agreement, the
Home Equity Loans will be immediately transferred by the Depositor to the Trust,
and the Depositor will assign its rights in, to and under the Purchase
Agreement, to the Trust.
In the Purchase Agreement, the Seller will make the same
representations and warranties made in the Agreement. In the event of a breach
of any such representations and warranties which has a material adverse effect
on the interests of the Certificateholders or the Certificate Insurer, the
Seller will be required to repurchase or substitute for the Home Equity Loans as
described herein under "DESCRIPTION OF THE CERTIFICATES--Assignment of Home
Equity Loans."
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The Seller has also agreed to indemnify the Depositor and the Trust
from and against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Purchase Agreement.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Class A Certificates will be applied by the Depositor to the purchase price
of the Home Equity Loans.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"). In the opinion of Brown & Wood
LLP, counsel to the Trust and the Underwriters, the Class A Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates will
constitute the sole class of "residual interests" in the REMIC. See "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES--REMICs" in the Prospectus.
The Class A Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on such Certificates
must be reported under an accrual method of accounting.
The Class A Certificates may, depending on their issue price, be issued
with original issue discount ("OID") for federal income tax purposes. Holders of
such Certificates issued with OID will be required to include OID in income as
it accrues under a constant yield method, in advance of the receipt of cash
attributable to such income. The Internal Revenue Service (the "IRS") has issued
regulations (the "OID Regulations") under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with OID or should
be treated in some other manner not yet set forth in regulations. Purchasers of
the Class A Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Class A Certificates. Because of the
uncertainty concerning the application of Section 1272(a)(6) of the Code to such
Certificates, the IRS could assert that the Class A Certificates should be
treated as issued with OID. Until the Treasury issues guidance to the contrary,
the Trustee intends to base its OID computation on Code Section 1272(a)(6) and
the OID Regulations as described in the Prospectus. However, because no
regulatory guidance currently exists under Code Section 1272(a)(6), there can be
no assurance that such methodology represents the correct manner of calculating
OID. Prospective purchasers of the Class A Certificates are advised to consult
their tax advisors concerning the tax treatment of such Certificates. See
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount and Premium" in the Prospectus.
The yield used to calculate accruals of OID with respect to the Class A
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Home Equity Loans will prepay in
accordance with a 30% CPR Prepayment Assumption. No representation is made as to
the actual rate at which the Home Equity Loans will prepay.
The Class A Certificates will be treated as regular interests in a
REMIC under section 860G of the Code. Accordingly, the Offered Certificates will
be treated as (i) assets described in section 7701(a)(19)(C) of the Code, and
(ii) "real estate assets" within the meaning of section 856(c)(4) of the Code,
in each case to the extent described in the Prospectus. The Class A Certificates
also will be treated as "qualified mortgages" under Section 860G(a)(3) of the
Code. Interest on the Class A Certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning of section
856(c)(3)(B) of the Code to the same extent that the Class A Certificates are
treated as real estate assets. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--REMICs" in the Prospectus.
It is not anticipated that the Trust Fund will engage in any
transactions that would subject it to the prohibited transactions tax as defined
in Section 860F(a)(2) of the Code, the tax on contributions after the startup
date as defined in Section 860G(d) of the Code or the tax on net income from
foreclosure property as defined in Section 860G(c) of the Code. However, in the
event that any such tax is imposed on the Trust Fund, such tax will be borne (i)
by the Trustee, if the Trustee has breached its obligations with respect to
REMIC compliance under the Agreement, (ii) the Master Servicer, if the Master
Servicer has breached its obligations with respect to REMIC
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compliance under the Agreement, and (iii) otherwise by the Trust Fund, with a
resulting reduction in amounts otherwise distributable to Holders of the Class A
Certificates. See "DESCRIPTION OF THE SECURITIES" and "MATERIAL FEDERAL INCOME
TAX CONSEQUENCES--REMICs--Prohibited Transactions and Other Taxes" in the
Prospectus.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee and/or the Master Servicer. See
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES--REMICs--Reporting and Other
Administrative Matters" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Class A Certificates, see "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--REMICs" in the Prospectus.
STATE TAXES
No representation is made regarding the tax consequences of purchase,
ownership or disposition of the Class A Certificates under the tax laws of any
state. Investors considering an investment in the Class A Certificates should
consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Class A Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan from engaging in certain
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan. A
violation of these "prohibited transaction" rules may generate excise tax and
other liabilities under ERISA and the Code for such person. For example, a
prohibited transaction would arise, unless an exemption were available, if the
Class A Certificates were viewed as debt of the Seller and the Seller were a
disqualified person or party in interest with respect to a plan that acquired
Class A Certificates.
Moreover, additional prohibited transactions could arise if the assets
of the Trust were deemed to constitute assets of any plan that owned Class A
Certificates. The Department of Labor ("DOL") has issued a final regulation (the
"Plan Assets Regulation") concerning the definition of what constitutes the
"plan assets" of an employee benefit plan subject to ERISA or the Code, or an
individual retirement account ("IRA") (collectively referred to as "Benefit
Plans"). Under the Plan Assets Regulation the assets and properties of certain
corporations, partnerships and certain other entities in which a Benefit Plan
acquires an "equity interest" could be deemed to be assets of the Benefit Plan
in certain circumstances. Accordingly, if Benefit Plans purchase Class A
Certificates, the Trust could be deemed to hold plan assets of such Benefit Plan
unless one of the exceptions under the Plan Assets Regulation is applicable to
the Trust.
Availability of Exemptions for Class A Certificates
The Plan Assets Regulation contains an exception (the "Publicly-Offered
Securities Exemption") that provides that if a Benefit Plan acquires a
"publicly-offered security", the issuer of the security is not deemed to hold
plan assets. A publicly-offered security is a security that is (i) freely
transferable, (ii) part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another and (iii) either is (A)
part of a class of securities registered under Section 12(b) or 12(g) of the
Exchange Act or (B) sold to the Benefit Plan as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and the class of securities of which such security is a part
is registered under the Exchange Act within 120 days (or such later time as may
be allowed by the Commission) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred.
It is anticipated that one or more Classes of the Class A Certificates
will meet the criteria of the Publicly-Offered Securities Exemption as set forth
above. The Underwriters expect (although no assurance can be given) that one or
more Classes of the Class A Certificates will be held by at least 100 persons
independent of the Trust and of each other at the conclusion of the offering;
there are no restrictions imposed on the transfer of the Class A
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Certificates; and the Class A Certificates will be sold as part of an offering
pursuant to an effective registration statement under the Securities Act, and
then will be timely registered under the Exchange Act under Section 12(b) or
12(g) of the Exchange Act. The Underwriters will notify the Trustee as to
whether or not one or more Classes of the Class A Certificates will be held by
100 independent persons at the conclusion of the offering. The Seller will not,
however, determine whether the 100-investor requirement of the Publicly-Offered
Securities Exemption is satisfied with respect to the Class A Certificates.
If one or more Classes of the Class A Certificates fail to meet the
criteria of the Publicly-Offered Securities Exemption and the Trust's assets are
deemed to include assets of Benefit Plans that are holders of such Classes of
Class A Certificates, transactions involving the Trust and "parties in interest"
or "disqualified persons" with respect to such Benefit Plans might be prohibited
under Section 406 of ERISA and Section 4975 of the Code unless another ERISA
prohibited transaction exemption is applicable. Thus, for example, if a
participant in any Benefit Plan is an obligor or guarantor of one of the Home
Equity Loans, under DOL interpretations the purchase of the Class A Certificates
by such Benefit Plan could constitute a prohibited transaction. There are five
class exemptions issued by the DOL that may apply in such event: DOL Prohibited
Transaction Exemption 84-14 (Class Exemption for Plan Asset Transactions
Determined by Independent Qualified Professional Asset Managers), 91-38 (Class
Exemption for Certain Transactions Involving Bank Collective Investment Funds),
90-1 (Class Exemption for Transactions Involving Insurance Company Pooled
Separate Accounts ), 95-60 (Class Exemption for Transactions Involving Insurance
Company General Accounts), and 96-23 (Class Exemption for Plan Asset
Transactions Determined by In-House Asset Managers). There is no assurance that
these exemptions, even if all of the conditions specified therein are satisfied,
will apply to all transactions involving the Trust's assets.
Review by Benefit Plan Fiduciaries
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is especially important that any
Benefit Plan fiduciary who proposes to cause a Benefit Plan to purchase Class A
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Benefit Plan's acquisition and
ownership of Class A Certificates. Assets of a Benefit Plan should not be
invested in the Class A Certificates unless it is clear that the assets of the
Trust will not be plan assets or unless it is clear that a prohibited
transaction class exemption will apply and exempt all potential prohibited
transactions.
In addition, prospective Benefit Plan investors should consult with
their legal advisors concerning the impact of ERISA and the Code, the
applicability of the Publicly-Offered Securities Exemption, and the potential
consequences in their specific circumstances, prior to making an investment in
the Class A Certificates. Moreover, each Benefit Plan fiduciary should determine
whether under the general fiduciary standards of investment prudence and
diversification, an investment in the Class A Certificates is appropriate for
the Benefit Plan, taking into account the overall investment policy of the
Benefit Plan and the composition of the Benefit Plan's investment portfolio.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA") because some of the mortgages securing the Home
Equity Loans are not first mortgages. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first mortgages
(i.e. "mortgage-related securities" under SMMEA) may not be legally authorized
to invest in the Class A Certificates. No representation is made as to whether
the Class A Certificates constitute legal investments for any entity under any
applicable statute, law, rule, regulation or order. Prospective purchasers are
urged to consult with their counsel concerning the status of the Class A
Certificates as legal investments for such purchasers prior to investing in the
Class A Certificates. See "LEGAL INVESTMENT" in the Prospectus.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Class A Certificates (the "Underwriting Agreement"),
the Depositor has agreed to sell to the underwriters named below (the
"Underwriters"), and the Underwriters have agreed to purchase, severally but not
jointly, the following principal amounts of the Class A Certificates.
<TABLE>
<CAPTION>
Underwriter Class A-1 Class A-2
----------- Certificates Certificates
------------ ------------
<S> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................... $92,500,000 $15,250,000
First Chicago Capital Markets, Inc................. $92,500,000 $15,250,000
----------- -----------
Total........................................ $185,000,000 $30,500,000
Underwriter Class A-3 Class A-4
----------- Certificates Certificates
------------ ------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................... $15,969,000 $14,059,000
First Chicago Capital Markets, Inc................. $15,969,000 $14,059,000
----------- -----------
Total........................................ $31,938,000 $28,118,000
</TABLE>
The Depositor has been advised that the Underwriters propose initially
to offer the Class A Certificates to the public at the respective offering
prices set forth on the cover hereof and to certain dealers at such prices less
a selling concession not to exceed the percentage of the Class A Certificate
denomination set forth below, and that the Underwriters may allow and such
dealers may reallow a reallowance discount not to exceed the percentage of the
Class A Certificate denomination set forth below.
<TABLE>
<CAPTION>
Class of Certificate Selling Concession Reallowance Discount
-------------------- ------------------ --------------------
<S> <C> <C> <C>
Class A-1................ 0.120% 0.100%
Class A-2................ 0.195% 0.117%
Class A-3................ 0.225% 0.135%
Class A-4................ 0.225% 0.135%
</TABLE>
Until the distribution of the Class A Certificates is completed, the
rules of the Commission may limit the ability of the Underwriters to bid for and
purchase the Class A Certificates. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the Class A Certificates. Such transactions may consist of bids and
purchases for the purpose of pegging, fixing or maintaining the price of such
Classes of Class A Certificates.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Class A Certificates. In addition,
neither the Depositor nor the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Depositor has been advised by the Underwriters that they presently
intend to make a market in the Class A Certificates; however, they are not
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for the Class A Certificates
will develop.
S-60
<PAGE>
It is expected that delivery of the Class A Certificates will be made
only in book entry form through The Depository Trust Company, Cedelbank or the
Euroclear System.
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase the Class A Certificates
offered hereby, if any are purchased.
The Depositor has agreed to indemnify each Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments the Underwriters may be required to make in respect
thereof.
The Depositor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"). The Seller and the Master Servicer are affiliates of
First Chicago Capital Markets, Inc. ("FCCM"). Any obligations of MLPF&S and FCCM
are the sole obligations of MLPF&S and FCCM, respectively, and do not create any
obligations on the part of any of their respective affiliates.
FCCM or any successor may from time to time purchase or acquire a
position in the Class A Certificates and may, at its option, hold or resell the
Class A Certificates. FCCM expects to offer and sell previously issued Class A
Certificates in the course of its business as a broker-dealer. FCCM may act as a
principal or agent in such transactions. This Prospectus Supplement and the
attached Prospectus may be used by FCCM and its successors in connection with
such transactions. Such sales, if any, will be made at varying prices related to
prevailing market prices at the time of sale.
EXPERTS
The consolidated financial statements of the Certificate Insurer, Ambac
Assurance Corporation, as of December 31, 1997 and 1996 and for each of the
years in the three-year period ended December 31, 1997, are incorporated by
reference herein and in the Registration Statement in reliance upon the report
of KPMG LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters relating to the Class A Certificates will be
passed upon for the Depositor and the Underwriters by Brown & Wood LLP, New
York, New York. Certain legal matters will be passed upon for the Seller by
Stroock & Stroock & Lavan LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
be rated "AAA" by Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's") and "Aaa" by Moody's Investors Service Inc.
("Moody's" and, together with Standard & Poor's, the "Rating Agencies").
Standard & Poor's ratings on mortgage pass-through certificates address
the likelihood of the receipt by Certificateholders of payments required under
the pooling and servicing agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Class A Certificates, and the extent to which the
payment stream in the home equity pool is adequate to make payments required
under the Class A Certificates. Standard & Poor's rating on the Class A
Certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages. See "PREPAYMENT AND YIELD CONSIDERATIONS" herein.
The rating process of Moody's addresses the structural and legal
aspects associated with the Class A Certificates, including the nature of the
underlying Home Equity Loans. The ratings assigned to the Class A 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.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently
S-61
<PAGE>
of any other security rating. In the event that the ratings initially assigned
to the Class A Certificates are subsequently lowered for any reason, no person
or entity is obligated to provide any additional credit support or credit
enhancement with respect to the Class A Certificates. The Depositor has not
requested that any rating agency rate the Class A Certificates other than as
stated above. However, there can be no assurance as to whether any other rating
agency will rate the Class A Certificates, or, if it does, what rating would be
assigned by any such other rating agency. A rating on the Class A Certificates
by another rating agency, if assigned at all, may be lower than the ratings
assigned to the Class A Certificates as stated above.
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
PAGE
----
Agreement................................................................S-36
Assignment Event.........................................................S-37
Available Funds..........................................................S-39
BANK ONE.................................................................S-15
beneficial owner.........................................................S-44
Benefit Plans............................................................S-58
BOFS.....................................................................S-15
Book-Entry Certificates..................................................S-44
Call Report..............................................................S-15
Cedelbank................................................................S-44
Cedelbank Participants...................................................S-45
Certificate Account......................................................S-38
Certificate Insurer......................................................S-48
Certificate Owners.......................................................S-44
Certificate Principal Balance............................................S-36
Certificateholder........................................................S-44
Certificates.............................................................S-36
Class....................................................................S-36
Class A Certificates.....................................................S-36
Class A-4 Pro Rata Principal Amount......................................S-41
Class R Certificates.....................................................S-36
Code.....................................................................S-57
Collection Account.......................................................S-38
Collection Period........................................................S-41
Combined Loan-to-Value Ratio.............................................S-22
Commission...............................................................S-48
Compensating Interest....................................................S-53
Cooperative..............................................................S-46
CPR......................................................................S-32
Cut-off Date Pool Principal Balance......................................S-22
Defective Home Equity Loan...............................................S-37
Deficiency Amount........................................................S-50
Definitive Certificate...................................................S-44
Depositor................................................................S-15
Distributable Excess Spread..............................................S-41
Distribution Date........................................................S-38
DOL......................................................................S-58
DTC......................................................................S-44
Due for Payment..........................................................S-50
Eligible Investments.....................................................S-39
Eligible Substitute Home Equity Loan.....................................S-38
ERISA....................................................................S-58
Euroclear................................................................S-44
Euroclear Operator.......................................................S-46
Euroclear Participants...................................................S-46
Excess Spread............................................................S-41
FCCM.....................................................................S-61
Financial Intermediary...................................................S-44
Formula Principal Distribution Amount....................................S-40
Global Securities.......................................................A-I-1
Holder...................................................................S-50
Home Equity Loan Pool....................................................S-22
Home Equity Loan Schedule................................................S-37
Home Equity Loans........................................................S-22
S-63
<PAGE>
Insolvency Event.........................................................S-54
Insured Amounts..........................................................S-50
Insured Obligations......................................................S-50
Insured Payments.........................................................S-50
Interest Period..........................................................S-40
IRA......................................................................S-58
IRS......................................................................S-57
Junior Lien Ratio........................................................S-22
Last Scheduled Distribution Date.........................................S-36
Liquidated Home Equity Loan..............................................S-42
Loan Rate................................................................S-22
Master Servicer..........................................................S-15
Master Servicing Fee.....................................................S-52
Master Servicing Fee Rate................................................S-52
MLPF&S...................................................................S-61
Modeling Assumptions.....................................................S-32
Monthly Advance..........................................................S-42
Moody's..................................................................S-61
Mortgage File............................................................S-37
Mortgage Notes...........................................................S-22
Mortgaged Properties.....................................................S-22
Mortgages................................................................S-22
Net Available Distribution Amount........................................S-50
Nonpayment...............................................................S-51
Nonrecoverable Advance...................................................S-43
Notice...................................................................S-51
OID......................................................................S-57
OID Regulations..........................................................S-57
Overcollateralization Amount.............................................S-42
Percentage Interest......................................................S-37
Plan Assets Regulation...................................................S-58
Policy...................................................................S-36
Preference Amount........................................................S-51
Prepayment Assumption....................................................S-32
Prepayment Interest Shortfall............................................S-39
Principal Balance........................................................S-22
Principal Distributable Amount...........................................S-40
Principal Prepayment in Full.............................................S-53
Priority Amount..........................................................S-41
Priority Percentage......................................................S-41
Publicly-Offered Securities Exemption....................................S-58
Purchase Agreement.......................................................S-36
Purchase Price...........................................................S-37
Rating Agencies..........................................................S-61
Related Documents........................................................S-37
Relief Act Shortfall.....................................................S-39
REMIC....................................................................S-57
Required Overcollateralization Amount....................................S-42
Required Payments........................................................S-51
Rules....................................................................S-44
Seller...................................................................S-15
Serviced Portfolio.......................................................S-20
Servicer.................................................................S-15
Servicer Default.........................................................S-54
Servicing Advance........................................................S-43
SMMEA....................................................................S-59
Standard & Poor's........................................................S-61
Sub-Serviced Portfolio...................................................S-20
S-64
<PAGE>
Substitution Adjustment Amount...........................................S-37
Termination Price........................................................S-55
Terms and Conditions.....................................................S-46
Trust Fund...............................................................S-22
Trustee..................................................................S-15
U.S. Person.............................................................A-I-3
Underwriters.............................................................S-60
Underwriting Agreement...................................................S-60
Unpaid Interest Shortfall................................................S-39
Unpaid Principal Shortfall...............................................S-41
S-65
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home
Equity Loan Asset Backed Certificates, Series 1999-1, Class A Certificates (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of DTC, Cedelbank
or Euroclear. The Global Securities will be traceable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedelbank and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedelbank and Euroclear and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedelbank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedelbank and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedelbank or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary
market trading between Cedelbank Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC Seller and Cedelbank or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedelbank Participant or a Euroclear Participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank Participant
or Euroclear Participant at least one business
A-I-1
<PAGE>
day prior to settlement. Cedelbank or Euroclear will instruct the Relevant
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the Relevant Depositary to the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedelbank Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Cedelbank or Euroclear cash debt will be valued
instead as of the actual settlement date.
Cedelbank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their account one day later. As an
alternative, if Cedelbank or Euroclear has extended a line of credit to them,
Cedelbank Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedelbank Participants or Euroclear Participants purchasing
Global Securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Cedelbank
Participant's or Euroclear Participant's particular cost of funds. Since the
settlement is taking place during New York business hours, DTC Participants can
employ their usual procedures for crediting Global Securities to the respective
European Depositary for the benefit of Cedelbank Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participants a cross- market transaction will
settle no differently than a trade between two DTC Participants.
Trading between Cedelbank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedelbank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective Depositary, as
appropriate, to credit the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist to 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedelbank Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the Cedelbank Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedelbank Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the Cedelbank Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day (until
the purchase side of the trade is reflected in their Cedelbank
or Euroclear accounts) in accordance with the clearing
system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which
would give the Global Securities sufficient time to be
reflected in their Cedelbank or
A-I-2
<PAGE>
Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for
the sale to the Cedelbank Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedelbank or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Holders of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Holders or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in, or
under the laws of, the United States or any political subdivision thereof
(except, in the case of a partnership, to the extent provided in regulations),
or an estate whose income is subject to United States federal income tax
regardless of its source, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States Persons have the authority to control all substantial
decisions of the trust. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
A-I-3
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
The Asset Backed Certificates (the "Certificates") and Asset Backed Notes (the
"Notes" and, together with the Certificates, the "Securities") offered hereby
and by Supplements to this Prospectus (the "Offered Securities") will be
offered from time to time in one or more series. Each series of Certificates
will represent in the aggregate the entire beneficial ownership interest in a
trust fund (with respect to any series, the "Trust Fund") consisting of one or
more segregated pools of various types of one- to five-family mortgage loans
(or certain balances thereof) (collectively, the "Mortgage Loans"), mortgage
pass-through certificates or mortgage-backed securities evidencing interests
in Mortgage Loans or secured thereby ("MBS") or certain direct obligations of
the United States, agencies thereof or agencies created thereby (the
"Government Securities") (with respect to any series, collectively, "Assets").
The Mortgage Loans and MBS are collectively referred to herein as the
"Mortgage Assets." If a series of Securities includes Notes, such Notes will
be issued and secured pursuant to an indenture and will represent indebtedness
of the Trust Fund. If so specified in the related Prospectus Supplement, the
Trust Fund for a series of Securities may include letters of credit, insurance
policies, guarantees, reserve funds or other types of credit support, or any
combination thereof (with respect to any series, collectively, "Credit
Support"), and currency or interest rate exchange agreements and other
financial assets or derivative instruments, or any combination thereof (with
respect to any series, collectively, "Cash Flow Agreements"). See "Description
of the Trust Funds," "Description of the Securities" and "Description of
Credit Support."
Each series of Securities will consist of one or more classes of Securities
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior or subordinate to one or more
other classes of Securities in respect of certain distributions on the
Securities; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be entitled
to interest distributions, with disproportionately low, nominal or no
principal distributions; (v) provide for distributions of accrued interest
thereon commencing only following the occurrence of certain events, such as
the retirement of one or more other classes of Securities of such series; (vi)
provide for distributions of principal as described in the related Prospectus
Supplement; and/or (vii) provide for distributions based on a combination of
two or more components thereof with one or more of the characteristics
described in this paragraph, to the extent of available funds, in each case as
described in the related Prospectus Supplement. Any such classes may include
classes of Offered Securities. See "Description of the Securities."
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the
Securities of any series will be made only from the assets of the related
Trust Fund.
The Securities of each series will not represent an obligation of or interest
in the Depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated, any
Master Servicer, any Sub-Servicer or any of their respective affiliates,
except to the limited extent described herein and in the related Prospectus
Supplement. Neither the Securities nor any assets in the related Trust Fund
will be guaranteed or insured by any governmental agency or instrumentality or
by any other person, unless otherwise provided in the related Prospectus
Supplement. The assets in each Trust Fund will be held in trust for the
benefit of the holders of the related series of Certificates pursuant to a
Pooling and Servicing Agreement or a Trust Agreement, as more fully described
herein.
The yield on each class of Securities of a series will be affected by, among
other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the
timing of receipt of such payments as described under the caption "Yield
Considerations" herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein
and in the related Prospectus Supplement.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION "RISK FACTORS" HEREIN AND SUCH INFORMATION AS MAY BE SET FORTH UNDER
THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE
PURCHASING ANY OFFERED SECURITY.
If so provided in the related Prospectus Supplement, one or more elections may
be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" for federal income tax purposes. See
also "Material Federal Income Tax Consequences" herein.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Prior to issuance there will have been no market for the Securities of any
series and there can be no assurance that a secondary market for any Offered
Securities will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of the Offered Securities of
any series unless accompanied by the Prospectus Supplement for such series.
Offers of the Offered Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described
under "Plan of Distribution" herein and in the related Prospectus Supplement.
MERRILL LYNCH & CO.
The date of this Prospectus is March ___, 1999.
2
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the Offered Securities covered by such
Prospectus Supplement, whether or not participating in the distribution
thereof, may be required to deliver such Prospectus Supplement and this
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus and Prospectus Supplement when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to the Offered Securities of each series will, among other things,
set forth with respect to such Securities, as appropriate: (i) a description
of the class or classes of Securities, the payment provisions with respect to
each such class and the Pass-Through Rate or interest rate or method of
determining the Pass-Through Rate or interest rate with respect to each such
class; (ii) the aggregate principal amount and distribution dates relating to
such series and, if applicable, the initial and final scheduled distribution
dates for each class; (iii) information as to the assets comprising the Trust
Fund, including the general characteristics of the assets included therein,
including the Assets and any Credit Support and Cash Flow Agreements (with
respect to the Securities of any series, the "Trust Assets"); (iv) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) additional information with respect to the method of
distribution of such Certificates; (vi) whether one or more REMIC elections
will be made and designation of the regular interests and residual interests;
(vii) the aggregate original percentage ownership interest in the Trust Fund
to be evidenced by each class of Securities; (viii) information as to any
Master Servicer, any Sub-Servicer and the Trustee, as applicable; (ix)
information as to the nature and extent of subordination with respect to any
class of Securities that is subordinate in right of payment to any other
class; and (x) whether such Securities will be initially issued in definitive
or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Offered Securities. This Prospectus and the Prospectus
Supplement relating to each series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement
pursuant to the rules and regulations of the Commission. For further
information, reference is made to such Registration Statement and the exhibits
thereto. Such Registration Statement and exhibits can be inspected and copied
at prescribed rates at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661; and New York Regional Office, Seven World Trade
Center, 13th Floor, New York, New York 10048. The Commission maintains a Web
site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the
Depositor, that file electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and
any Prospectus Supplement with respect hereto do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
Offered Securities or an offer of the Offered Securities to any person in any
state or other jurisdiction in which such offer would be unlawful. The
delivery of this Prospectus and any Prospectus Supplement hereto at any time
does not imply that information herein is correct as of any time subsequent to
its date.
A Master Servicer or the Trustee will be required to mail to holders
of Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or
unless otherwise provided in the related Prospectus Supplement, such reports
will be sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of the
Offered Securities, pursuant to the applicable Agreement. Such reports may be
available to holders of interests in the Securities (the "Securityholders")
upon request to their respective DTC participants. See "Description of the
Securities--Reports to Securityholders" and "Description of the
Agreements--Evidence as to Compliance." The Depositor will file or cause to be
filed with the Commission such periodic reports with respect to each Trust
Fund
3
<PAGE>
as are required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the rules and regulations of the Commission thereunder,
as interpreted by the staff of the Commission thereunder.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to
the termination of an offering of Offered Securities evidencing interests
therein. Upon request, the Depositor will provide or cause to be provided
without charge to each person to whom this Prospectus is delivered in
connection with the offering of one or more classes of Offered Securities, a
copy of any or all documents or reports incorporated herein by reference, in
each case to the extent such documents or reports relate to one or more of
such classes of such Offered Securities, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed in writing to
Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street, World Financial
Center-North Tower, 10th Floor, New York, New York 10281-1310, Attention:
Secretary, or by telephone at (212) 449-0357. The Depositor has determined
that its financial statements are not material to the offering of any Offered
Securities.
4
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT.........................................................3
AVAILABLE INFORMATION.........................................................3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............................4
SUMMARY OF PROSPECTUS.........................................................6
RISK FACTORS.................................................................14
DESCRIPTION OF THE TRUST FUNDS...............................................18
USE OF PROCEEDS..............................................................23
YIELD CONSIDERATIONS.........................................................23
THE DEPOSITOR................................................................27
DESCRIPTION OF THE SECURITIES................................................27
DESCRIPTION OF THE AGREEMENTS................................................36
DESCRIPTION OF CREDIT SUPPORT................................................53
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......................................55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.....................................65
STATE TAX CONSIDERATIONS.....................................................99
ERISA CONSIDERATIONS.........................................................99
LEGAL INVESTMENT............................................................101
PLAN OF DISTRIBUTION........................................................103
LEGAL MATTERS...............................................................104
FINANCIAL INFORMATION.......................................................104
RATING......................................................................104
INDEX OF PRINCIPAL DEFINITIONS..............................................105
5
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified
in its entirety by reference to the more detailed information appearing
elsewhere in this Prospectus and by reference to the information with respect
to each series of Securities contained in the Prospectus Supplement to be
prepared and delivered in connection with the offering of such series. An
Index of Principal Definitions is included at the end of this Prospectus.
Title of Securities........................ Asset-Backed Certificates (the
"Certificates") and Asset Backed
Notes (the "Notes" and, together
with the Certificates, the
"Securities"), issuable in series.
Issuer..................................... With respect to each series, the
trust fund (the "Trust Fund") formed
to issue the Securities of that
series.
Depositor.................................. Merrill Lynch Mortgage Investors,
Inc. (the "Depositor"), a wholly
owned subsidiary of Merrill Lynch
Mortgage Capital, Inc., which is a
wholly-owned indirect subsidiary of
Merrill Lynch & Co., Inc. The
Depositor is an affiliate of Merrill
Lynch, Pierce, Fenner & Smith
Incorporated. Neither Merrill Lynch
& Co., Inc. nor any of its
affiliates, including the Depositor
and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, will insure or
guarantee the Securities or the
Mortgage Loans or be otherwise
obligated in respect thereof.
Master Servicer............................ The master servicer or master
servicers (each, a "Master
Servicer"), if any, or a servicer
for substantially all the Mortgage
Loans for each series of Securities,
which servicer or master servicer(s)
may be affiliates of the Depositor,
will be named in the related
Prospectus Supplement. See
"Description of the
Agreements--General" and
"--Collection and Other Servicing
Procedures."
Trustee.................................... The trustee (the "Trustee") for each
series of Certificates will be named
in the related Prospectus
Supplement. See "Description of the
Agreements--The Trustee."
The Trust Assets........................... Each series of Certificates will
represent in the aggregate the
entire beneficial ownership interest
in a Trust Fund. If a series of
Securities includes Notes, such
Notes will represent indebtedness of
the Trust Fund and will be secured
by a security interest in the Assets
of the Trust Fund. A Trust Fund will
consist of any of the following
assets (the Mortgage Assets and
Government Securities may be
referred to collectively or
individually as "Assets"):
(a) Mortgage Assets................... The Mortgage Assets with respect to
a series of Certificates will
consist of a pool of single family
loans (or certain balances thereof)
(collectively, the "Mortgage
Loans"), mortgage pass-through
certificates or other
mortgage-backed securities (such as
debt obligations and participation
interests or certificates)
evidencing interests in or secured
by Mortgage Loans (collectively, the
"MBS") or a combination of Mortgage
Loans and/or MBS. The Mortgage Loans
will not be guaranteed or insured by
the Depositor or any of its
affiliates or, unless otherwise
provided in the Prospectus
Supplement, by any governmental
agency or instrumentality or other
person. The Mortgage Loans will be
secured by first and/or junior liens
on one- to five-family residential
properties or security interests in
shares issued by cooperative housing
corporations ("Single Family
Properties"), including mixed
residential and commercial
structures. The Mortgage
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<PAGE>
Loans may include (i) closed-end
and/or revolving home equity loans
or certain balances thereof ("Home
Equity Loans") and/or (ii) home
improvement installment sales
contracts and installment loan
agreements ("Home Improvement
Contracts"). The Mortgaged
Properties may be located in any one
of the fifty states, the District of
Columbia, the Commonwealth of Puerto
Rico or any other U.S. jurisdiction
specified in the Prospectus
Supplement. The Prospectus
Supplement will indicate additional
jurisdictions, if any, in which the
Mortgaged Properties may be located.
Unless otherwise provided in the
related Prospectus Supplement, all
Mortgage Loans will have individual
principal balances at origination of
not less than $25,000 and original
terms to maturity of not more than
40 years. All Mortgage Loans will
have been originated by persons
other than the Depositor, and all
Mortgage Assets will have been
purchased, either directly or
indirectly, by the Depositor on or
before the date of initial issuance
of the related series of
Certificates. The related Prospectus
Supplement will indicate if any such
persons are affiliates of the
Depositor.
Each Mortgage Loan may provide for
accrual of interest thereon at an
interest rate (a "Mortgage Rate")
that is fixed over its term or
that adjusts from time to time, or
that may be converted from an
adjustable to a fixed Mortgage
Rate, or from a fixed to an
adjustable Mortgage Rate, from
time to time at the mortgagor's
election, in each case as
described in the related
Prospectus Supplement. Adjustable
Mortgage Rates on the Mortgage
Loans in a Trust Fund may be based
on one or more indices. Each
Mortgage Loan may provide for
scheduled payments to maturity,
payments that adjust from time to
time to accommodate changes in the
Mortgage Rate or to reflect the
occurrence of certain events, and
may provide for negative
amortization or accelerated
amortization, in each case as
described in the related
Prospectus Supplement. Each
Mortgage Loan may be fully
amortizing or require a balloon
payment due on its stated maturity
date, in each case as described in
the related Prospectus Supplement.
Each Mortgage Loan may contain
prohibitions on prepayment or
require payment of a premium or a
yield maintenance penalty in
connection with a prepayment, in
each case as described in the
related Prospectus Supplement. The
Mortgage Loans may provide for
payments of principal, interest or
both, on due dates that occur
monthly, quarterly, semi-annually
or at such other interval as is
specified in the related
Prospectus Supplement. See
"Description of the Trust
Funds--Assets."
(b) Government Securities.............. If so provided in the related
Prospectus Supplement, the Trust
Fund may include, in addition to
Mortgage Assets, certain direct
obligations of the United States,
agencies thereof or agencies created
thereby which provide for payment of
interest and/or principal
(collectively, "Government
Securities").
(c) Collection Accounts................ Each Trust Fund will include one or
more accounts established and
maintained on behalf of the
Securityholders into which the
person or persons designated in the
related Prospectus Supplement will,
to the extent described herein and
in such Prospectus Supplement,
deposit all payments and collections
received or advanced with respect to
the Assets and other assets in the
Trust Fund. Such an account may be
maintained as an interest bearing or
a non-interest bearing account, and
funds held therein may be held as
cash or invested in certain
short-term, investment grade
obligations, in each case as
described in the related
7
<PAGE>
Prospectus Supplement. See
"Description of the Agreements
--Collection Account and Related
Accounts."
(d) Credit Support.................... If so provided in the related
Prospectus Supplement, partial or
full protection against certain
defaults and losses on the Assets in
the related Trust Fund may be
provided to one or more classes of
Securities of the related series in
the form of subordination of one or
more other classes of Securities of
such series, which other classes may
include one or more classes of
Offered Securities, and/or by one or
more of the following types of
credit support that has the effect
of covering losses on Assets: a
letter of credit, insurance policy,
guarantee, reserve fund or other
type of credit support consistent
with the foregoing (any such
coverage with respect to the
Securities of any series, "Credit
Support"). The amount and types of
coverage, the identification of the
entity providing the coverage (if
applicable) and related information
with respect to each type of Credit
Support, if any, will be described
in the Prospectus Supplement for a
series of Securities. The Prospectus
Supplement for any series of
Securities evidencing an interest in
a Trust Fund that includes MBS will
describe any similar forms of credit
support that are provided by or with
respect to, or are included as part
of the trust fund evidenced by or
providing security for, such MBS.
See "Risk Factors--Credit Support
Limitations" and "Description of
Credit Support."
(e) Cash Flow Agreements............... If so provided in the related
Prospectus Supplement, the Trust
Fund may include guaranteed
investment contracts pursuant to
which moneys held in the funds and
accounts established for the related
series will be invested at a
specified rate. The Trust Fund may
also include one or more of the
following agreements: interest rate
exchange agreements, interest rate
cap or floor agreements, currency
exchange agreements, other swaps and
derivative instruments or other
agreements consistent with the
foregoing. The principal terms of
any such agreement (any such
agreement, a "Cash Flow Agreement"),
including, without limitation,
provisions relating to the timing,
manner and amount of payments
thereunder and provisions relating
to the termination thereof, will be
described in the Prospectus
Supplement for the related series.
In addition, the related Prospectus
Supplement will provide certain
information with respect to the
obligor under any such Cash Flow
Agreement. The Prospectus Supplement
for any series of Securities
evidencing an interest in a Trust
Fund that includes MBS will describe
any cash flow agreements that are
included as part of the trust fund
evidenced by or providing security
for such MBS. See "Description of
the Trust Funds--Cash Flow
Agreements."
(f) Pre-Funding Account................ To the extent provided in a
Prospectus Supplement, the Depositor
will be obligated (subject only to
the availability thereof) to sell at
a predetermined price, and the Trust
Fund for the related series of
Securities will be obligated to
purchase (subject to the
satisfaction of certain conditions
described in the applicable
Agreement), additional Assets (the
"Subsequent Assets") from time to
time (as frequently as daily) within
the number of months specified in
the Prospectus Supplement after the
issuance of such series of
Securities having an aggregate
principal balance approximately
equal to the amount on deposit in
the Pre-Funding Account (the
"Pre-Funded Amount") for such series
on date of such issuance.
8
<PAGE>
Description of Securities.................. Each series of Certificates will
evidence an interest in the related
Trust Fund and will be issued
pursuant to a pooling and servicing
agreement or a trust agreement.
Pooling and servicing agreements and
trust agreements are referred to
herein as the "Agreements." If a
series of Securities includes Notes,
such Notes will represent
indebtedness of the related Trust
Fund and will be secured by a
security interest in the Assets of
the Trust Fund (or a specified group
thereof) pursuant to an indenture.
Each series of Securities will
include one or more classes. Each
class of Securities (other than
certain Stripped Interest
Securities, as defined below) will
have a stated principal amount (a
"Security Balance") and except for
certain Stripped Principal
Securities, as defined below, will
accrue interest thereon based on a
fixed, variable or adjustable
interest rate (in the case of
Certificates, a "Pass-Through
Rate"). The related Prospectus
Supplement will specify the
Security Balance, if any, and the
Pass-Through Rate or interest rate
for each class of Securities or,
in the case of a variable or
adjustable Pass-Through Rate or
interest rate, the method for
determining the Pass-Through Rate
or interest rate.
Distributions on Securities................ Each series of Securities will
consist of one or more classes of
Securities that may (i) provide for
the accrual of interest thereon
based on fixed, variable or
adjustable rates; (ii) be senior
(collectively, "Senior Securities")
or subordinate (collectively,
"Subordinate Securities") to one or
more other classes of Securities in
respect of certain distributions on
the Securities; (iii) be entitled to
principal distributions, with
disproportionately low, nominal or
no interest distributions
(collectively, "Stripped Principal
Securities"); (iv) be entitled to
interest distributions, with
disproportionately low, nominal or
no principal distributions
(collectively, "Stripped Interest
Securities"); (v) provide for
distributions of accrued interest
thereon commencing only following
the occurrence of certain events,
such as the retirement of one or
more other classes of Securities of
such series (collectively, "Accrual
Securities"); (vi) provide for
distributions of principal as
described in the related Prospectus
Supplement; and/or (vii) provide for
distributions based on a combination
of two or more components thereof
with one or more of the
characteristics described in this
paragraph, including a Stripped
Principal Security component and a
Stripped Interest Security
component, to the extent of
available funds, in each case as
described in the related Prospectus
Supplement. If so specified in the
related Prospectus Supplement,
distributions on one or more classes
of a series of Securities may be
limited to collections from a
designated portion of the Mortgage
Loans in the related Mortgage Pool
(each such portion of Mortgage
Loans, a "Mortgage Loan Group.") See
"Description of the
Securities--General." Any such
classes may include classes of
Offered Securities. With respect to
Securities with two or more
components, references herein to
Security Balance, notional amount
and Pass-Through Rate or interest
rate refer to the principal
balance, if any, notional amount,
if any, and the Pass-Through Rate
or interest rate, if any, for any
such component.
The Securities will not be
guaranteed or insured by the
Depositor or any of its
affiliates, by any governmental
agency or instrumentality or by
any other person, unless otherwise
provided in the related
9
<PAGE>
Prospectus Supplement. See "Risk
Factors--Limited Assets" and
"Description of the Securities."
(a) Interest.......................... Interest on each class of Offered
Securities (other than Stripped
Principal Securities and certain
classes of Stripped Interest
Securities) of each series will
accrue at the applicable
Pass-Through Rate or interest rate
on the outstanding Security Balance
thereof and will be distributed to
Securityholders as provided in the
related Prospectus Supplement. The
specified date on which
distributions are to be made is a
"Distribution Date." Distributions
with respect to interest on Stripped
Interest Securities may be made on
each Distribution Date on the basis
of a notional amount as described in
the related Prospectus Supplement.
Distributions of interest with
respect to one or more classes of
Securities may be reduced to the
extent of certain delinquencies,
losses, prepayment interest
shortfalls, and other contingencies
described herein and in the related
Prospectus Supplement. See "Risk
Factors--Average Life of Securities;
Prepayments; Yields," "Yield
Considerations" and "Description of
the Securities--Distributions of
Interest on the Securities."
(b Principal.......................... The Securities of each series
initially will have an aggregate
Security Balance no greater than the
outstanding principal balance of the
Assets as of, unless the related
Prospectus Supplement provides
otherwise, the close of business on
the first day of the month of
formation of the related Trust Fund
(the "Cut-off Date"), after
application of scheduled payments
due on or before such date, whether
or not received. The Security
Balance of a Security outstanding
from time to time represents the
maximum amount that the holder
thereof is then entitled to receive
in respect of principal from future
cash flow on the assets in the
related Trust Fund. Unless otherwise
provided in the related Prospectus
Supplement, distributions of
principal will be made on each
Distribution Date to the class or
classes of Securities entitled
thereto until the Security Balances
of such Securities have been reduced
to zero. Unless otherwise specified
in the related Prospectus
Supplement, distributions of
principal of any class of Securities
will be made on a pro rata basis
among all of the Securities of such
class or by random selection, as
described in the related Prospectus
Supplement or otherwise established
by the related Trustee. Stripped
Interest Securities with no Security
Balance will not receive
distributions in respect of
principal. See "Description of the
Securities--Distributions of
Principal of the Securities."
Risk Factors............................... There are material risks to be
considered in investing in the
Securities. See "Risk Factors"
herein and, if applicable, in the
related Prospectus Supplement.
Advances................................... Unless otherwise provided in the
related Prospectus Supplement, the
Master Servicer will be obligated as
part of its servicing
responsibilities to make certain
advances that in its good faith
judgment it deems recoverable with
respect to delinquent scheduled
payments on the Whole Loans in such
Trust Fund. Neither the Depositor
nor any of its affiliates will have
any responsibility to make such
advances. Advances made by a Master
Servicer are reimbursable generally
from subsequent recoveries in
respect of such Whole Loans and
otherwise to the extent described
herein and in the related Prospectus
Supplement. If and to the extent
provided in the Prospectus
Supplement for any series, the
Master
10
<PAGE>
Servicer will be entitled to receive
interest on its outstanding
advances, payable from amounts in
the related Trust Fund. The
Prospectus Supplement for any series
of Securities evidencing an interest
in a Trust Fund that includes MBS
will describe any corresponding
advancing obligation of any person
in connection with such MBS. See
"Description of the
Securities--Advances in Respect of
Delinquencies."
Termination................................ If so specified in the related
Prospectus Supplement, a series of
Securities may be subject to
optional early termination through
the repurchase of the Assets in the
related Trust Fund by the party
specified therein, under the
circumstances and in the manner set
forth therein. If so provided in the
related Prospectus Supplement, upon
the reduction of the Security
Balance of a specified class or
classes of Securities to a specified
percentage or amount or on and after
a date specified in such Prospectus
Supplement, the party specified
therein will solicit bids for the
purchase of all of the Assets of the
Trust Fund, or of a sufficient
portion of such Assets to retire
such class or classes, or purchase
such Assets at a price set forth in
the related Prospectus Supplement.
In addition, if so provided in the
related Prospectus Supplement,
certain classes of Securities may be
purchased subject to similar
conditions. See "Description of the
Securities--Termination."
Registration of Securities................. If so provided in the related
Prospectus Supplement, one or more
classes of the Offered Securities
will initially be represented by one
or more certificates or notes, as
applicable, registered in the name
of Cede & Co., as the nominee of
DTC. No person acquiring an interest
in Offered Securities so registered
will be entitled to receive a
definitive certificate or note, as
applicable, representing such
person's interest except in the
event that definitive certificates
or notes, as applicable, are issued
under the limited circumstances
described herein. See "Risk
Factors--Book-Entry Registration"
and "Description of the Securities
--Book-Entry Registration and
Definitive Securities."
Tax Status of the Certificates............. The Certificates of each series will
constitute, as specified in the
related Prospectus Supplement,
either (i) "regular interests"
("REMIC Regular Certificates") or
"residual interests" ("REMIC
Residual Certificates") in a Trust
Fund treated as a real estate
mortgage investment conduit
("REMIC") under Sections 860A
through 860G of the Internal Revenue
Code of 1986, as amended (the
"Code"), (ii) interests ("Grantor
Trust Certificates") in a Trust Fund
treated as a grantor trust under
applicable provisions of the Code,
(iii) interests in a Trust Fund
treated as a partnership for
purposes of federal and state income
tax or (iv) indebtedness of the
Trust Fund for federal income tax
purposes.
(a) REMIC.............................. REMIC Regular Certificates generally
will be treated as debt obligations
of the applicable REMIC for federal
income tax purposes. Certain REMIC
Regular Certificates may be issued
with original issue discount for
federal income tax purposes. See
"Material Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement.
The Offered Certificates
evidencing an interest in a Trust
Fund containing Mortgage Loans
will be treated as (i) assets
described in section
7701(a)(19)(C) of the Code and
(ii) "real estate assets" within
the meaning of section
856(c)(5)(A) of the Code, in each
case to the extent described
herein and in the Prospectus. See
"Material Federal
11
<PAGE>
Income Tax Consequences" herein and
in the related Prospectus
Supplement.
(b) Grantor Trust...................... If the related Prospectus Supplement
specifies that the related Trust
Fund will be a grantor trust, the
Trust Fund will be classified as a
grantor trust and not as an
association taxable as a corporation
for federal income tax purposes, and
therefore holders of Certificates
will be treated as the owners of
undivided pro rata interests in the
Assets held by the Trust Fund.
(c Partnership........................ If so specified in a Prospectus
Supplement, the related Trust Fund
will be treated as a partnership
for purposes of federal and state
income tax, and each
Certificateholder, by the
acceptance of a Certificate of
such Trust Fund, will agree to
treat the Trust Fund as a
partnership in which such
Certificateholder is a partner for
federal income and state tax
purposes. Alternative
characterizations of such Trust
Fund and such Certificates are
possible, but would not result in
materially adverse tax
consequences to
Certificateholders.
(d) Indebtedness....................... If so specified in the related
Prospectus Supplement, the
Certificates of a series will be
treated as indebtedness for federal
income tax purposes and the
Certificateholder, in accepting the
Certificate, will agree to treat
such Certificate as indebtedness.
Investors are advised to consult
their tax advisors and to review
"Material Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement.
Tax Status of Notes........................ Unless otherwise specified in the
related Prospectus Supplement, Notes
of a series will be treated as
indebtedness for federal and state
income tax purposes and the
Noteholder, in accepting the Note,
will agree to treat such Note as
indebtedness. See "Material Federal
Income Tax Consequences" herein and
in such Prospectus Supplement.
Investors are advised to consult
their tax advisors and to review
"Material Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement.
ERISA Considerations....................... A fiduciary of an employee benefit
plan and certain other retirement
plans and arrangements, including
individual retirement accounts,
annuities, Keogh plans, and
collective investment funds and
separate accounts in which such
plans, accounts, annuities or
arrangements are invested, that is
subject to the Employee Retirement
Income Security Act of 1974, as
amended ("ERISA"), or Section 4975
of the Code should carefully review
with its legal advisors whether the
purchase or holding of Offered
Securities could give rise to a
transaction that is prohibited or is
not otherwise permissible either
under ERISA or Section 4975 of the
Code. See "ERISA Considerations"
herein and in the related Prospectus
Supplement. Certain classes of
Securities may not be transferred
unless the Trustee and the Depositor
are furnished with a letter of
representations or an opinion of
counsel to the effect that such
transfer will not result in a
violation of the prohibited
transaction provisions of ERISA and
the Code and will not subject the
Trustee, the Depositor or the Master
Servicer to additional obligations.
See "Description of the
Securities--General" and "ERISA
Considerations".
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Legal Investment........................... Each Prospectus Supplement will
specify which class or classes of
Offered Securities, if any, will
constitute "mortgage-related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA").
Institutions whose investment
activities are subject to legal
investment laws and regulations or
review by certain regulatory
authorities may be subject to
restrictions on investment in
certain classes of the Offered
Securities. See "Legal Investment"
herein and in the related Prospectus
Supplement.
Rating..................................... At the date of issuance, as to each
series, each class of Offered
Securities will be rated not lower
than investment grade by one or more
nationally recognized statistical
rating agencies (each, a "Rating
Agency"). See "Rating" herein and in
the related Prospectus Supplement.
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RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors and additional risk
factors, if any, listed under "Risk Factors" in the related Prospectus
Supplement.
Limited Liquidity
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the Offered
Securities, but has no obligation to do so. There can be no assurance that a
secondary market for the Securities of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or will
continue while Securities of such series remain outstanding.
Limited Assets and Risk That Such Assets Will Not Be Sufficient to Pay
Securities in Full
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only
obligations with respect to the Securities or the Assets will be the
obligations (if any) of the Warranting Party (as defined herein) pursuant to
certain limited representations and warranties made with respect to the
Mortgage Loans, the Master Servicer's and any Sub-Servicer's servicing
obligations under the related Agreement (including the limited obligation to
make certain advances in the event of delinquencies on the Mortgage Loans, but
only to the extent deemed recoverable) and, if and to the extent expressly
described in the related Prospectus Supplement, certain limited obligations of
the Master Servicer in connection with an agreement to purchase or act as
remarketing agent with respect to a convertible ARM Loan (as defined herein)
upon conversion to a fixed rate or a different index. Since certain
representations and warranties with respect to the Mortgage Assets may have
been made and/or assigned in connection with transfers of such Mortgage Assets
prior to the Closing Date, the rights of the Trustee and the Securityholders
with respect to such representations or warranties will be limited to their
rights as an assignee thereof. Unless otherwise specified in the related
Prospectus Supplement, none of the Depositor, the Master Servicer or any
affiliate thereof will have any obligation with respect to representations or
warranties made by any other entity. Unless otherwise specified in the related
Prospectus Supplement, neither the Securities nor the underlying Assets will
be guaranteed or insured by any governmental agency or instrumentality, or by
the Depositor, the Master Servicer, any Sub-Servicer or any of their
affiliates. Proceeds of the assets included in the related Trust Fund for each
series of Securities (including the Assets and any form of credit enhancement)
will be the sole source of payments on the Securities, and there will be no
recourse to the Depositor or any other entity in the event that such proceeds
are insufficient or otherwise unavailable to make all payments provided for
under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a
series of Securities will not have any claim against or security interest in
the Trust Funds for any other series. If the related Trust Fund is
insufficient to make payments on such Securities, no other assets will be
available for payment of the deficiency. Additionally, certain amounts
remaining in certain funds or accounts, including the Collection Account and
any accounts maintained as Credit Support, may be withdrawn under certain
conditions, as described in the related Prospectus Supplement. In the event of
such withdrawal, such amounts will not be available for future payment of
principal of or interest on the Securities. If so provided in the Prospectus
Supplement for a series of Securities consisting of one or more classes of
Subordinate Securities, on any Distribution Date in respect of which losses or
shortfalls in collections on the Assets have been incurred, the amount of such
losses or shortfalls will be borne first by one or more classes of the
Subordinate Securities, and, thereafter, by the remaining classes of
Securities in the priority and manner and subject to the limitations specified
in such Prospectus Supplement.
See "Description of the Trust Funds."
Risk That Prepayments Will Adversely Affect Average Life and Yields of
Securities
Prepayments (including those caused by defaults) on the Assets in any
Trust Fund generally will result in a faster rate of principal payments on one
or more classes of the related Securities than if payments on such Assets
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<PAGE>
were made as scheduled. Thus, the prepayment experience on the Assets may affect
the average life of each class of related Securities. The rate of principal
payments on pools of mortgage loans varies between pools and from time to time
is influenced by a variety of economic, demographic, geographic, social, tax,
legal and other factors. There can be no assurance as to the rate of prepayment
on the Assets in any Trust Fund or that the rate of payments will conform to any
model described herein or in any Prospectus Supplement. If prevailing interest
rates fall significantly below the applicable mortgage interest rates, principal
prepayments are likely to be higher than if prevailing rates remain at or above
the rates borne by the Mortgage Loans underlying or comprising the Mortgage
Assets in any Trust Fund. As a result, the actual maturity of any class of
Securities evidencing an interest in a Trust Fund containing Mortgage Assets
could occur significantly earlier than expected.
A series of Securities may include one or more classes of Securities
with priorities of payment and, as a result, yields on other classes of
Securities, including classes of Offered Securities, of such series may be
more sensitive to prepayments on Assets. A series of Securities may include
one or more classes offered at a significant premium or discount. Yields on
such classes of Securities will be sensitive, and in some cases extremely
sensitive, to prepayments on Mortgage Assets and, where the amount of interest
payable with respect to a class is disproportionately high, as compared to the
amount of principal, as with certain classes of Stripped Interest Securities,
a holder might, in some prepayment scenarios, fail to recoup its original
investment. A series of Securities may include one or more classes of
Securities, including classes of Offered Securities, that provide for
distribution of principal thereof from amounts attributable to interest
accrued but not currently distributable on one or more classes of Accrual
Securities and, as a result, yields on such Securities will be sensitive to
(a) the provisions of such Accrual Securities relating to the timing of
distributions of interest thereon and (b) if such Accrual Securities accrue
interest at a variable or adjustable Pass-Through Rate or interest rate,
changes in such rate.
See "Yield Considerations" herein and, if applicable, in the related
Prospectus Supplement.
Mortgage Loans and Mortgaged Properties in General--Risk That Defaults by
Obligors or Declines in the Values of Mortgaged Properties Will Result in Losses
to Investors
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things,
a decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of
the related Mortgage Loans. If the relevant residential real estate market
should experience an overall decline in property values such that the
outstanding balances of the related Mortgage Loans, and any secondary
financing on the Mortgaged Properties, become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry in that market. In addition, in the case of
Mortgage Loans that are subject to negative amortization, due to the addition
to principal balance of deferred interest, the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the
likelihood of default. To the extent that such losses are not covered by the
applicable Credit Support, if any, holders of Securities of the series
evidencing interests in the related Mortgage Loans will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to the
value of the Mortgaged Properties for recovery of the outstanding principal
and unpaid interest on the defaulted Mortgage Loans. Certain of the types of
Mortgage Loans may involve additional uncertainties not present in traditional
types of loans. For example, certain of the Mortgage Loans provide for
escalating or variable payments by the mortgagor under the Mortgage Loan, as
to which the mortgagor is generally qualified on the basis of the initial
payment amount. In some instances the Mortgagor's income may not be sufficient
to enable them to continue to make their loan payments as such payments
increase and thus the likelihood of default will increase. In addition to the
foregoing, certain 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 than will
be experienced on mortgage loans generally. The Mortgage Loans underlying
certain series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Furthermore, the rate of default on Mortgage Loans that are refinance or
limited documentation mortgage loans, and on Mortgage Loans with high
Loan-to-Value Ratios, may be higher than for other types of Mortgage Loans.
Additionally, a decline in the value of the Mortgaged Properties will increase
the risk of loss particularly with respect to any related junior Mortgage
Loans. See "--Junior Mortgage Loans."
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In addition, a Prospectus Supplement may specify that the
Loan-to-Value Ratios for the Mortgage Loans in the related Trust will be in
excess of 100%. The related Mortgaged Properties, therefore, will be highly
unlikely to provide adequate security for such Mortgage Loans. To the extent
specified in such Prospectus Supplement, the assessment of the credit history
of a borrower and such borrower's capacity to make payments on the related
Mortgage Loan will have been the primary considerations in underwriting the
Mortgage Loans included in such Trust. The evaluation of the adequacy of the
Loan-to-Value Ratio, if so specified in the related Prospectus Supplement,
will have been given less consideration, and in certain cases no
consideration, in underwriting such Mortgage Loans.
Junior Mortgage Loans--Risk That There Will Be Reduced or No Proceeds Available
to Holders of Junior Lien Mortgage Loans
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the "senior
lien"), may not be included in the Mortgage Pool. The primary risk to holders
of Mortgage Loans secured by junior liens is the possibility that adequate
funds will not be received in connection with a foreclosure of the related
senior lien to satisfy fully both the senior lien and the Mortgage Loan. In
the event that a holder of the senior lien forecloses on a Mortgaged Property,
the proceeds of the foreclosure or similar sale will be applied first to the
payment of court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due and owing
to the holder of the senior lien. The claims of the holder of the senior lien
will be satisfied in full out of proceeds of the liquidation of the Mortgage
Loan, if such proceeds are sufficient, before the Trust Fund as holder of the
junior lien receives any payments in respect of the Mortgage Loan. If the
Master Servicer were to foreclose on any Mortgage Loan, it would do so subject
to any related senior lien. In order for the debt related to the Mortgage Loan
to be paid in full at such sale, a bidder at the foreclosure sale of such
Mortgage Loan would have to bid an amount sufficient to pay off all sums due
under the Mortgage Loan and the senior lien or purchase the Mortgaged Property
subject to the senior lien. In the event that such proceeds from a foreclosure
or similar sale of the related Mortgaged Property were insufficient to satisfy
both loans in the aggregate, the Trust Fund, as the holder of the junior lien,
and, accordingly, holders of the Certificates, would bear the risk of delay in
distributions while a deficiency judgment against the borrower was being
obtained and the risk of loss if the deficiency judgment were not realized
upon. Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the
property securing a junior mortgage unless it forecloses subject to the senior
mortgage. See "Certain Legal Aspects of the Mortgage Loans--Junior Mortgages."
Credit Support Limitations--Risk That Credit Support Will Not Cover All Losses
The Prospectus Supplement for a series of Certificates will describe
any Credit Support in the related Trust Fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of credit
support, or combinations thereof. Use of Credit Support will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Support may not cover all potential losses
or risks; for example, Credit Support may or may not cover fraud or negligence
by a mortgage loan or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce
the risk to holders of Senior Securities of delinquent distributions or
ultimate losses, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or more
classes of Securities of a series are made in a specified order of priority,
any limits with respect to the aggregate amount of claims under any related
Credit Support may be exhausted before the principal of the lower priority
classes of Securities of such series has been repaid. As a result, the impact
of significant losses and shortfalls on the Assets may fall primarily upon
those classes of Securities having a lower priority of payment. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
"Covered Trust"), holders of Securities evidencing an interest in a Covered
Trust will be subject to the risk that such Credit Support will be exhausted
by the claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more
classes of Offered Securities, including the subordination of one or more
classes of Securities, will be determined on the basis of criteria established
by each Rating Agency rating such classes of Securities based on an assumed
level of defaults,
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<PAGE>
delinquencies, other losses or other factors. There can, however, be no
assurance that the loss experience on the related Assets will not exceed such
assumed levels.
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. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or
a portion of the credit enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will
not be adversely affected. The rating of any series of Securities by any
applicable Rating Agency may be lowered following the initial issuance thereof
as a result of the downgrading of the obligations of any applicable Credit
Support provider, or as a result of losses on the related Assets substantially
in excess of the levels contemplated by such Rating Agency at the time of its
initial rating analysis. None of the Depositor, the Master Servicer or any of
their affiliates will have any obligation to replace or supplement any Credit
Support or to take any other action to maintain any rating of any series of
Securities.
See "--Limited Nature of Ratings," "Description of the Securities" and
"Description of Credit Support."
Subordination of the Subordinate Securities; Effect of Losses on the Subordinate
Securities
The rights of Subordinate Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Assets will be
subordinate to the rights of the Master Servicer (to the extent that the
Master Servicer is paid its servicing fee, including any unpaid servicing fees
with respect to one or more prior Due Periods, and is reimbursed for certain
unreimbursed advances and unreimbursed liquidation expenses) and the Senior
Securityholders to the extent described in the related Prospectus Supplement.
As a result of the foregoing, investors must be prepared to bear the risk that
they may be subject to delays in payment and may not recover their initial
investments in the Subordinate Securities. See "Description of the
Securities--General" and "--Allocation of Losses and Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive
to the loss experience of the Assets and the timing of any such losses. If the
actual rate and amount of losses experienced by the Assets exceed the rate and
amount of such losses assumed by an investor, the yields to maturity on the
Subordinate Securities may be lower than anticipated.
Balloon Payments--Risk that Obligor Will Not Be Able to Make Balloon Payment
Certain of the Mortgage Loans (the "Balloon Mortgage Loans") as of
the Cut-off Date may not be fully amortizing over their terms to maturity and,
thus, will require substantial principal payments (i.e., balloon payments) at
their stated maturity. Mortgage Loans with balloon payments involve a greater
degree of risk because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to timely refinance the loan or
to timely sell the related Mortgaged Property. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage interest rates at the time of sale
or refinancing, the mortgagor's equity in the related Mortgaged Property, the
financial condition of the mortgagor, the value of the Mortgaged Property, tax
laws, prevailing general economic conditions and the availability of credit
for single family or multifamily real properties generally.
Optional Termination of a Trust Fund--Possibility, if Prospectus Supplement So
Provides, That Amount Received May Be Less Than Outstanding Principal Amount
Plus Accrued Interest
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities to a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets
of the Trust Fund, or of a sufficient portion of such assets to retire such
class or classes or purchase such class or classes at a price set forth in the
related Prospectus Supplement, in each case, under the circumstances and in
the manner set forth therein.
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<PAGE>
In either such case, if the related Prospectus Supplement so
provides, the proceeds available for distribution to Securityholders may be
less than the outstanding principal balance of their Securities plus accrued
interest thereon, in which event such Securityholders could incur a loss on
their investment.
Certain Federal Tax Considerations Regarding REMIC Residual Certificates
Holders of REMIC Residual Certificates will be required to report on
their federal income tax returns as ordinary income their pro rata share of
the taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described in "Material Federal Income Tax
Consequences--REMICs." Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have
taxable income and tax liabilities arising from such investment during a
taxable year in excess of the cash received during such period. Individual
holders of REMIC Residual Certificates may be limited in their ability to
deduct servicing fees and other expenses of the REMIC. In addition, REMIC
Residual Certificates are subject to certain restrictions on transfer. Because
of the special tax treatment of REMIC Residual Certificates, the taxable
income arising in a given year on a REMIC Residual Certificate will not be
equal to the taxable income associated with investment in a corporate bond or
stripped instrument having similar cash flow characteristics and pre-tax
yield. Therefore, the after-tax yield on the REMIC Residual Certificate may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics. Additionally, prospective purchasers of a
REMIC Residual Certificate should be aware that recently issued temporary
regulations provide restrictions on the ability to mark-to-market certain
"negative value" REMIC residual interests. See "Material Federal Income Tax
Consequences--REMICs."
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders
of Securities of such class will receive payments to which such
Securityholders are entitled under the related Agreement. Such rating will not
constitute an assessment of the likelihood that principal prepayments
(including those caused by defaults) on the related Mortgage Assets will be
made, the degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional termination of the
series of Securities. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an investor
purchasing a Security at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios. Each Prospectus
Supplement will identify any payment to which holders of Offered Securities of
the related series are entitled that is not covered by the applicable rating.
See "Rating."
Book-Entry Registration
If so provided in the Prospectus Supplement, one or more classes of
the Securities will be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be
registered in the names of the Securityholders or their nominees. Because of
this, unless and until Definitive Securities are issued, Securityholders will
not be recognized by the Trustee as "Securityholders" (as that term is to be
used in the related Agreement). Hence, until such time, Securityholders will
be able to exercise the rights of Securityholders only indirectly through DTC
and its participating organizations. See "Description of the
Securities--Book-Entry Registration and Definitive Securities.
DESCRIPTION OF THE TRUST FUNDS
Assets
The primary assets of each Trust Fund (the "Assets") will include (i)
one- to five-family mortgage loans (or certain balances thereof)
(collectively, the "Mortgage Loans"), including without limitation, Home
Equity Loans and Home Improvement Contracts, (ii) pass-through certificates or
other mortgage-backed securities (such as debt obligations or participation
interests or certificates) evidencing interests in or secured by one or more
Mortgage Loans or other similar participations, certificates or securities
("MBS") or (iii) direct obligations of the United
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States, agencies thereof or agencies created thereby which are
(a)interest-bearing securities, (b) non-interest-bearing securities, (c)
originally interest-bearing securities from which coupons representing the right
to payment of interest have been removed, or (d) interest-bearing securities
from which the right to payment of principal has been removed (the "Government
Securities"). As used herein, "Mortgage Loans" refers to both whole Mortgage
Loans (or certain balances thereof) and Mortgage Loans underlying MBS. Mortgage
Loans that secure, or interests in which are evidenced by, MBS are herein
sometimes referred to as "Underlying Mortgage Loans." Mortgage Loans (or certain
balances thereof) that are not Underlying Mortgage Loans are sometimes referred
to as "Whole Loans." Any pass-through certificates or other asset-backed
certificates in which an MBS evidences an interest or which secure an MBS are
sometimes referred to herein also as MBS or as "Underlying MBS." Mortgage Loans
and MBS are sometimes referred to herein as "Mortgage Assets." The Mortgage
Assets will not be guaranteed or insured by Merrill Lynch Mortgage Investors,
Inc. (the "Depositor") or any of its affiliates or, unless otherwise provided in
the Prospectus Supplement, by any governmental agency or instrumentality or by
any other person. Each Asset will be selected by the Depositor for inclusion in
a Trust Fund from among those purchased, either directly or indirectly, from a
prior holder thereof (an "Asset Seller"), which may be an affiliate of the
Depositor and, with respect to Assets, which prior holder may or may not be the
originator of such Mortgage Loan or the issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of
any other trust fund established by the Depositor. If specified in the related
Prospectus Supplement, the assets of a Trust Fund will consist of certificates
representing beneficial ownership interests in, or indebtedness of, another
trust fund that contains the Assets.
Mortgage Loans
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property consisting
of a one- to five-family residential property (a "Single Family Property" and
the related Mortgage Loan a "Single Family Mortgage Loan") or (ii) a security
interests in shares issued by private cooperative housing corporations
("Cooperatives"). If so specified in the related Prospectus Supplement, a
Mortgaged Property may include some commercial use. Mortgaged Properties will
be located, unless otherwise specified in the related Prospectus Supplement,
in any one of the fifty states, the District of Columbia, the Commonwealth of
Puerto Rico or any U.S. possession. To the extent specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by first and/or
junior mortgages or deeds of trust or other similar security instruments
creating a first or junior lien on Mortgaged Property. The Mortgaged
Properties may include apartments owned by Cooperatives and leasehold
interests in properties, the title to which is held by third party lessors.
Unless otherwise specified in the Prospectus Supplement, the term of any such
leasehold shall exceed the term of the related mortgage note by at least five
years. Each Mortgage Loan will have been originated by a person (the
"Originator") other than the Depositor. The related Prospectus Supplement will
indicate if any Originator is an affiliate of the Depositor. The Mortgage
Loans will be evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other security instruments (the "Mortgages")
creating a lien on the Mortgaged Properties. No more than 20% of the Mortgage
Loans (by principal balance) in a Trust Fund will be, as of the related
Cut-off Date, 30 days or more past their most recent contractually scheduled
payment date.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the Mortgage Loan plus the principal balance of any senior mortgage loan to
the Value of the related Mortgaged Property. The "Value" of a Mortgaged
Property, other than with respect to Refinance Loans, is generally the lesser
of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and (b) the sales price for such
property. "Refinance Loans" are loans made to refinance existing loans. Unless
otherwise set forth in the related Prospectus Supplement, the Value of the
Mortgaged Property securing a Refinance Loan is the appraised value thereof
determined in an appraisal obtained at the time of origination of the
Refinance Loan. The Value of a Mortgaged Property as of the date of initial
issuance of the related series of Certificates may be less than the value at
origination and will fluctuate from time to time based upon changes in
economic conditions and the real estate market.
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Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans, (iv) the earliest and
latest origination date and maturity date of the Mortgage Loans, (v) the range
of the Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the
Mortgage Rates or range of Mortgage Rates and the weighted average Mortgage
Rate borne by the Mortgage Loans, (vii) the state or states in which most of
the Mortgaged Properties are located, (viii) information with respect to the
prepayment provisions, if any, of the Mortgage Loans, (ix) with respect to
Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the index, the
frequency of the adjustment dates, the range of margins added to the index,
and the maximum Mortgage Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Loan and (x) information
regarding the payment characteristics of the Mortgage Loans, including without
limitation balloon payment and other amortization provisions. If specific
information respecting the Mortgage Loans is not known to the Depositor at the
time Securities are initially offered, more general information of the nature
described above will be provided in the Prospectus Supplement, and specific
information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission within fifteen days after such initial issuance.
The related Prospectus Supplement may specify whether the Mortgage
Loans include (i) closed-end and/or revolving home equity loans or certain
balances thereof ("Home Equity Loans"), which may be secured by Mortgages that
are junior to other liens on the related Mortgaged Property and/or (ii) home
improvement installment sales contracts or installment loan agreements (the
"Home Improvement Contracts") originated by a home improvement contractor and
secured by a Mortgage on the related Mortgaged Property that is junior to
other liens on the Mortgaged Property. Except as otherwise described in the
related Prospectus Supplement, the home improvements purchased with the Home
Improvement Contracts will generally be replacement windows, house siding,
roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling goods
and solar heating panels. The related Prospectus Supplement will specify
whether the Home Improvement Contracts are partially insured under Title I of
the National Housing Act and, if so, the limitations on such insurance.
If specified in the related Prospectus Supplement, new draws by
borrowers under the revolving Home Equity Loans will, during a specified
period of time, automatically become part of the Trust Fund for a series. As a
result, the aggregate balance of the revolving Home Equity Loans will
fluctuate from day to day as new draws by borrowers are added to the Trust
Fund and principal collections are applied to purchase such balances. Such
amounts will usually differ each day, as more specifically described in the
related Prospectus Supplement.
If specified in the related Prospectus Supplement, principal
collections received on the Mortgage Loans may be applied to purchase
additional Mortgage Loans which will become part of the Trust Fund for a
series. Such additions may be made to the extent that such additions could be
made in connection with a Trust Fund with respect to which a REMIC election
has been made. The related Prospectus Supplement will set forth the
characteristics that such additional Mortgage Loans will be required to meet.
Such characteristics will be specified in terms of the categories described in
the second preceding paragraph.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all
of the Mortgage Loans will (i) have individual principal balances at
origination of not less than $25,000, (ii) have original terms to maturity of
not more than 40 years and (iii) provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at
such other interval as is specified in the related Prospectus Supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of
interest thereon at an interest rate (a "Mortgage Rate") that is fixed over
its term or that adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate or a different adjustable Mortgage Rate,
or from a fixed to an adjustable Mortgage Rate, from time to time pursuant to
an election or as otherwise specified on the related Mortgage Note, in each
case as described in the
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related Prospectus Supplement. Each Mortgage Loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a participation agreement, a trust agreement, an indenture or
similar agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or
servicer (the "MBS Servicer") of the underlying Mortgage Loans (or Underlying
MBS) will have entered into the MBS Agreement with a trustee or a custodian
under the MBS Agreement (the "MBS Trustee"), if any, or with the original
purchaser of the interest in the underlying Mortgage Loans or MBS evidenced by
the MBS.
Distributions of any principal or interest, as applicable, will be
made on MBS on the dates specified in the related Prospectus Supplement. The
MBS may be issued in one or more classes with characteristics similar to the
classes of Securities described in this Prospectus. Any principal or interest
distributions will be made on the MBS by the MBS Trustee or the MBS Servicer.
The MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other
forms of credit support similar to that described for the Securities under
"Description of Credit Support" may be provided with respect to the MBS. The
type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Underlying Mortgage Loans or
Underlying MBS evidenced by or securing such MBS and other factors and
generally will have been established for the MBS on the basis of requirements
of either any Rating Agency that may have assigned a rating to the MBS or the
initial purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing
interests in Mortgage Assets that include MBS will specify, to the extent
available to the Depositor, (i) the aggregate approximate initial and
outstanding principal amount or notional amount, as applicable, and type of
the MBS to be included in the Trust Fund, (ii) the original and remaining term
to stated maturity of the MBS, if applicable, (iii) whether such MBS is
entitled only to interest payments, only to principal payments or to both,
(iv) the pass-through or bond rate of the MBS or formula for determining such
rates, if any, (v) the applicable payment provisions for the MBS, including,
but not limited to, any priorities, payment schedules and subordination
features, (vi) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of credit or
guarantees relating to the related Underlying Mortgage Loans, the Underlying
MBS or directly to such MBS, (viii) the terms on which the related Underlying
Mortgage Loans or Underlying MBS for such MBS or the MBS may, or are required
to, be purchased prior to their maturity, (ix) the terms on which Mortgage
Loans or Underlying MBS may be substituted for those originally underlying the
MBS, (x) the servicing fees payable under the MBS Agreement, (xi) the type of
information in respect of the Underlying Mortgage Loans described under
"--Mortgage Loans--Mortgage Loan Information in Prospectus Supplements" above,
and the type of information in respect of the Underlying MBS described in this
paragraph, (xii) the characteristics of any cash flow agreements that are
included as part of the trust fund evidenced or secured by the MBS and (xiii)
whether the MBS is in certificated form or held through a depository such as
The Depository Trust Company or the Participants Trust Company.
Each MBS will be either (i) a security exempted from the registration
requirements of the Securities Act, (ii) a security that has been previously
registered under the Securities Act or (iii) a security that is eligible for
sale under Rule 144(k) under the Securities Act. In the case of clauses (ii)
and (iii), such security will be acquired in a secondary market transaction
not from the issuer thereof or an affiliate of such issuer.
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Government Securities
The Prospectus Supplement for a series of Securities evidencing
interests in Assets of a Trust Fund that include Government Securities will
specify, to the extent available, (i) the aggregate approximate initial and
outstanding principal amounts or notional amounts, as applicable, and types of
the Government Securities to be included in the Trust Fund, (ii) the original
and remaining terms to stated maturity of the Government Securities, (iii)
whether such Government Securities are entitled only to interest payments,
only to principal payments or to both, (iv) the interest rates of the
Government Securities or the formula to determine such rates, if any, (v) the
applicable payment provisions for the Government Securities and (vi) to what
extent, if any, the obligation evidenced thereby is backed by the full faith
and credit of the United States.
Pre-Funding Account
To the extent provided in a Prospectus Supplement, the Depositor will
be obligated (subject only to the availability thereof) to sell at a
predetermined price, and the Trust Fund for the related series of Securities
will be obligated to purchase (subject to the satisfaction of certain
conditions described in the applicable Agreement), additional Assets (the
"Subsequent Assets") from time to time (as frequently as daily) within the
number of months specified in the related Prospectus Supplement after the
issuance of such series of Securities having an aggregate principal balance
approximately equal to the amount on deposit in the Pre-Funding Account (the
"Pre-Funded Amount") for such series on date of such issuance.
Accounts
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement.
See "Description of the Agreement--Collection Account and Related Accounts."
Credit Support
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series and/or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or other type of
credit support consistent with the foregoing, or a combination thereof (any
such coverage with respect to the Securities of any series, "Credit Support").
The amount and types of coverage, the identification of the entity providing
the coverage (if applicable) and related information with respect to each type
of Credit Support, if any, will be described in the Prospectus Supplement for
a series of Securities. See "Risk Factors--Credit Support Limitations" and
"Description of Credit Support."
Cash Flow Agreements
If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys held in
the funds and accounts established for the related series will be invested at
a specified rate. The Trust Fund may also include one or more of the following
agreements: interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements, other swaps and derivative
instruments or other agreements consistent with the foregoing. The principal
terms of any such agreement (any such agreement, a "Cash Flow Agreement"),
including, without limitation, provisions relating to the timing, manner and
amount of payments thereunder and provisions relating to the termination
thereof, will be described in the Prospectus Supplement for the related
series. In addition, the related Prospectus Supplement will provide certain
information with respect to the obligor under any such Cash Flow Agreement.
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USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will
be applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred
in connection with such purchase of Assets and sale of Securities. The
Depositor expects to sell the Securities from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors,
including the volume of Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
General
The yield on any Offered Security will depend on the price paid by
the Securityholder, the Pass-Through Rate or interest rate of the Security,
the receipt and timing of receipt of distributions on the Security and the
weighted average life of the Assets in the related Trust Fund (which may be
affected by prepayments, defaults, liquidations or repurchases). See "Risk
Factors."
Pass-Through Rate and Interest Rate
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify
the Pass-Through Rate or interest rate for each class of such Securities or,
in the case of a variable or adjustable Pass-Through Rate or interest rate,
the method of determining the Pass-Through Rate or interest rate; the effect,
if any, of the prepayment of any Asset on the Pass-Through Rate or interest
rate of one or more classes of Securities; and whether the distributions of
interest on the Securities of any class will be dependent, in whole or in
part, on the performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective
yield to maturity to each holder of Securities entitled to payments of
interest will be below that otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price of such Security because, while
interest may accrue on each Asset during a certain period, the distribution of
such interest will be made on a day which may be several days, weeks or months
following the period of accrual.
Timing of Payment of Interest
Each payment of interest on the Securities (or addition to the
Security Balance of a class of Accrual Securities) on a Distribution Date will
include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under "--Pass-Through Rate and Interest
Rate," if the Interest Accrual Period ends on a date other than the day before
a Distribution Date for the related series, the yield realized by the holders
of such Securities may be lower than the yield that would result if the
Interest Accrual Period ended on such day before the Distribution Date.
Payments of Principal; Prepayments
The yield to maturity on the Securities will be affected by the rate
of principal payments on the Assets (including principal prepayments on
Mortgage Loans resulting from both voluntary prepayments by the borrowers and
involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans will be affected by a variety of factors, including,
without limitation, the terms of the Mortgage Loans, the level of prevailing
interest rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors. In general, however, if prevailing
interest rates fall significantly below the Mortgage Rates on the Mortgage
Loans comprising or underlying the Assets in a particular Trust Fund, such
Mortgage Loans are likely to be the subject of higher principal prepayments
than if prevailing rates remain at or above the rates borne by such Mortgage
Loans. In this regard, it should be noted that certain Assets may consist of
Mortgage Loans with different Mortgage
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Rates and the stated pass-through or pay-through interest rate of certain MBS
may be a number of percentage points higher or lower than certain of the
Underlying Mortgage Loans. The rate of principal payments on some or all of the
classes of Securities of a series will correspond to the rate of principal
payments on the Assets in the related Trust Fund. Mortgage Loans with a
prepayment premium provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than otherwise
identical Mortgage Loans without such provisions or with lower Prepayment
Premiums.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that
is slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Securities, the effect on yield
on one or more classes of the Securities of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
Unless otherwise specified in the related Prospectus Supplement, when
a full prepayment is made on a Mortgage Loan, the obligor is charged interest
on the principal amount of the Mortgage Loan so prepaid for the number of days
in the month actually elapsed up to the date of the prepayment. Unless
otherwise specified in the related Prospectus Supplement, the effect of
prepayments in full will be to reduce the amount of interest paid in the
following month to holders of Securities entitled to payments of interest
because interest on the principal amount of any Mortgage Loan so prepaid will
be paid only to the date of prepayment rather than for a full month. Unless
otherwise specified in the related Prospectus Supplement, a partial prepayment
of principal is applied so as to reduce the outstanding principal balance of
the related Mortgage Loan as of the Due Date in the month in which such
partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets
may significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Assets and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by
the investor during a given period may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest
principal received in respect of a Security at a yield at least equal to the
yield on such Security. Prepayments--Maturity and Weighted Average Life
Prepayments-Maturity and Weighted Average Life
The rates at which principal payments are received on the Assets
included in or comprising a Trust Fund and the rate at which payments are made
from any Credit Support or Cash Flow Agreement for the related series of
Securities may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund will generally accelerate the
rate at which principal is paid on some or all of the classes of the
Securities of the related series.
If so provided in the Prospectus Supplement for a series of
Securities, one or more classes of Securities may have a final scheduled
Distribution Date, which is the date on or prior to which the Security Balance
thereof is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to such series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Securities of a series will be influenced by the rate at which
principal on the Mortgage Loans comprising or underlying the Assets is paid to
such class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
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In addition, the weighted average life of the Securities may be
affected by the varying maturities of the Mortgage Loans comprising or
underlying the Assets in a Trust Fund. If any Mortgage Loans comprising or
underlying the Assets in a particular Trust Fund have actual terms to maturity
less than those assumed in calculating final scheduled Distribution Dates for
the classes of Securities of the related series, one or more classes of such
Securities may be fully paid prior to their respective final scheduled
Distribution Dates, even in the absence of prepayments. Accordingly, the
prepayment experience of the Assets will, to some extent, be a function of the
mix of Mortgage Rates and maturities of the Mortgage Loans comprising or
underlying such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment
model, each as described below. CPR represents a constant assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans for the life of such loans. SPA represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans. A prepayment assumption of 100% of SPA assumes prepayment rates
of 0.2% per annum of the then outstanding principal balance of such loans in
the first month of the life of the loans and an additional 0.2% per annum in
each month thereafter until the thirtieth month. Beginning in the thirtieth
month and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans,
including the Mortgage Loans underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities
may contain tables, if applicable, setting forth the projected weighted
average life of each class of Offered Securities of such series and the
percentage of the initial Security Balance of each such class that would be
outstanding on specified Distribution Dates based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Mortgage Loans comprising or underlying the related Assets are made at rates
corresponding to various percentages of CPR, SPA or such other standard
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of the
Securities to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual
weighted average life of the Securities. It is unlikely that prepayment of any
Mortgage Loans comprising or underlying the Assets for any series will conform
to any particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
Other Factors Affecting Weighted Average Life
Type of Mortgage Asset
If so specified in the related Prospectus Supplement, a number of
Mortgage Loans may have balloon payments due at maturity, and because the
ability of a mortgagor to make a balloon payment typically will depend upon
its ability either to refinance the loan or to sell the related Mortgaged
Property, there is a risk that a number of Mortgage Loans having balloon
payments may default at maturity. In the case of defaults, recovery of
proceeds may be delayed by, among other things, bankruptcy of the mortgagor or
adverse conditions in the market where the property is located. In order to
minimize losses on defaulted Mortgage Loans, the servicer may, to the extent
and under the circumstances set forth in the related Prospectus Supplement, be
permitted to modify Mortgage Loans that are in default or as to which a
payment default is imminent. Any defaulted balloon payment or modification
that extends the maturity of a Mortgage Loan will tend to extend the weighted
average life of the Securities, thereby lengthening the period of time elapsed
from the date of issuance of a Security until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the mortgagor under each Mortgage Loan
generally will be qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the mortgagor or obligor to make larger level monthly payments
following the adjustment of the Mortgage Rate. In addition, certain Mortgage
Loans may be subject to temporary buydown plans ("Buydown
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Mortgage Loans") pursuant to which the monthly payments made by the mortgagor
during the early years of the Mortgage Loan will be less than the scheduled
monthly payments thereon (the "Buydown Period"). The periodic increase in the
amount paid by the mortgagor of a Buydown Mortgage Loan during or at the end of
the applicable Buydown Period may create a greater financial burden for the
mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as
immediately after origination (initial Mortgage Rates are generally lower than
the sum of the applicable index at origination and the related margin over
such index at which interest accrues), the amount of interest accruing on the
principal balance of such Mortgage Loans may exceed the amount of the minimum
scheduled monthly payment thereon. As a result, a portion of the accrued
interest on negatively amortizing Mortgage Loans may be added to the principal
balance thereof and will bear interest at the applicable Mortgage Rate. The
addition of any such deferred interest to the principal balance of any related
class or classes of Securities will lengthen the weighted average life thereof
and may adversely affect yield to holders thereof, depending upon the price at
which such Securities were purchased. In addition, with respect to certain ARM
Loans subject to negative amortization, during a period of declining interest
rates, it might be expected that each minimum scheduled monthly payment on
such a Mortgage Loan would exceed the amount of scheduled principal and
accrued interest on the principal balance thereof, and since such excess will
be applied to reduce the principal balance of the related class or classes of
Securities, the weighted average life of such Securities will be reduced and
may adversely affect yield to holders thereof, depending upon the price at
which such Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans will also affect the rate,
timing and amount of principal payments on the Assets and thus the yield on
the Securities. In general, defaults on mortgage loans are expected to occur
with greater frequency in their early years. The rate of default on Mortgage
Loans which are refinance or limited documentation mortgage loans, and on
Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the
general economic condition of the region of the country in which the related
Mortgage Properties are located. The risk of delinquencies and loss is greater
and prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount
of the Mortgage Loans comprising or underlying the Assets that are foreclosed
or repossessed in relation to the number and principal amount of Mortgage
Loans that are repaid in accordance with their terms will affect the weighted
average life of the Mortgage Loans comprising or underlying the Assets and
that of the related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer
may allow the refinancing of a Mortgage Loan in any Trust Fund by accepting
prepayments thereon and permitting a new loan secured by a mortgage on the
same property. In the event of such a refinancing, the new loan would not be
included in the related Trust Fund and, therefore, such refinancing would have
the same effect as a prepayment in full of the related Mortgage Loan. A
Sub-Servicer or the Master Servicer may, from time to time, implement programs
designed to encourage refinancing. Such programs may include, without
limitation, modifications of existing loans, general or targeted
solicitations, the offering of pre-approved applications, reduced origination
fees or closing costs, or other financial incentives. In addition,
Sub-Servicers may encourage the refinancing of Mortgage Loans, including
defaulted Mortgage Loans, that would permit creditworthy borrowers to assume
the outstanding indebtedness of such Mortgage Loans.
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Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates
that may not be reflected in the prepayment standards or models used in the
relevant Prospectus Supplement. A number of the Mortgage Loans comprising or
underlying the Assets may include "due-on-sale" clauses that allow the holder
of the Mortgage Loans to demand payment in full of the remaining principal
balance of the Mortgage Loans upon sale, transfer or conveyance of the related
Mortgaged Property. With respect to any Whole Loans, unless otherwise provided
in the related Prospectus Supplement, the Master Servicer will generally
enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying Mortgaged Property and it
is entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage
under any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Due-on-Sale
Provisions."
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal
executive offices of the Depositor are located at 250 Vesey Street, World
Financial Center, North Tower, 10th Floor, New York, New York 10218-1310. Its
telephone number is (212) 449-0357.
The Depositor's principal business is to acquire, hold and/or sell or
otherwise dispose of cash flow assets, usually in connection with the
securitization of that asset. The Depositor does not have, nor is it expected
in the future to have, any significant assets.
DESCRIPTION OF THE SECURITIES
General
The Certificates of each series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. If a series of
Securities includes Notes, such Notes will represent indebtedness of the
related Trust Fund and will be issued and secured pursuant to an indenture (an
"Indenture"). Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior (collectively, "Senior
Securities") or subordinate (collectively, "Subordinate Securities") to one or
more other classes of Securities in respect of certain distributions on the
Securities; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions (collectively,
"Stripped Principal Securities"); (iv) be entitled to interest distributions,
with disproportionately low, nominal or no principal distributions
(collectively, "Stripped Interest Securities"); (v) provide for distributions
of accrued interest thereon commencing only following the occurrence of
certain events, such as the retirement of one or more other classes of
Securities of such series (collectively, "Accrual Securities"); (vi) provide
for payments of principal as described in the related Prospectus Supplement,
from all or only a portion of the Assets in such Trust Fund, to the extent of
available funds, in each case as described in the related Prospectus
Supplement; and/or (vii) provide for distributions based on a combination of
two or more components thereof with one or more of the characteristics
described in this paragraph including a Stripped Principal Security component
and a Stripped Interest Security component. If so specified in the related
Prospectus Supplement, a Trust Fund may include (i) additional Mortgage Loans
(or certain balances thereof) that will be transferred to the Trust from time
to time and/or (ii) in the case of revolving Home Equity loans or certain
balances thereof, any additional balances advanced to the borrowers under the
revolving Home Equity loans during certain periods. If so specified in the
related Prospectus Supplement, distributions on one or more classes of a
series of Securities may be limited to collections from a designated portion
of the Whole Loans in the related Mortgage Pool (each such portion of Whole
Loans, a "Mortgage Loan Group"). Any such classes may include classes of
Offered Securities.
Each class of Offered Securities of a series will be issued in
minimum denominations corresponding to the Security Balances or, in case of
Stripped Interest Securities, notional amounts or percentage interests
specified in the
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related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in definitive form
("Definitive Securities") or in book-entry form ("Book-Entry Securities"), as
provided in the related Prospectus Supplement. See "Risk Factors--Book-Entry
Registration" and "Description of the Securities--Book-Entry Registration and
Definitive Securities." Definitive Securities will be exchangeable for other
Securities of the same class and series of a like aggregate Security Balance,
notional amount or percentage interest but of different authorized
denominations. See "Risk Factors--Limited Liquidity" and "--Limited Assets."
Distributions
Distributions on the Securities of each series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such series
and such Distribution Date. Except as otherwise specified in the related
Prospectus Supplement, distributions (other than the final distribution) will
be made to the persons in whose names the Securities are registered at the
close of business on the last business day of the month preceding the month in
which the Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution
Date will be allocated pro rata among the outstanding Securities in such class
or by random selection, as described in the related Prospectus Supplement or
otherwise established by the related Trustee. Payments will be made either by
wire transfer in immediately available funds to the account of a
Securityholder at a bank or other entity having appropriate facilities
therefor, if such Securityholder has so notified the Trustee or other person
required to make such payments no later than the date specified in the related
Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Securities in the requisite amount specified therein), or by
check mailed to the address of the person entitled thereto as it appears on
the Security Register; provided, however, that the final distribution in
retirement of the Securities (whether Definitive Securities or Book-Entry
Securities) will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
Available Distribution Amount
All distributions on the Securities of each series on each
Distribution Date will be made from the Available Distribution Amount
described below, in accordance with the terms described in the related
Prospectus Supplement. Unless provided otherwise in the related Prospectus
Supplement, the "Available Distribution Amount" for each Distribution Date
equals the sum of the following amounts:
(i) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date,
exclusive of:
(a) all scheduled payments of principal and
interest collected but due on a date subsequent to the
related Due Period (unless the related Prospectus Supplement
provides otherwise, a "Due Period" with respect to any
Distribution Date will commence on the second day of the
month in which the immediately preceding Distribution Date
occurs, or the day after the Cut-off Date in the case of the
first Due Period, and will end on the first day of the month
of the related Distribution Date),
(b) unless the related Prospectus Supplement
provides otherwise, all prepayments, together with related
payments of the interest thereon and related Prepayment
Premiums, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related
Due Period, and
(c) all amounts in the Collection Account that are
due or reimbursable to the Depositor, the Trustee, an Asset
Seller, a Sub-Servicer, the Master Servicer or any other
entity as specified in the related Prospectus Supplement or
that are payable in respect of certain expenses of the
related Trust Fund;
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(ii) if the related Prospectus Supplement so provides,
interest or investment income on amounts on deposit in the Collection
Account, including any net amounts paid under any Cash Flow
Agreements;
(iii) all advances made by a Master Servicer or any other
entity as specified in the related Prospectus Supplement with respect
to such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement
so provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to
interest shortfalls resulting from prepayments during the related
Prepayment Period; and
(v) unless the related Prospectus Supplement provides
otherwise, to the extent not on deposit in the related Collection
Account as of the corresponding Determination Date, any amounts
collected under, from or in respect of any Credit Support with
respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
Distributions of Interest on the Securities
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a
different Pass-Through Rate or interest rate, which will be a fixed, variable
or adjustable rate at which interest will accrue on such class or a component
thereof (the "Pass-Through Rate" in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable
Pass-Through Rate or interest rate, the method for determining the
Pass-Through Rate or interest rate. Unless otherwise specified in the related
Prospectus Supplement, interest on the Securities will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class
will be made on each Distribution Date (other than any class of Accrual
Securities, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances,
specified in the related Prospectus Supplement, and any class of Stripped
Principal Securities that are not entitled to any distributions of interest)
based on the Accrued Security Interest for such class and such Distribution
Date, subject to the sufficiency of the portion of the Available Distribution
Amount allocable to such class on such Distribution Date. Prior to the time
interest is distributable on any class of Accrual Securities, the amount of
Accrued Security Interest otherwise distributable on such class will be added
to the Security Balance thereof on each Distribution Date. With respect to
each class of Securities and each Distribution Date (other than certain
classes of Stripped Interest Securities), "Accrued Security Interest" will be
equal to interest accrued for a specified period on the outstanding Security
Balance thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. Unless
otherwise provided in the Prospectus Supplement, Accrued Security Interest on
Stripped Interest Securities will be equal to interest accrued for a specified
period on the outstanding notional amount thereof immediately prior to each
Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below. The method of determining the notional amount for
any class of Stripped Interest Securities will be described in the related
Prospectus Supplement. Reference to notional amount is solely for convenience
in certain calculations and does not represent the right to receive any
distributions of principal. Unless otherwise provided in the related
Prospectus Supplement, the Accrued Security Interest on a series of Securities
will be reduced in the event of prepayment interest shortfalls, which are
shortfalls in collections of interest for a full accrual period resulting from
prepayments prior to the due date in such accrual period on the Mortgage Loans
comprising or underlying the Assets in the Trust Fund for such series. The
particular manner in which such shortfalls are to be allocated among some or
all of the classes of Securities of that series will be specified in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe the extent to which the amount of Accrued Certificate Interest that
is otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a class of Offered Securities
may be reduced as a result of any other contingencies, including
delinquencies, losses and deferred interest on or in respect of the Mortgage
Loans comprising or underlying the Assets in the related Trust Fund. Unless
otherwise provided in the related Prospectus Supplement, any reduction in the
amount of Accrued Security Interest otherwise distributable on a class of
Securities by reason of the allocation to such class of a portion
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of any deferred interest on the Mortgage Loans comprising or underlying the
Assets in the related Trust Fund will result in a corresponding increase in the
Security Balance of such class. See "Risk Factors--Average Life of Securities;
Prepayments; Yields" and "Yield Considerations."
Distributions of Principal of the Securities
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a "Security Balance" which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other
assets included in the related Trust Fund. The outstanding Security Balance of
a Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the
related Mortgage Loans to the extent provided in the related Prospectus
Supplement and, in the case of Accrual Securities prior to the Distribution
Date on which distributions of interest are required to commence, will be
increased by any related Accrued Security Interest. Unless otherwise provided
in the related Prospectus Supplement, the initial aggregate Security Balance
of all classes of Securities of a series will not be greater than the
outstanding aggregate principal balance of the related Assets as of the
applicable Cut-off Date. The initial aggregate Security Balance of a series
and each class thereof will be specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, distributions
of principal will be made on each Distribution Date to the class or classes of
Securities entitled thereto in accordance with the provisions described in
such Prospectus Supplement until the Security Balance of such class has been
reduced to zero. Stripped Interest Securities with no Security Balance are not
entitled to any distributions of principal.
Components
To the extent specified in the related Prospectus Supplement,
distribution on a class of Securities may be based on a combination of two or
more different components as described under "--General" above. To such
extent, the descriptions set forth under "--Distributions of Interests on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of such a class of Securities. In such case, reference in
such sections to Security Balance and Pass-Through Rate or interest rate refer
to the principal balance, if any, of any such component and the Pass-Through
Rate or interest rate, if any, on any such component, respectively.
Allocation of Losses and Shortfalls
If so provided in the Prospectus Supplement for a series of
Securities consisting of one or more classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will be
borne first by a class of Subordinate Securities in the priority and manner
and subject to the limitations specified in such Prospectus Supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Assets
comprising such Trust Fund.
Advances in Respect of Delinquencies
With respect to any series of Securities evidencing an interest in a
Trust Fund, unless otherwise provided in the related Prospectus Supplement,
the Master Servicer or another entity described therein will be required as
part of its servicing responsibilities to advance on or before each
Distribution Date its own funds or funds held in the Collection Account that
are not included in the Available Distribution Amount for such Distribution
Date, in an amount equal to the aggregate of payments of principal (other than
any balloon payments) and interest (net of related servicing fees and Retained
Interest) that were due on the Whole Loans in such Trust Fund during the
related Due Period and were delinquent on the related Determination Date,
subject to the Master Servicer's (or another entity's) good faith
determination that such advances will be reimbursable from Related Proceeds
(as defined below). In the case of a series of Securities that includes one or
more classes of Subordinate Securities and if so provided in the related
Prospectus Supplement, the Master Servicer's (or another entity's) advance
obligation may be limited only to the portion of such delinquencies necessary
to make the required distributions on one or more classes of Senior Securities
and/or may be subject to the Master Servicer's (or another entity's) good
faith determination that such advances will be reimbursable not only from
Related Proceeds but also from collections on
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other Assets otherwise distributable on one or more classes of such Subordinate
Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled
interest and principal payments to holders of the class or classes of
Certificates entitled thereto, rather than to guarantee or insure against
losses. Unless otherwise provided in the related Prospectus Supplement,
advances of the Master Servicer's (or another entity's) funds will be
reimbursable only out of related recoveries on the Mortgage Loans (including
amounts received under any form of Credit Support) respecting which such
advances were made (as to any Mortgage Loan, "Related Proceeds") and, if so
provided in the Prospectus Supplement, out of any amounts otherwise
distributable on one or more classes of Subordinate Securities of such series;
provided, however, that any such advance will be reimbursable from any amounts
in the Collection Account prior to any distributions being made on the
Securities to the extent that the Master Servicer (or such other entity) shall
determine in good faith that such advance (a "Nonrecoverable Advance") is not
ultimately recoverable from Related Proceeds or, if applicable, from
collections on other Assets otherwise distributable on such Subordinate
Securities. If advances have been made by the Master Servicer from excess
funds in the Collection Account, the Master Servicer is required to replace
such funds in the Collection Account on any future Distribution Date to the
extent that funds in the Collection Account on such Distribution Date are less
than payments required to be made to Securityholders on such date. If so
specified in the related Prospectus Supplement, the obligations of the Master
Servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of, and the
identity of any obligor on, any such surety bond, will be set forth in the
related Prospectus Supplement.
If and to the extent so provided in the related Prospectus
Supplement, the Master Servicer (or another entity) will be entitled to
receive interest at the rate specified therein on its outstanding advances and
will be entitled to pay itself such interest periodically from general
collections on the Assets prior to any payment to Securityholders or as
otherwise provided in the related Agreement and described in such Prospectus
Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
Reports to Securityholders
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement,
will forward or cause to be forwarded to each such holder, to the Depositor
and to such other parties as may be specified in the related Agreement, a
statement setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities
of such class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of
Securities of such class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to
Prepayment Premiums;
(iv) the amount of related servicing compensation received
by a Master Servicer (and, if payable directly out of the related
Trust Fund, by any Sub-Servicer) and such other customary information
as any such Master Servicer or the Trustee deems necessary or
desirable, or that a Securityholder reasonably requests, to enable
Securityholders to prepare their tax returns;
(v) the aggregate amount of advances included in such
distribution, and the aggregate amount of unreimbursed advances at
the close of business on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the
close of business on such Distribution Date;
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(vii) the number and aggregate principal balance of Whole
Loans in respect of which (a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent, (c) three or more
scheduled payments are delinquent and (d) foreclosure proceedings
have been commenced;
(viii) with respect to any Whole Loan liquidated during the
related Due Period, (a) the portion of such liquidation proceeds
payable or reimbursable to the Master Servicer (or any other entity)
in respect of such Mortgage Loan and (b) the amount of any loss to
Securityholders;
(ix) with respect to each REO Property relating to a Whole
Loan and included in the Trust Fund as of the end of the related Due
Period, (a) the loan number of the related Mortgage Loan and (b) the
date of acquisition;
(x) with respect to each REO Property relating to a Whole
Loan and included in the Trust Fund as of the end of the related Due
Period, (a) the book value, (b) the principal balance of the related
Mortgage Loan immediately following such Distribution Date
(calculated as if such Mortgage Loan were still outstanding taking
into account certain limited modifications to the terms thereof
specified in the Agreement), (c) the aggregate amount of unreimbursed
servicing expenses and unreimbursed advances in respect thereof and
(d) if applicable, the aggregate amount of interest accrued and
payable on related servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the
related Due Period (a) the aggregate amount of sale proceeds, (b) the
portion of such sales proceeds payable or reimbursable to the Master
Servicer in respect of such REO Property or the related Mortgage Loan
and (c) the amount of any loss to Securityholders in respect of the
related Mortgage Loan;
(xii) the aggregate Security Balance or notional amount, as
the case may be, of each class of Securities (including any class of
Securities not offered hereby) at the close of business on such
Distribution Date, separately identifying any reduction in such
Security Balance due to the allocation of any loss and increase in
the Security Balance of a class of Accrual Securities in the event
that Accrued Security Interest has been added to such balance;
(xiii) the aggregate amount of principal prepayments made
during the related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on
such Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of
the close of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if
any, on each class of Securities at the close of business on such
Distribution Date;
(xvii) in the case of Securities with a variable
Pass-Through Rate or interest rate, the Pass-Through Rate or interest
rate applicable to such Distribution Date, and, if available, the
immediately succeeding Distribution Date, as calculated in accordance
with the method specified in the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable
Pass-Through Rate or interest rate, for statements to be distributed
in any month in which an adjustment date occurs, the adjustable
Pass-Through Rate or interest rate applicable to such Distribution
Date, if available, and the immediately succeeding Distribution Date
as calculated in accordance with the method specified in the related
Prospectus Supplement;
(xix) as to any series which includes Credit Support, the
amount of coverage of each instrument of Credit Support included
therein as of the close of business on such Distribution Date; and
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(xx) the aggregate amount of payments by the obligors of (a)
default interest, (b) late charges and (c) assumption and
modification fees collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Securities or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i),
(ii), (xii), (xvi) and (xvii) above, such amounts shall also be provided with
respect to each component, if any, of a class of Securities. The Master
Servicer or the Trustee, as specified in the related Prospectus Supplement,
will forward or cause to be forwarded to each holder, to the Depositor and to
such other parties as may be specified in the Agreement, a copy of any
statements or reports received by the Master Servicer or the Trustee, as
applicable, with respect to any MBS. The Prospectus Supplement for each series
of Offered Securities will describe any additional information to be included
in reports to the holders of such Securities.
Within a reasonable period of time after the end of each calendar
year, the Master Servicer or the Trustee, as provided in the related
Prospectus Supplement, shall furnish to each person who at any time during the
calendar year was a holder of a Security a statement containing the
information set forth in subclauses (i)-(iv) above, aggregated for such
calendar year or the applicable portion thereof during which such person was a
Securityholder. Such obligation of the Master Servicer or the Trustee shall be
deemed to have been satisfied to the extent that substantially comparable
information shall be provided by the Master Servicer or the Trustee pursuant
to any requirements of the Code as are from time to time in force. See
"Description of the Securities--Registration and Definitive Securities."
Termination
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Whole Loan subject thereto and (ii)
the purchase of all of the assets of the Trust Fund by the party entitled to
effect such termination, under the circumstances and in the manner set forth
in the related Prospectus Supplement. In no event, however, will the trust
created by the Agreement continue beyond the date specified in the related
Prospectus Supplement. Written notice of termination of the Agreement will be
given to each Securityholder, and the final distribution will be made only
upon presentation and surrender of the Securities at the location to be
specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets
of the Trust Fund, or of a sufficient portion of such assets to retire such
class or classes or purchase such class or classes at a price set forth in the
related Prospectus Supplement, in each case, under the circumstances and in
the manner set forth therein.
Book-Entry Registration and Definitive Securities
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Securities of any series will be issued as Book-Entry
Securities, and each such class will be represented by one or more single
Securities registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
DTC is a limited-purpose trust company organized under the laws of
the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating
the need for physical movement of certificates. Participants include Merrill
Lynch, Pierce, Fenner & Smith Incorporated, securities brokers and dealers,
banks, trust companies and
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clearing corporations and may include certain other organizations. Indirect
access to the DTC system also is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Unless otherwise provided in the related Prospectus Supplement,
investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants. In addition, such investors ("Security Owners") will receive all
distributions on the Book-Entry Securities through DTC and its Participants.
Under a book-entry format, Security Owners will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede & Co., as nominee for DTC ("Cede"), on each such date, DTC will
forward such payments to its Participants which thereafter will be required to
forward them to Indirect Participants or Security Owners. Unless otherwise
provided in the related Prospectus Supplement, the only "Securityholder" (as
such term is used in the Agreement) will be Cede, as nominee of DTC, and the
Security Owners will not be recognized by the Trustee as Securityholders under
the Agreement. Security Owners will be permitted to exercise the rights of
Securityholders under the related Agreement, Trust Agreement or Indenture, as
applicable, only indirectly through the Participants who in turn will exercise
their rights through DTC.
Under the rules, regulations and procedures creating and affecting
DTC and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Book-Entry Securities
and is required to receive and transmit distributions of principal of and
interest on the Book-Entry Securities. Participants and Indirect Participants
with which Security Owners have accounts with respect to the Book-Entry
Securities similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act
on behalf of Indirect Participants and certain banks, the ability of a
Security Owner to pledge its interest in the Book-Entry Securities to persons
or entities that do not participate in the DTC system, or otherwise take
actions in respect of its interest in the Book-Entry Securities, may be
limited due to the lack of a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted
to be taken by a Securityholder under an Agreement only at the direction of
one or more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Cedelbank ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may
be settled in CEDEL in any of 28 currencies, including United States dollars.
CEDEL provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL interfaces with
domestic markets in several countries. As a professional depository, CEDEL is
subject to regulation by the Luxembourg Monetary Institute. CEDEL Participants
are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations and may include the Underwriters.
Indirect access to CEDEL is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a CEDEL Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in Euroclear
in any of 32 currencies, including United States dollars. The Euroclear System
includes various other services, including securities lending and borrowing,
and interfaces with domestic markets in several countries generally similar to
the arrangements for cross-market transfers with DTC. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium
office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
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"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within the Euroclear
System, withdrawal of securities and cash from the Euroclear System, and
receipts of payments with respect to securities in the Euroclear System. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates to specific securities clearance
accounts. The Euroclear Operator acts under the Terms and Conditions only on
behalf of Euroclear Participants and has no record of or relationship with
persons holding through Euroclear Participants.
Distributions with respect to Securities held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. See "Material Federal Income Tax Consequences" in this
Prospectus and "Global Clearance, Settlement and Tax Documentation Procedures"
in Annex I to the related Prospectus Supplement. CEDEL or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a Security under the Indenture, Trust Agreement or Pooling and Servicing
Agreement, as applicable, on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Cede, as nominee for DTC, will hold the Securities. CEDEL and
Euroclear will hold omnibus positions in the Securities on behalf of the CEDEL
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries"), which in turn will
hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
Transfers between DTC's participating organizations (the
"Participants") will occur in accordance with DTC rules. Transfers between
CEDEL Participants and Euroclear Participants will occur in the ordinary way
in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its Depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant CEDEL Participant or Euroclear Participant on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant or a Euroclear
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Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
In the event that any of DTC, CEDEL or Euroclear should discontinue
its services, the Administrator would seek an alternative depository (if
available) or cause the issuance of Definitive Securities to the owners
thereof or their nominees in the manner described in the Prospectus under
"Description of the Securities--Book Entry Registration and Definitive
Securities".
Unless otherwise specified in the related Prospectus Supplement,
Securities initially issued in book-entry form will be issued in fully
registered, certificated form to Security Owners or their nominees
("Definitive Securities"), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to properly discharge its responsibilities as depository with respect to the
Securities and the Depositor is unable to locate a qualified successor or (ii)
the Depositor, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants of
the availability through DTC of Definitive Securities for the Security Owners.
Upon surrender by DTC of the certificate or certificates representing the
Book-Entry Securities, together with instructions for reregistration, the
Trustee will issue (or cause to be issued) to the Security Owners identified
in such instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
Agreements Applicable to a Series
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax
purposes will be issued, and the related Trust Fund will be created, pursuant
to a pooling and servicing agreement (a "Pooling and Servicing Agreement")
among the Depositor, the Master Servicer and the Trustee. The Assets of such
Trust Fund will be transferred to the Trust Fund and thereafter serviced in
accordance with the terms of the Pooling and Servicing Agreement. In the
context of the conveyance and servicing of the related Assets, the Pooling and
Servicing Agreement may be referred to herein as the "Agreement".
Notwithstanding the foregoing, if the Assets of the Trust Fund for such a
series consists only of Government Securities or MBS, such Assets will be
conveyed to the Trust Fund and administered pursuant to a trust agreement
between the Depositor and the Trustee (a "Trust Agreement"), which may also be
referred to herein as the "Agreement".
Certificates That Are Partnership Interests for Tax Purposes and
Notes. Certificates that are partnership interests for tax purposes will be
issued, and the related Trust Fund will be created, pursuant to a Trust
Agreement between the Depositor and the Trustee. The Assets of the related
Trust Fund will be transferred to the Trust Fund and thereafter serviced in
accordance with a servicing agreement (a "Servicing Agreement") between the
Depositor, the Servicer and the Trustee. In the context of the conveyance and
servicing of the related Assets, a Servicing may be referred to herein as the
"Agreement".
A series of Notes issued by a Trust Fund will be issued pursuant to
the indenture (the "Indenture") between the related Trust Fund and an
indenture trustee (the "Indenture Trustee") named in the related Prospectus
Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist
only of MBS or Government Securities, such Assets will be conveyed to the
Trust Fund and administered in accordance with the terms of the Trust
Agreement, which in such context may be referred to herein as the Agreement.
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General. Any Master Servicer and the Trustee with respect to any
series of Securities will be named in the related Prospectus Supplement. In
any series of Securities for which there are multiple Master Servicers, there
may also be multiple Mortgage Loan Groups, each corresponding to a particular
Master Servicer; and, if the related Prospectus Supplement so specifies, the
servicing obligations of each such Master Servicer will be limited to the
Whole Loans in such corresponding Mortgage Loan Group. In lieu of appointing a
Master Servicer, a servicer may be appointed pursuant to the Agreement for any
Trust Fund. Such servicer will service all or a significant number of Whole
Loans directly without a Sub-Servicer. Unless otherwise specified in the
related Prospectus Supplement, the obligations of any such servicer shall be
commensurate with those of the Master Servicer described herein. References in
this Prospectus to Master Servicer and its rights and obligations, unless
otherwise specified in the related Prospectus Supplement, shall be deemed to
also be references to any servicer servicing Whole Loans directly. A manager
or administrator may be appointed pursuant to the Trust Agreement for any
Trust Fund to administer such Trust Fund. The provisions of each Agreement
will vary depending upon the nature of the Securities to be issued thereunder
and the nature of the related Trust Fund. Forms of a Pooling and Servicing
Agreement, a Sale and Servicing Agreement and a Trust Agreement have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
The following summaries describe certain provisions that may appear
in each Agreement. The Prospectus Supplement for a series of Securities will
describe any provision of the Agreement relating to such series that
materially differs from the description thereof contained in this Prospectus.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each Trust Fund and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Security" refers to all of the Securities of that series, whether or not
offered hereby and by the related Prospectus Supplement, unless the context
otherwise requires. The Depositor will provide a copy of the Agreement
(without exhibits) relating to any series of Securities without charge upon
written request of a holder of a Security of such series addressed to Merrill
Lynch Mortgage Investors, Inc., 250 Vesey Street, World Financial Center,
North Tower, 10th Floor, New York, New York 10281-1310. Attention: Jack Ross.
Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Assets to
be included in the related Trust Fund, together with all principal and
interest to be received on or with respect to such Assets after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest. The Trustee will, concurrently with such
assignment, deliver the Securities to the Depositor in exchange for the Assets
and the other assets comprising the Trust Fund for such series. Each Asset
will be identified in a schedule appearing as an exhibit to the related
Agreement. Unless otherwise provided in the related Prospectus Supplement,
such schedule will include detailed information (i) in respect of each Whole
Loan included in the related Trust Fund, including without limitation, the
address of the related Mortgaged Property and type of such property, the
Mortgage Rate and, if applicable, the applicable index, margin, adjustment
date and any rate cap information, the original and remaining term to
maturity, the original and outstanding principal balance and balloon payment,
if any, the Value and Loan-to-Value Ratio as of the date indicated and payment
and prepayment provisions, if applicable; and (ii) in respect of each MBS
included in the related Trust Fund, including without limitation, the MBS
Issuer, MBS Servicer and MBS Trustee, the pass-through or bond rate or formula
for determining such rate, the issue date and original and remaining term to
maturity, if applicable, the original and outstanding principal amount and
payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment
of the Mortgage to the Trustee in recordable form. Notwithstanding the
foregoing, a Trust Fund may include Mortgage Loans where the original Mortgage
Note is not delivered to the Trustee if the Depositor delivers to the Trustee
or the custodian a copy or a duplicate original of the Mortgage Note, together
with an affidavit certifying that the original thereof has been lost or
destroyed. With respect to such Mortgage Loans, the Trustee (or its nominee)
may not be able to enforce the Mortgage Note against the related borrower.
Unless otherwise specified in the related Prospectus Supplement, the Asset
Seller will be required to agree to repurchase, or substitute for, each such
Mortgage Loan that
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is subsequently in default if the enforcement thereof or of the related Mortgage
is materially adversely affected by the absence of the original Mortgage Note.
Unless otherwise provided in the related Prospectus Supplement, the related
Agreement will require the Depositor or another party specified therein to
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records, except in the State of
California or in other states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Master Servicer and the Depositor, and the Master Servicer shall immediately
notify the relevant Asset Seller. If the Asset Seller cannot cure the omission
or defect within a specified number of days after receipt of such notice, then
unless otherwise specified in the related Prospectus Supplement, the Asset
Seller will be obligated, within a specified number of days of receipt of such
notice, to repurchase the related Whole Loan from the Trustee at the Purchase
Price or substitute for such Mortgage Loan. There can be no assurance that an
Asset Seller will fulfill this repurchase or substitution obligation, and
neither the Master Servicer nor the Depositor will be obligated to repurchase
or substitute for such Mortgage Loan if the Asset Seller defaults on its
obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for omission of, or a
material defect in, a constituent document. To the extent specified in the
related Prospectus Supplement, in lieu of curing any omission or defect in the
Asset or repurchasing or substituting for such Asset, the Asset Seller may
agree to cover any losses suffered by the Trust Fund as a result of such
breach or defect.
Notwithstanding the preceding two paragraphs, unless otherwise
specified in the related Prospectus Supplement, the documents with respect to
Home Equity Loans and Home Improvement Contracts will not be delivered to the
Trustee (or a custodian), but will be retained by the Master Servicer, which
may also be the Asset Seller. In addition, assignments of the related
Mortgages to the Trustee will not be recorded, unless otherwise provided in
the related Prospectus Supplement.
With respect to each Government Security or MBS in certificated form,
the Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of
the Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing corporation or of one or more securities intermediaries in the name
of the Trustee for the benefit of the Securityholders. Unless otherwise
provided in the related Prospectus Supplement, the related Agreement will
require that either the Depositor or the Trustee promptly cause any MBS and
Government Securities in certificated form not registered in the name of the
Trustee to be re-registered, with the applicable persons, in the name of the
Trustee.
Representations and Warranties; Repurchases
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, assign certain
representations and warranties, as of a specified date (the person making such
representations and warranties, the "Warranting Party") covering, by way of
example, the following types of matters: (i) the accuracy of the information
set forth for such Whole Loan on the schedule of Assets appearing as an
exhibit to the related Agreement; (ii) the existence of title insurance
insuring the lien priority of the Whole Loan; (iii) the authority of the
Warranting Party to sell the Whole Loan; (iv) the payment status of the Whole
Loan; (v) in the case of a Whole Loan, the existence of customary provisions
in the related Mortgage Note and Mortgage to permit realization against the
Mortgaged Property of the benefit of the security of the Mortgage; and (vi)
the existence of hazard and extended perils insurance coverage on the
Mortgaged Property.
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Any Warranting Party shall be an Asset Seller or an affiliate thereof
or such other person acceptable to the Depositor and shall be identified in
the related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may
have been made as of a date prior to the applicable Cut-off Date. A
substantial period of time may have elapsed between such date and the date of
initial issuance of the related series of Certificates evidencing an interest
in such Whole Loan. Unless otherwise specified in the related Prospectus
Supplement, in the event of a breach of any such representation or warranty,
the Warranting Party will be obligated to reimburse the Trust Fund for losses
caused by any such breach or either cure such breach or repurchase or replace
the affected Whole Loan as described below. Since the representations and
warranties may not address events that may occur following the date as of
which they were made, the Warranting Party will have a reimbursement, cure,
repurchase or substitution obligation in connection with a breach of such a
representation and warranty only if the relevant event that causes such breach
occurs prior to such date. Such party would have no such obligations if the
relevant event that causes such breach occurs after such date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that
materially and adversely affects the value of such Whole Loan or the interests
therein of the Securityholders. If such Warranting Party cannot cure such
breach within a specified period following the date on which such party was
notified of such breach, then such Warranting Party will be obligated to
repurchase such Whole Loan from the Trustee within a specified period from the
date on which the Warranting Party was notified of such breach, at the
Purchase Price therefor. As to any Whole Loan, unless otherwise specified in
the related Prospectus Supplement, the "Purchase Price" is equal to the sum of
the unpaid principal balance thereof, plus unpaid accrued interest thereon at
the Mortgage Rate from the date as to which interest was last paid to the due
date in the Due Period in which the relevant purchase is to occur, plus
certain servicing expenses that are reimbursable to the Master Servicer. If so
provided in the Prospectus Supplement for a series, a Warranting Party, rather
than repurchase a Whole Loan as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such series of
Certificates, to cause the removal of such Whole Loan from the Trust Fund and
substitute in its place one or more other Whole Loans in accordance with the
standards described in the related Prospectus Supplement. If so provided in
the Prospectus Supplement for a series, a Warranting Party, rather than
repurchase or substitute a Whole Loan as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. Unless otherwise specified in the related
Prospectus Supplement, this reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to holders of Securities
or the Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for
a Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of
a specified date, with respect to such Government Securities or MBS, covering
(i) the accuracy of the information set forth therefor on the schedule of
Assets appearing as an exhibit to the related Agreement and (ii) the authority
of the Warranting Party to sell such Assets. The related Prospectus Supplement
will describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation
of the Master Servicer which materially and adversely affects the interests of
the Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach
to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights (unless otherwise specified
in the related Prospectus Supplement), will constitute an Event of Default
under such Pooling and Servicing Agreement. See "Events of Default" and
"Rights Upon Event of Default."
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Collection Account and Related Accounts
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account
or accounts the deposits in which are insured by the Federal Deposit Insurance
Corporation ("FDIC") (to the limits established by the FDIC) and, if so
specified in the related Prospectus Supplement, the uninsured deposits in
which are otherwise secured such that the Trustee have a claim with respect to
the funds in the Collection Account or a perfected first priority security
interest against any collateral securing such funds that is superior to the
claims of any other depositors or general creditors of the institution with
which the Collection Account is maintained or (ii) otherwise maintained with a
bank or trust company, and in a manner, satisfactory to the Rating Agency or
Agencies rating any class of Securities of such series. The collateral
eligible to secure amounts in the Collection Account is limited to United
States government securities and other investment grade obligations specified
in the Agreement ("Permitted Investments"). A Collection Account may be
maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Distribution Date
in certain short-term Permitted Investments. Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Collection Account will be paid to a Master Servicer or its designee as
additional servicing compensation. The Collection Account may be maintained
with an institution that is an affiliate of the Master Servicer, if
applicable, provided that such institution meets the standards imposed by the
Rating Agency or Agencies. If permitted by the Rating Agency or Agencies and
so specified in the related Prospectus Supplement, a Collection Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds respecting payments on mortgage loans
belonging to the Master Servicer or serviced or master serviced by it on
behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be
deposited in the Collection Account for one or more Trust Funds on a daily
basis, unless otherwise provided in the related Agreement, the following
payments and collections received, or advances made, by the Master Servicer or
the Trustee or on its behalf subsequent to the Cut-off Date (other than
payments due on or before the Cut-off Date, and exclusive of any amounts
representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets,
including any default interest collected, in each case net of any
portion thereof retained by a Master Servicer or a Sub-Servicer as
its servicing compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies to be
maintained in respect of each Mortgaged Property securing a Whole
Loan in the Trust Fund (to the extent such proceeds are not applied
to the restoration of the property or released to the mortgagor in
accordance with the normal servicing procedures of a Master Servicer
or the related Sub-Servicer, subject to the terms and conditions of
the related Mortgage and Mortgage Note) (collectively, "Insurance
Proceeds") and all other amounts received and retained in connection
with the liquidation of defaulted Mortgage Loans in the Trust Fund,
by foreclosure or otherwise ("Liquidation Proceeds"), together with
the net proceeds on a monthly basis with respect to any Mortgaged
Properties acquired for the benefit of Securityholders by foreclosure
or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any
fund that constitutes Credit Support for the related series of
Securities as described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies";
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(vi) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds--Cash Flow
Agreements";
(vii) all proceeds of any Asset or, with respect to a Whole
Loan, property acquired in respect thereof purchased by the
Depositor, any Asset Seller or any other specified person as
described under "Assignment of Assets; Repurchases" and
"Representations and Warranties; Repurchases," all proceeds of any
defaulted Mortgage Loan purchased as described under "Realization
Upon Defaulted Whole Loans," and all proceeds of any Asset purchased
as described under "Description of the Securities--Termination"
(also, "Liquidation Proceeds");
(viii) any amounts paid by a Master Servicer to cover
certain interest shortfalls arising out of the prepayment of Whole
Loans in the Trust Fund as described under "Description of the
Agreements --Retained Interest; Servicing Compensation and Payment of
Expenses";
(ix) to the extent that any such item does not constitute
additional servicing compensation to a Master Servicer, any payments
on account of modification or assumption fees, late payment charges
or prepayment premiums on the Mortgage Assets;
(x) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket
insurance policy described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Master
Servicer or the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer or the Trustee, as
the case may be, of funds held in the Collection Account; and
(xii) any other amounts required to be deposited in the
Collection Account as provided in the related Agreement and described
in the related Prospectus Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless
otherwise specified in the related Prospectus Supplement or the related
Agreement, make withdrawals from the Collection Account for each Trust Fund
for any of the following purposes:
(i) to make distributions to the Securityholders on each
Distribution Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts
advanced as described under "Description of the Securities--Advances
in Respect of Delinquencies," such reimbursement to be made out of
amounts received which were identified and applied by the Master
Servicer as late collections of interest (net of related servicing
fees and Retained Interest) on and principal of the particular Whole
Loans with respect to which the advances were made or out of amounts
drawn under any form of Credit Support with respect to such Whole
Loans;
(iii) to reimburse a Master Servicer for unpaid servicing
fees earned and certain unreimbursed servicing expenses incurred with
respect to Whole Loans and properties acquired in respect thereof,
such reimbursement to be made out of amounts that represent
Liquidation Proceeds and Insurance Proceeds collected on the
particular Whole Loans and properties, and net income collected on
the particular properties, with respect to which such fees were
earned or such expenses were incurred or out of amounts drawn under
any form of Credit Support with respect to such Whole Loans and
properties;
(iv) to reimburse a Master Servicer for any advances
described in clause (ii) above and any servicing expenses described
in clause (iii) above which, in the Master Servicer's good faith
judgment, will not be recoverable from the amounts described in
clauses (ii) and (iii), respectively, such reimbursement to be made
from amounts collected on other Assets or, if and to the extent so
provided by the related Agreement and described in the related
Prospectus Supplement, just from that portion of amounts collected
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on other Assets that is otherwise distributable on one or more classes
of Subordinate Securities, if any, remain outstanding, and otherwise
any outstanding class of Securities, of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Master Servicer interest accrued on the advances
described in clause (ii) above and the servicing expenses described
in clause (iii) above while such remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any
of their respective directors, officers, employees and agents, as the
case may be, for certain expenses, costs and liabilities incurred
thereby, as and to the extent described under "Certain Matters
Regarding a Master Servicer and the Depositor";
(vii) if and to the extent described in the related
Prospectus Supplement, to pay (or to transfer to a separate account
for purposes of escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the
extent described under "Certain Matters Regarding the Trustee";
(ix) unless otherwise provided in the related Prospectus
Supplement, to pay a Master Servicer, as additional servicing
compensation, interest and investment income earned in respect of
amounts held in the Collection Account;
(x) to pay the person entitled thereto any amounts deposited
in the Collection Account that were identified and applied by the
Master Servicer as recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with
the proper management and maintenance of any Mortgaged Property
acquired for the benefit of Securityholders by foreclosure or by deed
in lieu of foreclosure or otherwise, such payments to be made out of
income received on such property;
(xii) if one or more elections have been made to treat the
Trust Fund or designated portions thereof as a REMIC, to pay any
federal, state or local taxes imposed on the Trust Fund or its assets
or transactions, as and to the extent described under "Material
Federal Income Tax Consequences--REMICS--Prohibited Transactions Tax
and Other Taxes";
(xiii) to pay for the cost of an independent appraiser or
other expert in real estate matters retained to determine a fair sale
price for a defaulted Whole Loan or a property acquired in respect
thereof in connection with the liquidation of such Whole Loan or
property;
(xiv) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
Securityholders;
(xv) to pay for the costs of recording the related Agreement
if such recordation materially and beneficially affects the interests
of Securityholders, provided that such payment shall not constitute a
waiver with respect to the obligation of the Warranting Party to
remedy any breach of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts
deposited in the Collection Account in error, including amounts
received on any Asset after its removal from the Trust Fund whether
by reason of purchase or substitution as contemplated by "Assignment
of Assets; Repurchase" and "Representations and Warranties;
Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related
Agreement; and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
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Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related
Prospectus Supplement, the Agreement for any series of Securities may provide
for the establishment and maintenance of a separate collection account into
which the Master Servicer or any related Sub-Servicer will deposit on a daily
basis the amounts described under "--Deposits" above for one or more series of
Securities. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Collection Account by a
time specified in the related Prospectus Supplement. To the extent specified
in the related Prospectus Supplement, any amounts which could be withdrawn
from the Collection Account as described under "--Withdrawals" above, may also
be withdrawn from any such collection account. The Prospectus Supplement will
set forth any restrictions with respect to any such collection account,
including investment restrictions and any restrictions with respect to
financial institutions with which any such collection account may be
maintained.
Collection and Other Servicing Procedures
The Master Servicer, directly or through Sub-Servicers, is required
to make reasonable efforts to collect all scheduled payments under the Whole
Loans and will follow or cause to be followed such collection procedures as it
would follow with respect to mortgage loans that are comparable to the Whole
Loans and held for its own account, provided such procedures are consistent
with (i) the terms of the related Agreement and any related hazard insurance
policy or instrument of Credit Support, if any, included in the related Trust
Fund described herein or under "Description of Credit Support," (ii)
applicable law and (iii) the general servicing standard specified in the
related Prospectus Supplement or, if no such standard is so specified, its
normal servicing practices (in either case, the "Servicing Standard"). In
connection therewith, the Master Servicer will be permitted in its discretion
to waive any late payment charge or penalty interest in respect of a late
payment on a Whole Loan.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder; maintaining escrow or
impoundment accounts of mortgagors for payment of taxes, insurance and other
items required to be paid by any mortgagor pursuant to a Whole Loan;
processing assumptions or substitutions in those cases where the Master
Servicer has determined not to enforce any applicable due-on-sale clause;
attempting to cure delinquencies; supervising foreclosures or repossessions;
inspecting and managing Mortgaged Properties under certain circumstances; and
maintaining accounting records relating to the Whole Loans. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
responsible for filing and settling claims in respect of particular Whole
Loans under any applicable instrument of Credit Support. See "Description of
Credit Support."
The Master Servicer may agree to modify, waive or amend any term of
any Whole Loan in a manner consistent with the Servicing Standard so long as
the modification, waiver or amendment will not (i) affect the amount or timing
of any scheduled payments of principal or interest on the Whole Loan or (ii)
in its judgment, materially impair the security for the Whole Loan or reduce
the likelihood of timely payment of amounts due thereon. The Master Servicer
also may agree to any modification, waiver or amendment that would so affect
or impair the payments on, or the security for, a Whole Loan if, unless
otherwise provided in the related Prospectus Supplement, (i) in its judgment,
a material default on the Whole Loan has occurred or a payment default is
imminent and (ii) in its judgment, such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the Whole Loan
on a present value basis than would liquidation. The Master Servicer is
required to notify the Trustee in the event of any modification, waiver or
amendment of any Whole Loan.
Sub-Servicers
A Master Servicer may delegate its servicing obligations in respect
of the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Securities is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
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Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be solely liable for all fees owed by it to any
Sub-Servicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Agreement is sufficient to pay such fees. However, a
Sub-Servicer may be entitled to a Retained Interest in certain Whole Loans.
Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under an Agreement. See "Retained Interest; Servicing
Compensation and Payment of Expenses."
Realization Upon Defaulted Whole Loans
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer is required to monitor any Whole Loan which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if
cure is likely, inspect the Mortgaged Property and take such other actions as
are consistent with the Servicing Standard. A significant period of time may
elapse before the Master Servicer is able to assess the success of such
corrective action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans may
grant to the Master Servicer and/or the holder or holders of certain classes
of Securities a right of first refusal to purchase from the Trust Fund at a
predetermined purchase price any such Whole Loan as to which a specified
number of scheduled payments thereunder are delinquent. Any such right granted
to the holder of an Offered Security will be described in the related
Prospectus Supplement. The related Prospectus Supplement will also describe
any such right granted to any person if the predetermined purchase price is
less than the Purchase Price described under "Representations and Warranties;
Repurchases."
If so specified in the related Prospectus Supplement, the Master
Servicer may offer to sell any defaulted Whole Loan described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The related Agreement will
provide that any such offering be made in a commercially reasonable manner for
a specified period and that the Master Servicer accept the highest cash bid
received from any person (including itself, an affiliate of the Master
Servicer or any Securityholder) that constitutes a fair price for such
defaulted Whole Loan. In the absence of any bid determined in accordance with
the related Agreement to be fair, the Master Servicer shall proceed with
respect to such defaulted Mortgage Loan as described below. Any bid in an
amount at least equal to the Purchase Price described under "Representations
and Warranties; Repurchases" will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to
a Mortgaged Property securing a Whole Loan by operation of law or otherwise,
if such action is consistent with the Servicing Standard and a default on such
Whole Loan has occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a
REMIC election has been made, the Master Servicer, on behalf of the Trust
Fund, will be required to sell the Mortgaged Property within three years of
acquisition, unless (i) the Internal Revenue Service grants an extension of
time to sell such property or (ii) the Trustee receives an opinion of
independent counsel to the effect that the holding of the property by the
Trust Fund subsequent to three years after its acquisition will not result in
the imposition of a tax on the Trust Fund or cause the Trust Fund to fail to
qualify as a REMIC under the Code at any time that any Security is
outstanding. Subject to the foregoing, the Master Servicer will be required to
(i) solicit bids for any Mortgaged Property so acquired in such a manner as
will be reasonably likely to realize a fair price for such property and (ii)
accept the first (and, if multiple bids are contemporaneously received, the
highest) cash bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the ownership and management of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure."
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If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Whole Loan. If the proceeds of any liquidation of the property securing the
defaulted Whole Loan are less than the outstanding principal balance of the
defaulted Whole Loan plus interest accrued thereon at the Mortgage Rate, as
applicable, plus the aggregate amount of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Whole Loan, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Whole Loan, unreimbursed servicing expenses
incurred with respect to the Whole Loan and any unreimbursed advances of
delinquent payments made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged the Master
Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to Securityholders on liquidation of the Whole Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of
itself, the Trustee and the Securityholders, will present claims to the
obligor under each instrument of Credit Support, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder
with respect to defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Whole Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Collection Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See "Hazard Insurance Policies" and "Description of
Credit Support."
Hazard Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance
policy. The ability of the Master Servicer to assure that hazard insurance
proceeds are appropriately applied may be dependent upon its being named as an
additional insured under any hazard insurance policy and under any other
insurance policy referred to below, or upon the extent to which information in
this regard is furnished by mortgagors. All amounts collected by the Master
Servicer under any such 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, subject
to the terms and conditions of the related Mortgage and Mortgage Note) will be
deposited in the Collection Account. The Agreement will provide that the
Master Servicer may satisfy its obligation to cause each mortgagor to maintain
such a hazard insurance policy by the Master Servicer's maintaining a blanket
policy insuring against hazard losses on the Whole Loans. If such blanket
policy contains a deductible clause, the Master Servicer will be required to
deposit in the Collection Account all sums that would have been deposited
therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property
by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Whole Loans will be underwritten
by different insurers under different state laws in accordance with different
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applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry
rot, vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Whole Loans will typically contain a co-insurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause generally provides that the insurer's liability in the event of
partial loss does not exceed the lesser of (i) the replacement cost of the
improvements less physical depreciation and (ii) such proportion of the loss
as the amount of insurance carried bears to the specified percentage of the
full replacement cost of such improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require
the Master Servicer to cause the mortgagor on each Whole Loan to maintain all
such other insurance coverage with respect to the related Mortgaged Property
as is consistent with the terms of the related Mortgage and the Servicing
Standard, which insurance may typically include flood insurance (if the
related Mortgaged Property was located at the time of origination in a
federally designated flood area).
Any cost incurred by the Master Servicer in maintaining any such
insurance policy will be added to the amount owing under the Mortgage Loan
where the terms of the Mortgage Loan so permit; provided, however, that the
addition of such cost will not be taken into account for purposes of
calculating the distribution to be made to Certificateholders. Such costs may
be recovered by the Master Servicer or Sub-Servicer, as the case may be, from
the Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Master Servicer, on behalf
of the Trustee and Certificateholders, is obligated to present or cause to be
presented claims under any blanket insurance policy insuring against hazard
losses on Mortgaged Properties securing the Whole Loans. However, the ability
of the Master Servicer to present or cause to be presented such claims is
dependent upon the extent to which information in this regard is furnished to
the Master Servicer by mortgagors.
Fidelity Bonds and Errors and Omissions Insurance
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the Master Servicer. The related Agreement will allow the Master
Servicer to self-insure against loss occasioned by the errors and omissions of
the officers, employees and agents of the Master Servicer so long as certain
criteria set forth in the Agreement are met.
Due-on-Sale Provisions
The Whole Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the Whole
Loan upon any sale, transfer or conveyance of the related Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the Master Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Unless otherwise
specified in the related Prospectus Supplement, 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.
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Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a series of Certificates will specify
whether there will be any Retained Interest in the Assets, and, if so, the
initial owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's and a Sub-Servicer's primary servicing compensation with
respect to a series of Securities will come from the periodic payment to it of
a portion of the interest payment on each Asset. Since any Retained Interest
and a Master Servicer's primary compensation are percentages of the principal
balance of each Asset, such amounts will decrease in accordance with the
amortization of the Assets. The Prospectus Supplement with respect to a series
of Securities evidencing interests in a Trust Fund that includes Whole Loans
may provide that, as additional compensation, the Master Servicer or the
Sub-Servicers may retain all or a portion of assumption fees, modification
fees, late payment charges or Prepayment Premiums collected from mortgagors
and any interest or other income which may be earned on funds held in the
Collection Account or any account established by a Sub-Servicer pursuant to
the Agreement.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Assets,
including, without limitation, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in
connection with distributions and reports to Securityholders, and payment of
any other expenses described in the related Prospectus Supplement. Certain
other expenses, including certain expenses relating to defaults and
liquidations on the Whole Loans and, to the extent so provided in the related
Prospectus Supplement, interest thereon at the rate specified therein may be
borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement,
the Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any Due Period to certain
interest shortfalls resulting from the voluntary prepayment of any Whole Loans
in the related Trust Fund during such period prior to their respective due
dates therein.
Evidence as to Compliance
Each Agreement relating to Assets which include Whole Loans will
provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for the Federal
Home Loan Mortgage Corporation ("FHLMC") or such other audit or attestation
program used by the Master Servicer, the servicing by or on behalf of the
Master Servicer of mortgage loans under agreements substantially similar to
each other (including the related Agreement) was conducted in compliance with
the terms of such agreements or such program except for any significant
exceptions or errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for FHLMC, or paragraph 4 of the Uniform
Single Attestation Program for Mortgage Bankers, or such other audit or
attestation program requires it to report. In rendering its statement such
firm may rely, as to matters relating to the direct servicing of mortgage
loans 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 FHLMC or such
other audit or attestation program used by such Sub-Servicer (rendered within
one year of such statement) of firms of independent public accountants with
respect to the related Sub-Servicer.
Each such 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 Agreement throughout the preceding
calendar year or other specified twelve-month period.
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Unless otherwise provided in the related Prospectus Supplement,
copies of such annual accountants' statement and such statements of officers
will be obtainable by Securityholders without charge upon written request to
the Master Servicer at the address set forth in the related Prospectus
Supplement.
Certain Matters Regarding a Master Servicer and the Depositor
The Master Servicer, if any, or a servicer for substantially all the
Whole Loans under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may be
an affiliate of the Depositor and may have other normal business relationships
with the Depositor or the Depositor's affiliates. Reference herein to the
Master Servicer shall be deemed to be to the servicer of substantially all of
the Whole Loans.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Master Servicer so causing such
a conflict being of a type and nature carried on by the Master Servicer at the
date of the Agreement. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or Security
holders for any action taken, or for refraining from the taking of any action,
in good faith pursuant to the Agreement; provided, however, that neither a
Master Servicer, the Depositor nor any such person will be protected against
any breach of a representation, warranty or covenant made in such Agreement,
or against any liability specifically imposed thereby, or against any
liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of obligations or duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. Unless otherwise specified in the related Prospectus Supplement,
each Agreement will further provide that any Master Servicer, the Depositor
and any director, officer, employee or agent of a 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 Agreement or the Securities;
provided, however, that such indemnification will not extend to any loss,
liability or expense (i) specifically imposed by such Agreement or otherwise
incidental to the performance of obligations and duties thereunder, including,
in the case of a Master Servicer, the prosecution of an enforcement action in
respect of any specific Whole Loan or Whole Loans (except as any such loss,
liability or expense shall be otherwise reimbursable pursuant to such
Agreement); (ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement; (iii) incurred by reason of
misfeasance, bad faith or gross negligence in the performance of obligations
or duties thereunder, or by reason of reckless disregard of such obligations
or duties; (iv) incurred in connection with any violation of any state or
federal securities law; or (v) imposed by any taxing authority if such loss,
liability or expense is not specifically reimbursable pursuant to the terms of
the related Agreement. In addition, each Agreement will provide that neither
any Master Servicer nor the Depositor will be under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. Any such Master Servicer or the
Depositor may, however, in its discretion undertake any such action which it
may deem necessary or desirable with respect to the Agreement and the rights
and duties of the parties thereto and the interests of the Securityholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Securityholders, and the Master Servicer or the Depositor, as the case may be,
will be entitled to be reimbursed therefor and to charge the Collection
Account.
Any person into which the Master Servicer or the Depositor may be
merged or consolidated, or any person resulting from any merger or
consolidation to which the Master Servicer or the Depositor is a party, or any
person succeeding to the business of the Master Servicer or the Depositor,
will be the successor of the Master Servicer or the Depositor, as the case may
be, under the related Agreement.
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Events of Default Under the Agreement
Unless otherwise provided in the related Prospectus Supplement,
Events of Default under the related Agreement will include (i) any failure by
the Master Servicer to distribute or cause to be distributed to
Securityholders, or to remit to the Trustee or Indenture Trustee, as
applicable, for distribution to Securityholders, any required payment that
continues after a grace period, if any; (ii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or obligations under the Agreement which continues unremedied for
thirty days (or such other period specified in the related Prospectus
Supplement) after written notice of such failure has been given to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities evidencing not less
than 25% of the Voting Rights; (iii) any breach of a representation or
warranty made by the Master Servicer under the Agreement which materially and
adversely affects the interests of Securityholders and which continues
unremedied for thirty days (or such longer period specified in the related
Prospectus Supplement) after written notice of such breach has been given to
the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Securities
evidencing not less than 25% of the Voting Rights; and (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by or on behalf of the Master Servicer
indicating its insolvency or inability to pay its obligations. Material
variations to the foregoing Events of Default (other than to shorten cure
periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Trustee shall, not later than the later of 60 days after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an Event of Default and five days after certain
officers of the Trustee become aware of the occurrence of such an event,
transmit by mail to the Depositor and all Securityholders of the applicable
series notice of such occurrence, unless such default shall have been cured or
waived.
The manner of determining the "Voting Rights" of a Security or class
or classes of Securities will be specified in the related Prospectus
Supplement.
Rights Upon Event of Default Under the Agreement
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Securities evidencing not less than 51% (or such other percentage specified in
the related Prospectus Supplement) of the Voting Rights, the Trustee shall,
terminate all of the rights and obligations of the Master Servicer under the
Agreement and in and to the Mortgage Loans (other than as a Securityholder or
as the owner of any Retained Interest), whereupon the Trustee will succeed to
all of the responsibilities, duties and liabilities of the Master Servicer
under the Agreement (except that if the Trustee is prohibited by law from
obligating itself to make advances regarding delinquent Mortgage Loans, or if
the related Prospectus Supplement so specifies, then the Trustee will not be
obligated to make such advances) and will be entitled to similar compensation
arrangements. Unless otherwise specified in the related Prospectus Supplement,
in the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least
$15,000,000 (or such other amount specified in the related Prospectus
Supplement) to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity.
The Trustee and any such successor may agree upon the servicing compensation
to be paid, which in no event may be greater than the compensation payable to
the Master Servicer under the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66-2/3% (or such other
percentage specified in the related Prospectus Supplement) of the Voting
Rights allocated to the respective classes of Securities affected by any Event
of Default will be entitled to waive such Event of Default; provided, however,
that an Event of Default involving a failure to distribute a required payment
to Securityholders described in clause (i) under "Events of Default" may be
waived only by all of the Securityholders. Upon any such waiver of an Event of
Default, such Event of Default shall cease to exist and shall be deemed to
have been remedied for every purpose under the Agreement.
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No Securityholders will have the right under any Agreement to
institute any proceeding with respect thereto unless such holder previously
has given to the Trustee written notice of default and unless the holders of
Securities evidencing not less than 25% (or such other percentage specified in
the related Prospectus Supplement) of the Voting Rights have made written
request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for sixty days (or such other number of days specified in the
related Prospectus Supplement) has neglected or refused to institute any such
proceeding. The Trustee, however, is under no obligation to exercise any of
the trusts or powers vested in it by any Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Securities covered by such Agreement,
unless such Securityholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the
consent of any of the holders of Securities covered by the Agreement, (i) to
cure any ambiguity or correct any mistake, (ii) to correct, modify or
supplement any provision therein which may be inconsistent with any other
provision therein or with the related Prospectus Supplement, (iii) to make any
other provisions with respect to matters or questions arising under the
Agreement which are not materially inconsistent with the provisions thereof,
or (iv) to comply with any requirements imposed by the Code; provided that, in
the case of clause (iii), such amendment will not (as evidenced by an opinion
of counsel to such effect or a letter from the applicable Rating Agency that
such amendment will not result in a reduction or withdrawal of its rating of
the related Security) adversely affect in any material respect the interests
of any holder of Securities covered by the Agreement. Unless otherwise
specified in the related Prospectus Supplement, each Agreement may also be
amended by the Depositor, the Master Servicer, if any, and the Trustee, with
the consent of the holders of Securities affected thereby evidencing not less
than 51% (or such other percentage specified in the related Prospectus
Supplement) of the Voting Rights, for any purpose; provided, however, that
unless otherwise specified in the related Prospectus Supplement, no such
amendment may (i) reduce in any manner the amount of or delay the timing of,
payments received or advanced on Mortgage Loans which are required to be
distributed on any Security without the consent of the holder of such Security
or (ii) reduce the consent percentages described in this paragraph without the
consent of the holders of all Securities covered by such Agreement then
outstanding. However, with respect to any series of Securities as to which a
REMIC election is to be made, the Trustee will not consent to any amendment of
the Agreement unless it shall first have received an opinion of counsel to the
effect that such amendment will not result in the imposition of a tax on the
related Trust Fund or cause the related Trust Fund to fail to qualify as a
REMIC at any time that the related Securities are outstanding.
The Trustee
The Trustee under each Agreement or Trust Agreement will be named in
the related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have
a banking relationship with the Depositor and its affiliates and with any
Master Servicer and its affiliates.
Duties of the Trustee
The Trustee will make no representations as to the validity or
sufficiency of any Agreement or Trust Agreement, the Securities or any Asset
or related document and is not accountable for the use or application by or on
behalf of any Master Servicer of any funds paid to the Master Servicer or its
designee in respect of the Securities or the Assets, or deposited into or
withdrawn from the Collection Account or any other account by or on behalf of
the Master Servicer. If no Event of Default has occurred and is continuing,
the Trustee is required to perform only those duties specifically required
under the related Agreement or Trust Agreement, as applicable. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the Agreement or Trust
Agreement, as applicable.
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Certain Matters Regarding the Trustee
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the Trustee's (i) enforcing its rights
and remedies and protecting the interests, of the Securityholders during the
continuance of an Event of Default, (ii) defending or prosecuting any legal
action in respect of the related Agreement or series of Securities (iii) being
the mortgagee of record with respect to the Mortgage Loans in a Trust Fund and
the owner of record with respect to any Mortgaged Property acquired in respect
thereof for the benefit of Securityholders, or (iv) acting or refraining from
acting in good faith at the direction of the holders of the related series of
Securities entitled to not less than 25% (or such other percentage as is
specified in the related Agreement with respect to any particular matter) of
the Voting Rights for such series; provided, however, that such
indemnification will not extend to any loss, liability or expense that
constitutes a specific liability of the Trustee pursuant to the related
Agreement, or to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence on the part of the Trustee in the
performance of its obligations and duties thereunder, or by reason of its
reckless disregard of such obligations or duties, or as may arise from a
breach of any representation, warranty or covenant of the Trustee made
therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor, the
Master Servicer, if any, and all Securityholders. Upon receiving such notice
of resignation, the Depositor is required promptly to appoint a successor
trustee acceptable to the Master Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a
successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will
adversely affect the rating on any class of the Securities, then the Depositor
may remove the Trustee and appoint a successor trustee acceptable to the
Master Servicer, if any. Holders of the Securities of any series entitled to
at least 51% (or such other percentage specified in the related Prospectus
Supplement) of the Voting Rights for such series may at any time remove the
Trustee without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment
by the successor trustee.
Certain Terms of the Indenture
Events of Default. Unless otherwise specified in the related
Prospectus Supplement, Events of Default under the Indenture for each Series
of Notes include: (i) a default for thirty (30) days (or such other number of
days specified in such Prospectus Supplement) or more in the payment of any
principal of or interest on any Note of such series; (ii) failure to perform
any other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund
in the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such series
having been incorrect in a material respect as of the time made, and such
breach is not cured within sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust Fund; or (v) any other Event of Default provided
with respect to Notes of that series.
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If an Event of Default with respect to the Notes of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee or the
holders of a majority of the then aggregate outstanding amount of the Notes of
such series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that series, as provided in the related Prospectus
Supplement) of all the Notes of such series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled
by the holders of a majority in aggregate outstanding amount of the Notes of
such series.
If, following an Event of Default with respect to any series of
Notes, the Notes of such series have been declared to be due and payable, the
Indenture Trustee may, in its discretion, notwithstanding such acceleration,
elect to maintain possession of the collateral securing the Notes of such
series and to continue to apply distributions on such collateral as if there
had been no declaration of acceleration if such collateral continues to
provide sufficient funds for the payment of principal of and interest on the
Notes of such series as they would have become due if there had not been such
a declaration. In addition, the Indenture Trustee may not sell or otherwise
liquidate the collateral securing the Notes of a series following an Event of
Default, other than a default in the payment of any principal or interest on
any Note of such series for thirty (30) days or more, unless (a) the holders
of 100% (or such other percentage specified in the related Prospectus
Supplement) of the then aggregate outstanding amount of the Notes of such
series consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and
unpaid, on the outstanding Notes of such series at the date of such sale or
(c) the Indenture Trustee determines that such collateral would not be
sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of
66-2/3% (or such other percentage specified in the related Prospectus
Supplement) of the then aggregate outstanding amount of the Notes of such
series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days
(or such other number of days specified in the related Prospectus Supplement)
or more in the payment of principal of or interest on the Notes of a series,
the Indenture provides that the Indenture Trustee will have a prior lien on
the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for distribution to the Noteholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a series is declared due and payable,
as described above, the holders of any such Notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be
continuing with respect to a series of Notes, the Indenture Trustee shall be
under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of Notes of such
series, unless such holders offered to the Indenture Trustee security or
indemnity satisfactory to it against the costs, expenses and liabilities which
might be incurred by it in complying with such request or direction. Subject
to such provisions for indemnification and certain limitations contained in
the Indenture, the holders of a majority of the then aggregate outstanding
amount of the Notes of such series shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee or exercising any trust or power conferred on the Indenture
Trustee with respect to the Notes of such series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such series
may, in certain cases, waive any default with respect thereto, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of such series
affected thereby.
Discharge of the Indenture. The Indenture will be discharged with
respect to a series of Notes (except with respect to certain continuing rights
specified in the Indenture) upon the delivery to the Indenture Trustee for
cancellation of all the Notes of such series or, with certain limitations,
upon deposit with the Indenture Trustee of funds sufficient for the payment in
full of all of the Notes of such series.
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In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any series,
the related Trust Fund will be discharged from any and all obligations in
respect of the Notes of such series (except for certain obligations relating
to temporary Notes and exchange of Notes, to register the transfer of or
exchange Notes of such series, to replace stolen, lost or mutilated Notes of
such series, to maintain paying agencies and to hold monies for payment in
trust) upon the deposit with the Indenture Trustee, in trust, of money and/or
direct obligations of or obligations guaranteed by the United States of
America which through the payment of interest and principal in respect thereof
in accordance with their terms will provide money in an amount sufficient to
pay the principal of and each installment of interest on the Notes of such
series on the maturity date for such Notes and any installment of interest on
such Notes in accordance with the terms of the Indenture and the Notes of such
series. In the event of any such defeasance and discharge of Notes of such
series, holders of Notes of such series would be able to look only to such
money and/or direct obligations for payment of principal and interest, if any,
on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each
series of Notes will be required to mail each year to all related Noteholders
a brief report relating to its eligibility and qualification to continue as
Indenture Trustee under the related Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds physically held by such Indenture
Trustee as such and any action taken by it that materially affects such Notes
and that has not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes
will be specified in the related Prospectus Supplement. The Indenture Trustee
for any series may resign at any time, in which event the Depositor will be
obligated to appoint a successor trustee for such series. The Depositor may
also remove any such Indenture Trustee if such Indenture Trustee ceases to be
eligible to continue as such under the related Indenture or if such Indenture
Trustee becomes insolvent. In such circumstances the Depositor will be
obligated to appoint a successor trustee for the applicable series of Notes.
Any resignation or removal of the Indenture Trustee and appointment of a
successor trustee for any series of Notes does not become effective until
acceptance of the appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a
banking relationship with the Depositor or any of its affiliates or the Master
Servicer or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
General
For any series of Securities Credit Support may be provided with
respect to one or more classes thereof or the related Assets. Credit Support
may be in the form of the subordination of one or more classes of Securities,
letters of credit, insurance policies, guarantees, the establishment of one or
more reserve funds or another method of Credit Support described in the
related Prospectus Supplement, or any combination of the foregoing. If so
provided in the related Prospectus Supplement, any form of Credit Support may
be structured so as to be drawn upon by more than one series to the extent
described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Securities the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Security
Balance of the Securities and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Securityholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one
series of Securities (each, a "Covered Trust"), holders of Securities
evidencing interests in any of such Covered Trusts will be subject to the risk
that such Credit Support will be exhausted by the claims of other Covered
Trusts prior to such Covered Trust receiving any of its intended share of such
coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such Credit Support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such Credit Support may be reduced and under which such
Credit
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Support may be terminated or replaced and (d) the material provisions
relating to such Credit Support. Additionally, the related Prospectus
Supplement will set forth certain information with respect to the obligor
under any instrument of Credit Support, including (i) a brief description of
its principal business activities, (ii) its principal place of business, place
of incorporation and the jurisdiction under which it is chartered or licensed
to do business, (iii) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its business and (iv) its
total assets, and its stockholders' or policyholders' surplus, if applicable,
as of the date specified in the Prospectus Supplement. See "Risk
Factors--Credit Support Limitations--Risk That Credit Support Will Not Cover
All Losses."
Subordinate Securities
If so specified in the related Prospectus Supplement, one or more
classes of Securities of a series may be Subordinate Securities. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to such
rights of the holders of Senior Securities. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the
event of (or may be limited to) certain types of losses or shortfalls. The
related Prospectus Supplement will set forth information concerning the amount
of subordination of a class or classes of Subordinate Securities in a series,
the circumstances in which such subordination will be applicable and the
manner, if any, in which the amount of subordination will be effected.
Cross-Support Provisions
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group
of Assets prior to distributions on Subordinate Securities evidencing
interests in a different group of Assets within the Trust Fund. The Prospectus
Supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying such provisions.
Insurance or Guarantees
If so provided in the Prospectus Supplement for a series of
Securities, the Whole Loans in the related Trust Fund will be covered for
various default risks by insurance policies or guarantees.
Letter of Credit
If so provided in the Prospectus Supplement for a series of
Securities, deficiencies in amounts otherwise payable on such Securities or
certain classes thereof will be covered by one or more letters of credit,
issued by a bank or financial institution specified in such Prospectus
Supplement (the "L/C Bank"). Under a letter of credit, the L/C Bank will be
obligated to honor draws thereunder in an aggregate fixed dollar amount, net
of unreimbursed payments thereunder, generally equal to a percentage specified
in the related Prospectus Supplement of the aggregate principal balance of the
Assets on the related Cut-off Date or of the initial aggregate Security
Balance of one or more classes of Securities. If so specified in the related
Prospectus Supplement, the letter of credit may permit draws in the event of
only certain types of losses and shortfalls. The amount available under the
letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Securities will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund.
Insurance Policies and Surety Bonds
If so provided in the Prospectus Supplement for a series of
Securities, deficiencies in amounts otherwise payable on such Securities or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such
instruments may cover, with respect to one or more classes of Securities of
the related series, timely distributions of interest and/or full distributions
of principal on the
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basis of a schedule of principal distributions set forth in or determined in the
manner specified in the related Prospectus Supplement.
Reserve Funds
If so provided in the Prospectus Supplement for a series of
Securities, deficiencies in amounts otherwise payable on such Securities or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a
combination thereof will be deposited, in the amounts so specified in such
Prospectus Supplement. The reserve funds for a series may also be funded over
time by depositing therein a specified amount of the distributions received on
the related Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with
the reinvestment income thereon, if any, will be applied for the purposes, in
the manner, and to the extent specified in the related Prospectus Supplement.
A reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Certificates. If so
specified in the related Prospectus Supplement, reserve funds may be
established to provide limited protection against only certain types of losses
and shortfalls. Following each Distribution Date amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from
the reserve fund under the conditions and to the extent specified in the
related Prospectus Supplement and will not be available for further
application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
any reinvestment income or other gain from such investments will be credited
to the related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
Additional information concerning any Reserve Fund will be set forth
in the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund
may be applied to make distributions to Securityholders and use of investment
earnings from the Reserve Fund, if any.
Credit Support With Respect to MBS
If so provided in the Prospectus Supplement for a series of
Securities, the MBS in the related Trust Fund and/or the Mortgage Loans
underlying such MBS may be covered by one or more of the types of Credit
Support described herein. The related Prospectus Supplement will specify as to
each such form of Credit Support the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain state law legal aspects of loans secured by single-family
or multi-family residential properties. Because such legal aspects are
governed primarily by the applicable laws of the state in which the related
Mortgaged Property is located (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the
security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans. See "Description of the Trust Funds--Assets."
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General
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
Interest In Real Property
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Offered Securities, the Mortgage Loans may also consist of cooperative apartment
loans ("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
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appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to meet
the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alternative, to purchase the land could lead to termination of the
cooperatives's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder of
a blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure--Cooperatives"
below.
Foreclosure
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
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Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these
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reasons, it is common for the lender to purchase the mortgaged property for an
amount equal to or less than the underlying debt and accrued and unpaid interest
plus the expenses of foreclosure. Generally, state law controls the amount of
foreclosure costs and expenses which may be recovered by a lender. Thereafter,
subject to the mortgagor's right in some states to remain in possession during a
redemption period, if applicable, the lender will become the owner of the
property and have both the benefits and burdens of ownership of the mortgaged
property. For example, the lender will become obligated to pay taxes, obtain
casualty insurance and to make such repairs at its own expense as are necessary
to render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be recovered
by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause contained in a senior mortgage, the junior mortgagee may be required to
pay the full amount of the senior mortgage to avoid its foreclosure.
Accordingly, with respect to those Mortgage Loans, if any, that are junior
mortgage loans, if the lender purchases the property the lender's title will be
subject to all senior mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the mortgagor,
must be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years. Unless
otherwise provided in the related Prospectus Supplement, with respect to a
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series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the Agreement will permit foreclosed property to be
held for more than three years if the Internal Revenue Service grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's Certificate of Incorporation and By-laws, as well as
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such 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 such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building was so converted.
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Junior Mortgages
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust and
the junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a
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general unsecured creditor for the difference between the value of the residence
and the outstanding balance of the loan. Generally, however, the terms of a
mortgage loan secured only by a mortgage on real property that is the debtor's
principal residence may not be modified pursuant to a plan confirmed pursuant to
Chapter 11 or Chapter 13 except with respect to mortgage payment arrearages,
which may be cured within a reasonable time period.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases this liability may affect
assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Environmental Legislation
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party that
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the related series of Securities might
realize a loss if such costs were required to be paid by the Trust Fund.
Due-On-Sale Clauses
Unless the related Prospectus Supplement indicates otherwise, the
Mortgage Loans will contain due-on-sale clauses. These clauses generally provide
that the lender may accelerate the maturity of the loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St Germain Depository
Institutions Act of 1982 preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain limited
exceptions. Due-on-sale clauses contained in mortgage loans originated by
federal savings and loan associations of federal savings banks are fully
enforceable pursuant to regulations of the United States Federal Home Loan Bank
Board, as succeeded by the Office of Thrift Supervision, which preempt state law
restrictions on the enforcement of such clauses. Similarly, "due-on-sale"
clauses in mortgage loans made by national banks and federal credit unions are
now fully enforceable pursuant to preemptive regulations of the Comptroller of
the Currency and the National Credit Union Administration, respectively.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment
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penalty upon the acceleration of a loan pursuant to a due-on-sale clause. The
inability to enforce a "due-on-sale" clause may result in a mortgage that bears
an interest rate below the current market rate being assumed by a new home buyer
rather than being paid off, which may affect the average life of the Mortgage
Loans and the number of Mortgage Loans which may extend to maturity.
Subordinate Financing
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision that expressly
rejects application of the federal law. In addition, even where Title V is not
so rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not taken
the requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of such state action will be eligible
for inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the mortgagor may cancel the recorded mortgage or deed of
trust upon paying its debt with lawful interest, and the lender may foreclose,
but only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
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Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Certificates, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, any form of Credit Support provided in connection with
such Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the servicer to foreclose on an affected Mortgage Loan
during the mortgagor's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
represents the opinion of Brown & Wood LLP, counsel to the Depositor, as of the
date of this Prospectus. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
Securities applicable to all categories of investors, some of which (for
example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Securities.
The term "U.S. Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any state thereof or the District of
Columbia (other than a partnership that is not treated as a United States person
under any applicable Treasury regulations), an estate whose income is subject to
U.S. federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision of the administration
of the trust and one or more United States persons have the authority to control
all substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be treated as United states persons shall be considered U.S. Persons
as well.
General
The federal income tax consequences to Securityholders will vary
depending on whether an election is made to treat the Trust Fund relating to a
particular Series of Securities as a REMIC under the Code. The Prospectus
Supplement for each Series of Securities will specify whether a REMIC election
will be made.
Grantor Trust Funds
If the related Prospectus Supplement indicates that the Trust Fund will
be treated as a grantor trust, then Brown & Wood LLP will deliver its opinion
that the Trust Fund will not be classified as an association taxable as a
corporation and that each such Trust Fund will be classified as a grantor trust
under subpart E, Part I of subchapter J 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.
A. Single Class of Grantor Trust Certificates
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust 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 Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset 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 Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162 or
212 each Grantor Trust 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 such amounts are reasonable compensation for services rendered to
the Trust Fund. Grantor Trust Certificateholders that
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are individuals, estates or trusts will be entitled to deduct their share of
expenses as itemized deductions only to the extent such expenses plus all other
Code Section 212 expenses exceed two percent of its adjusted gross income. In
addition, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable amount
(which amount will be adjusted for inflation) will be reduced by the lesser of
(i) 3% of the excess of adjusted gross income over the applicable amount and
(ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. A Grantor Trust 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 Grantor Trust
Certificateholder using an accrual method of accounting must take into account
its pro rata share of income and deductions as they become due or are paid to
the Master Servicer, whichever is earlier. If the servicing fees paid to the
Master Servicer are deemed to exceed reasonable servicing compensation, the
amount of such 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 Assets. The Mortgage Assets would then be subject to
the "coupon stripping" rules of the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to
each Series of Certificates evidencing an interest in a Trust Fund comprised of
Mortgage Loans, Brown & Wood LLP will have advised the Depositor that:
(i) a Grantor Trust 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 Assets 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 Assets
represented by that Grantor Trust Certificate are of a type described
in such Code section;
(ii) a Grantor Trust Certificate owned by a real estate
investment trust representing an interest in Mortgage Assets will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A), and interest income on the Mortgage Assets 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 Assets represented by that Grantor Trust
Certificate are of a type described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will
represent "obligation[s] . . . which [are] principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities which constitute "stripped bonds" or "stripped coupons" as
those terms are defined in section 1286 of the Code, and, as a result, such
assets would be subject to the stripped bond provisions of the Code. Under these
rules, such Government Securities are treated as having OID based on the
purchase price and the stated redemption price at maturity of each Security. As
such, Grantor Trust Certificateholders would be required to include in income
their pro rata share of the OID on each Government Security recognized in any
given year on an economic accrual basis even if the Grantor Trust
Certificateholder is a cash method taxpayer. Accordingly, the sum of the income
includible to the Grantor Trust Certificateholder in any taxable year may exceed
amounts actually received during such year.
Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Trust Fund that includes Buydown Loans.
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Premium. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Mortgage Asset
based on each Mortgage Asset's relative fair market value, so that such holder's
undivided interest in each Mortgage Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Mortgage Assets at a
premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Mortgage Assets
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 such 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 such Grantor Trust Certificate. The basis for such
Grantor Trust 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. 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 such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at a
premium should recognize a loss if a Mortgage Loan (or an underlying mortgage
loan with respect to a Mortgage Asset) prepays in full, equal to the difference
between the portion of the prepaid principal amount of such 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 such Mortgage Loan
(or underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a 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.
On December 30, 1997 the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Certificates. Absent further guidance from
the IRS, the Trustee intends to account for amortizable bond premium in the
manner described above. Prospective Certificateholders should consult their tax
advisors regarding the possible application of the amortizable Bond Premium
Regulations.
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the special rules of the
Code relating to original issue discount ("OID") (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994, as
amended on June 11, 1996, under such Sections (the "OID Regulations"), will be
applicable to a Grantor Trust Certificateholder's interest in those Mortgage
Assets meeting the conditions necessary for these Sections to apply. Rules
regarding periodic inclusion of OID income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such OID could arise by the
financing of points or other charges by the originator of the mortgages in an
amount greater than a statutory de minimis exception to the extent that the
points are not currently deductible under applicable Code provisions or are not
for services provided by the lender. OID generally must be reported as ordinary
gross income as it accrues under a constant interest method. See "--Multiple
Classes of Grantor Trust Certificates--Accrual of Original Issue Discount"
below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a "market discount."
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such holder's tax basis in such interest. Market
discount with respect to a Grantor Trust Certificate will be considered to be
zero if the amount allocable to the Grantor Trust Certificate is less than 0.25%
of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
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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 such 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.
While the Treasury Department has not yet issued regulations, rules described in
the relevant legislative history will apply. Under those rules, 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
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) 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 Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) 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 the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. 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 Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry such Grantor Trust Certificate purchased with market discount. For
these purposes, the de minimis rule referred above applies. Any such deferred
interest expense would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the year
in which such market discount is includible in income. If such holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
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 such an election were to be made with respect to a Grantor Trust
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 such 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 such
Certificateholder owns or acquires. See "--Regular Certificates--Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
B. Multiple Classes of Grantor Trust Certificates
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, 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 Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Grantor Trust Certificates, one class
of Grantor Trust Certificates may represent the right to principal and interest,
or principal only, on all or a portion of the Mortgage Assets (the "Stripped
Bond
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Certificates"), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
"Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Mortgage
Asset principal balance) or the Certificates are initially sold with a de
minimis discount (assuming no prepayment assumption is required), 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 Asset by Mortgage Asset basis, which
could result in some Mortgage Assets being treated as having more than 100 basis
points of interest stripped off. See "--Non-REMIC Certificates" and "Multiple
Classes of Grantor Trust Certificates --Stripped Bonds and Stripped Coupons"
herein.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an in interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Grantor Trust
Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
Mortgage Assets as market discount rather than OID if either (i) the amount of
OID with respect to the Mortgage Assets is treated as zero under the OID de
minimis rule when the Certificate was stripped or (ii) 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 Assets. Pursuant to Revenue
Procedure 91-49, issued on August 8, 1991, purchasers of Stripped Bond
Certificates using an inconsistent method of accounting must change their method
of accounting and request the consent of the IRS to the change in their
accounting method on a statement attached to their first timely tax return filed
after August 8, 1991.
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 Asset. However, based
on the recent IRS guidance, it appears that all payments from a Mortgage Asset
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 such Mortgage Asset would be included in the Mortgage Asset's
stated redemption price at maturity for purposes of calculating income on such
certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
Mortgage Assets will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
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 such Grantor Trust 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
such Certificate is treated as an interest in discrete Mortgage Assets, or if no
prepayment assumption is used, then when a Mortgage Asset is prepaid, the holder
of such Certificate should be able to recognize a loss equal to the portion of
the adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper treatment
of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID, it
is not clear whether such characterization would apply with regard to these
other Code sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(4)(A)
and "loans . . . secured by, an interest in real property which is . . .
residential real property" within the meaning of Code Section 7701(a)(19)(C)(v),
and interest income attributable to Grantor Trust Certificates
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should be considered to represent "interest on obligations secured by mortgages
on real property" within the meaning of Code Section 856(c)(3)(B), provided that
in each case the underlying Mortgage Assets and interest on such Mortgage Assets
qualify for such treatment. Prospective purchasers to which such
characterization of an investment in Certificates is material should consult
their own tax advisors regarding the characterization of the Grantor Trust
Certificates and the income therefrom. Grantor Trust Certificates will be
"obligation[s] . . . which [are] principally secured, directly or indirectly, by
an interest in real property" within the meaning of Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests in
Loans Other Than ARM Loans
The OID rules of Code Sections 1271 through 1275 will be applicable to
a Certificateholder's interest in those Mortgage Assets as to which the
conditions for the application of those sections are met. Rules regarding
periodic inclusion of OID in income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Under the OID Regulations, such OID 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 on the Mortgage Assets.
OID on each Grantor Trust 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 such income. The amount of OID
required to be included in an owner's income in any taxable year with respect to
a Grantor Trust Certificate representing an interest in Mortgage Assets other
than Mortgage Assets with interest rates that adjust periodically ("ARM Loans")
likely will be computed as described below under "--Accrual of Original Issue
Discount." The following discussion is based in part on the OID Regulations and
in part on the provisions of the Tax Reform Act of 1986 (the "1986 Act"). The
OID Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but may be relied upon as authority with respect to debt
instruments, such as the Grantor Trust Certificates, issued after December 21,
1992. Alternatively, proposed Treasury regulations issued December 21, 1992 may
be treated as authority for debt instruments issued after December 21, 1992 and
prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and
1991 may be treated as authority for instruments issued before December 21,
1992. In applying these dates, the issued date of the Mortgage Assets should be
used, or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the date such Certificates are acquired. The holder of a
Certificate should be aware, however, that neither the proposed OID Regulations
nor the OID Regulations adequately address certain issues relevant to prepayable
securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset 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 Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as qualified
stated interest payments. The accrual of this OID, as described below under
"--Accrual of Original Issue Discount," will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Grantor Trust Certificate calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the Grantor Trust 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 such 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 such debt instruments, such as 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 below.
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Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily portions,"
as defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such 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 such
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 Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (b) any payments included in the
state redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the "adjusted issue price" of the respective
component at the beginning of such accrual period. The adjusted issue price of a
Grantor Trust Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a Grantor Trust 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 other than
a payment of qualified stated interest made at the end of or during that accrual
period. The OID accruing during such 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.
OID 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 OID
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 OID, less prior
payments of principal. Accordingly, if such Mortgage Assets acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Asset, no OID attributable to the difference between the
issue price and the original principal amount of such Mortgage Asset (i.e.
points) will be includible by such holder. Other OID on the Mortgage Assets
(e.g., that arising from a "teaser" rate) would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in
ARM Loans
The OID Regulations do not address the treatment of instruments, such
as the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ("Stripped ARM Obligations") to holders in a manner it believes is
consistent with the rules described above under the heading "--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to such Certificates.
C. Sale or Exchange of a Grantor Trust Certificate
Sale or exchange of a Grantor Trust Certificate prior to 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 Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or
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loss to an owner for which a Grantor Trust Certificate is a "capital asset"
within the meaning of Code Section 1221, and will be long-term or short-term
depending on whether the Grantor Trust Certificate has been owned for the
long-term capital gain holding period (generally more than one year). Long-term
capital gains of non-corporate taxpayers are subject to reduced maximum rates
while short-term capital gains are taxable at ordinary rates. The use of capital
losses is subject to limitations.
Prospective investors should consult their own tax advisors concerning
the treatment of capital gains.
Grantor Trust 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 Grantor Trust Certificate by a bank or a thrift institution to which
such section applies will be treated as ordinary income or loss.
D. Non-U.S. Persons
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets 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 (i) an owner that is not a U.S. Person or (ii) a Grantor
Trust 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 such lower rate as may be provided for interest by an applicable tax
treaty. Accrued OID recognized by the owner on the sale or exchange of such a
Grantor Trust Certificate also will be subject to federal income tax at the same
rate. Generally, such payments would not be subject to withholding to the extent
that a Grantor Trust Certificate evidences ownership in Mortgage Assets issued
after July 18, 1984, by natural persons if such Grantor Trust Certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the Grantor Trust Certificateholder under penalties of
perjury, certifying that such Grantor Trust Certificateholder is not a U.S.
Person and providing the name and address of such Grantor Trust
Certificateholder). Additional restrictions apply to Mortgage Assets of where
the mortgagor is not a natural person in order to qualify for the exemption from
withholding.
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 such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
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 such 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 such recipient's federal income tax liability.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
REMICs
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 "--Taxation of Owners of REMIC Residual Certificates" and
"--Prohibited Transactions" below), if a Trust Fund with respect to which a
REMIC election is made fails to comply with one or more of the
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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 below under "Taxation of Owners of
REMIC Residual Certificates," the Code provides that a Trust Fund will not be
treated as a REMIC for such year and thereafter. In that event, such entity may
be taxable as a separate corporation, and the related Certificates (the "REMIC
Certificates") may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such 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 such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Pooling and Servicing Agreement, such Trust
Fund will qualify as a REMIC, and the related Certificates will be considered to
be regular interests ("REMIC Regular Certificates") or a sole class of residual
interests ("REMIC Residual Certificates") in the REMIC. The related Prospectus
Supplement for each Series of Certificates will indicate whether the Trust Fund
will make a REMIC election and whether a class of Certificates will be treated
as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) such 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); (ii) such Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(4)(A); and (iii) interest on such 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 the
foregoing 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 Assets held pending distribution on the REMIC Certificates will be
considered to be real estate assets for purposes of Code Section 856(c). The
Small Business Job Protection Act of 1996, as part of the repeal of the bad debt
reserve method for thrift institutions, repealed the application of Code Section
593(d) to any taxable year beginning after December 31, 1995.
In some instances the Mortgage Assets 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 Grantor
Trust Certificates" above. 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 such 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 certain Series of Certificates, two
separate elections may be made to treat designated portions of the related Trust
Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for
federal income tax purposes. Upon the issuance of any such Series of
Certificates, Brown & Wood LLP, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Agreement, the Master REMIC as well as any Subsidiary REMIC will
each qualify as a REMIC, and the REMIC Certificates issued by the Master REMIC
and the Subsidiary REMIC, respectively, will be considered to evidence ownership
of REMIC Regular Certificates or REMIC Residual Certificates in the related
REMIC within the meaning of the REMIC provisions.
Only REMIC Certificates, other than the residual interest in the
Subsidiary REMIC, issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC
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solely for purposes of determining whether the REMIC Certificates will be (i)
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code;
(ii) "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code; and (iii) whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code.
A. Taxation of Owners of REMIC Regular Certificates
General. Except as otherwise stated in this discussion, REMIC 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 REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates may
be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular Certificate
and its "issue price." Holders of any class of Certificates issued with OID will
be required to include such 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 Tax Reform Act of 1986 (the
"1986 Act"). Holders of REMIC Regular Certificates (the "REMIC Regular
Certificateholders") should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273
and 1275. These 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 REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such 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 such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC 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 REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC 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 REMIC Regular Certificate is the first price at which a substantial amount of
REMIC Regular Certificates of that class are first sold to the public (excluding
bond houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of REMIC Regular Certificates is sold for cash on
or prior to the date of their initial issuance (the "Closing Date"), the issue
price for such class will be treated as the fair market value of such class on
the Closing Date. The issue price of a REMIC Regular Certificate also includes
the amount paid by an initial Certificateholder for accrued interest that
relates to a period prior to the issue date of the REMIC Regular Certificate.
The stated redemption price at maturity of a REMIC Regular Certificate includes
the original principal amount of the REMIC Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
"qualified stated interest." Qualified stated interest generally means interest
payable at a single fixed rate or qualified variable rate (as described below)
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the REMIC 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 REMIC 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 such REMIC Regular Certificates includes
all distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC 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 at
maturity of the Certificate exceeds its issue price for purposes of the de
minimis
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rule described below. The OID Regulations suggest that all interest on a long
first period REMIC Regular Certificate that is issued with non-de minimis OID,
as determined under the foregoing rule, will be treated as OID. Where the
interval between the issue date and the first Distribution Date on a REMIC
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. REMIC Regular Certificateholders should consult
their own tax advisors to determine the issue price and stated redemption price
at maturity of a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC 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 REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
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 such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC 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 Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain proposed contingent payment rules contained in regulations issued on
December 15, 1994, with respect to OID, should apply to such Certificates.
Although such rules are not applicable to instruments governed by Code Section
1272(a)(6), they represent the only guidance regarding the current views of the
IRS with respect to contingent payment instruments. In the alternative, the IRS
could assert that the stated redemption price at maturity of such REMIC Regular
Certificates should be limited to their principal amount (subject to the
discussion below under "--Accrued Interest Certificates"), so that such REMIC
Regular Certificates would be considered for federal income tax purposes to be
issued at a premium. If such a position were to prevail, the rules described
below under "--Taxation of Owners of REMIC 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 such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under "--REMIC Regular Certificates --Premium" should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such 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 such premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on a
REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the disposition
date. In the case of an
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original holder of a REMIC Regular Certificate, a calculation will be made of
the portion of the OID that accrues during each successive period ("an accrual
period") that ends on the day in the calendar year corresponding to a
Distribution Date (or if Distribution Dates are on the first day or first
business day of the immediately preceding month, interest may be treated as
payable on the last day of the immediately preceding month) and begins on the
day after the end of the immediately preceding accrual period (or on the issue
date in the case of the first accrual period). This will be done, in the case of
each full accrual period, by (i) adding (a) the present value at the end of the
accrual period (determined by using as a discount factor the original yield to
maturity of the REMIC Regular Certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the REMIC Regular
Certificates under the Prepayment Assumption and (b) any payments included in
the stated redemption price at maturity received during such accrual period, and
(ii) subtracting from that total the adjusted issue price of the REMIC Regular
Certificates at the beginning of such accrual period. The adjusted issue price
of a REMIC Regular Certificate at the beginning of the first accrual period is
its issue price; the adjusted issue price of a REMIC Regular 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 and reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The OID accrued during an 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 accrual period. The calculation of OID under the method described
above will cause the accrual of OID to either increase or decrease (but never
below zero) in a given accrual period to reflect the fact that prepayments are
occurring faster or slower than under the Prepayment Assumption. With respect to
an initial accrual period shorter than a full accrual period, the daily portions
of OID may be determined according to an appropriate allocation under any
reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular Certificate.
In computing the daily portions of OID for such a purchaser (as well as an
initial purchaser that purchases at a price higher than the adjusted issue price
but less than the stated redemption price at maturity), however, the daily
portion is reduced by the amount that would be the daily portion for such day
(computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the price paid
by such holder for that REMIC Regular Certificate exceeds the following amount:
(a) the sum of the issue price plus the aggregate amount of OID that would have
been includible in the gross income of an original REMIC Regular
Certificateholder (who purchased the REMIC Regular Certificate at its issue
price), less (b) any prior payments included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for that
REMIC Regular Certificate for all days beginning on the date after the purchase
date and ending on the maturity date computed under the Prepayment Assumption. A
holder who pays an acquisition premium instead may elect to accrue OID by
treating the purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates
may provide for interest based on a variable rate. Interest based on a variable
rate will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments, and (iii) interest is based on a "qualified floating rate,"
an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such REMIC Regular
Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above 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 interest on
a REMIC Regular Certificate that is a weighted average of the net interest rates
on Mortgage Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules
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relating to obligations providing for contingent payments. Such treatment may
effect the timing of income accruals on such REMIC Regular Certificates.
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. If such an election were to be made with
respect to a REMIC Regular 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 such Certificateholder acquires during the year of the
election and 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 such Certificateholder owns or acquires. See
"--REMIC Regular Certificates--Premium" herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate is
irrevocable.
Market Discount. A purchaser of a REMIC 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 (i) the REMIC Regular Certificate's stated principal amount
or, in the case of a REMIC Regular Certificate with OID, the adjusted issue
price (determined for this purpose as if the purchaser had purchased such REMIC
Regular Certificate from an original holder) over (ii) the price for such REMIC
Regular Certificate paid by the purchaser. A Certificateholder that purchases a
REMIC Regular Certificate at a market discount will recognize income upon
receipt of each distribution representing amounts included in such certificate's
stated redemption price at maturity. In particular, under Section 1276 of the
Code such a holder generally will be required to allocate each such 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, such election
will apply to all market discount bonds acquired by such Certificateholder on or
after the first day of the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
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 such 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 authority to the Treasury Department 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.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) 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 period. For REMIC Regular Certificates issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (a) the total remaining market discount and (b) 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 period. For purposes of calculating market discount
under any of the above methods in
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the case of instruments (such as the REMIC Regular Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same Prepayment Assumption applicable
to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry such Certificate purchased with market discount. For these purposes,
the de minimis rule referred to above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC 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 REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. 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 such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. 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 REMIC Regular Certificates without regard to
whether such 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 such REMIC Regular Certificates and
will be applied as an offset against such interest payment. On December 30,
1997, the IRS issued final regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code section
1272(a)(6). Absent further guidance from the IRS the Trust intends to account
for amortizable bond premium in the manner described above. Certificateholders
should consult their tax advisors regarding the possibility of making an
election to amortize any such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all or
a portion of the interest payable on such Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as OID
(which could accelerate such inclusion). Interest on REMIC Regular Certificates
must in any event be accounted for under an accrual method by the holders of
such 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
such REMIC 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 Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinated Certificates attributable to defaults and
delinquencies on the Mortgage Assets, except to the extent that it can be
established that such 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 such 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 Assets. Timing and characterization of such
losses is discussed in "--REMIC Regular Certificates--Treatment of Realized
Losses" below.
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Sale, Exchange or Redemption. If a REMIC 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 REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC 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 REMIC 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 REMIC Regular Certificate. A REMIC Regular Certificateholder who
receives a final payment that is less than the holder's adjusted basis in the
REMIC Regular Certificate will generally recognize a loss. Except as provided in
the following paragraph and as provided under "--Market Discount" above, any
such gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Such gain or loss generally will be long-term capital gain or loss if
the Note were held for more than one year. Long-term capital gains of
non-corporate taxpayers are subject to reduced maximum rates while short-term
capital gains are taxable at ordinary rates. The use of capital losses is
subject to limitations. Prospective investors should consult their own tax
advisors concerning the treatment of capital gains.
Gain from the sale or other disposition of a REMIC Regular Certificate
that might otherwise be capital gain will be treated as ordinary income to the
extent that such gain does not exceed the excess, if any, of (i) the amount that
would have been includible in such holder's income with respect to the REMIC
Regular Certificate had income accrued thereon at a rate equal to 110% of the
AFR as defined in Code Section 1274(d) determined as of the date of purchase of
such REMIC Regular Certificate, over (ii) the amount actually includible in such
holder's income.
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
REMIC Regular Certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC 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 REMIC 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 REMIC 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 prior to each such Distribution Date. The period between the
Closing Date for Payment Lag Certificates and their first Distribution Date may
or may not exceed such interval. Purchasers of Payment Lag Certificates for
which the period between the Closing Date and the first Distribution Date does
not exceed such interval could pay upon purchase of the REMIC 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 REMIC Regular Certificate is allocable to interest that has accrued
prior to the issue date ("pre-issuance accrued interest") and the REMIC 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 REMIC 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 REMIC 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 such payments represent interest for
the number of days that the Certificateholder has held such Payment Lag
Certificate during the first accrual period.
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Investors should consult their own tax advisors concerning the
treatment for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under 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 REMIC Regular Certificateholders that are
"pass-through interest holders." Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the REMIC Regular Certificates. See "Pass-Through of
Non-Interest Expenses of the REMIC" under "Taxation of Owners of REMIC Residual
Certificates" below.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of REMIC 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 any such 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 any such Certificates becoming
wholly worthless. Although the matter is not entirely clear, non-corporate
holders of Certificates may be allowed a bad debt deduction at such time that
the principal balance of any such Certificate is reduced to reflect realized
losses resulting from any liquidated Mortgage Assets. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all Mortgage
Assets 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 urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the REMIC Regular Certificates to a
REMIC 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 (i) such REMIC Regular Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions of
interest to such holder, including distributions in respect of accrued OID, may
be subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate
of a non-resident alien individual and will not be subject to United States
estate taxes. However, Certificateholders who are non-resident alien individuals
should consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the "REMIC Residual Certificateholder")
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
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 REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such REMIC 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 such person has not reported all interest and
dividend income required to be shown on its
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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 such recipient's federal income
tax liability.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information reporting
rules described above. The New Regulations attempt to unify certification
requirements and modify reliance standards. The New Regulations will generally
be effective for payments made after December 31, 1999, subject to certain
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the New Regulations.
B. Taxation of Owners of REMIC Residual Certificates
Allocation of the Income of the REMIC to the REMIC 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" below. Instead, each original
holder of a REMIC 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 such holder owns any REMIC 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. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such 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 REMIC Residual Certificates without regard to the timing or amounts
of cash distributions by the REMIC. Ordinary income derived from REMIC 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 REMIC Residual Certificates will be subject to tax
rules, described below, that differ from those that would apply if the REMIC
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 REMIC Residual Certificateholder may be required to include taxable
income from the REMIC 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 such a
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
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should consult their own tax advisors concerning the federal income
tax treatment of a REMIC Residual Certificate and the impact of such tax
treatment on the after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC 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 such REMIC Residual Certificateholder owns
such REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
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 REMIC Residual Certificate that purchased
such REMIC Residual Certificate at a price greater than (or less than) the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder. See "--Sale or Exchange of REMIC
Residual Certificates" below. It is not clear, however, whether such adjustments
will in fact be permitted or required and, if so, how they would be made. The
REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under "--Taxation of Owners of REMIC 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 (i) the
limitations on deductibility of investment interest expense
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and expenses for the production of income do not apply, (ii) all bad loans will
be deductible as business bad debts, and (iii) the limitation on the
deductibility of interest and expenses related to tax-exempt income will apply.
The REMIC's gross income includes interest, original issue discount income, and
market discount income, if any, on the Mortgage Loans, reduced by amortization
of any premium on the Mortgage Loans, plus income on reinvestment of cash flows
and reserve assets, plus any cancellation of indebtedness income upon allocation
of realized losses to the REMIC Regular Certificates. Note that the timing of
cancellation of indebtedness income recognized by REMIC Residual
Certificateholders resulting from defaults and delinquencies on Mortgage Assets
may differ from the time of the actual loss on the Mortgage Asset. The REMIC's
deductions include interest and original issue discount expense on the REMIC
Regular Certificates, servicing fees on the Mortgage Loans, other administrative
expenses of the REMIC and realized losses on the Mortgage Loans. The requirement
that REMIC 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 REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been acquired with discount or premium to the extent that
the REMIC's basis therein is less than or greater than its principal balance,
respectively. Any such 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 such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an 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
such a mortgage loan would be allocated among the principal payments thereon 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 REMIC
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 REMIC
Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize
the cost of the REMIC Residual Certificate as an offset to its share of the
REMIC's taxable income. However, REMIC 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 REMIC Residual
Certificates will be added to the issue price of the REMIC Regular Certificates
in determining the REMIC's initial basis in its assets. See "--Sale or Exchange
of REMIC Residual Certificates" below. For a discussion of possible adjustments
to income of a subsequent holder of a REMIC Residual Certificate to reflect any
difference between the actual cost of such REMIC Residual Certificate to such
holder and the adjusted basis such REMIC Residual Certificate would have in the
hands of an original REMIC Residual Certificateholder, see "--Allocation of the
Income of the REMIC to the REMIC Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net loss
would be allocated among the REMIC Residual Certificateholders in the same
manner as the REMIC's taxable income. The net loss allocable to any REMIC
Residual Certificate will not be deductible by the holder to the extent that
such net loss exceeds such holder's adjusted basis in such REMIC Residual
Certificate. Any net loss that is not currently deductible by reason of this
limitation may only be used by such REMIC Residual Certificateholder to offset
its share of the REMIC's taxable income in future periods (but not otherwise).
The ability of REMIC Residual Certificateholders that are individuals or closely
held corporations to deduct net losses may be subject to additional limitations
under the Code.
Mark to Market Rules. A Residual Certificate acquired after January 3,
1995 cannot be marked to market.
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Pass-Through of Non-Interest Expenses of the REMIC. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders of
the REMIC 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 REMIC Regular Certificateholders and
the REMIC Residual Certificateholders on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) 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 such a trust and
is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to holders of the related REMIC 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
REMIC Regular Certificate or a REMIC 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), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such 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 (i) 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such 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. REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual
Certificate (referred to in the Code as an "excess inclusion") for any calendar
quarter will be subject to federal income tax in all events. Thus, for example,
an excess inclusion (i) may not, except as described below, be offset by any
unrelated losses, deductions or loss carryovers of a REMIC Residual
Certificateholder; (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the REMIC 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" below); and
(iii) is not eligible for any reduction in the rate of withholding tax in the
case of a REMIC Residual Certificateholder that is a foreign investor. See
"--Non-U.S. Persons" below. 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
REMIC Residual Certificateholder, the excess inclusions for any calendar quarter
is the excess, if any, of (i) the income of such REMIC Residual
Certificateholder for that calendar quarter from its REMIC Residual Certificate
over (ii) the sum of the "daily accruals" (as defined below) for all days during
the calendar quarter on which the REMIC Residual Certificateholder holds such
REMIC Residual Certificate. For this purpose, the daily accruals with respect to
a REMIC Residual Certificate are determined by allocating to each day in the
calendar quarter its ratable portion of the product of the "adjusted issue
price" (as defined below) of the REMIC Residual Certificate at the beginning of
the calendar quarter and 120 percent of the "Federal long-term rate" in effect
at the time the REMIC Residual Certificate is issued. For this purpose, the
"adjusted issue price" of a REMIC Residual Certificate at the beginning of any
calendar quarter equals the issue price of the REMIC 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 REMIC
Residual Certificate before the beginning of such 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.
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In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
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
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
Payments. Any distribution made on a REMIC Residual Certificate to a
REMIC Residual Certificateholder will be treated as a non-taxable return of
capital to the extent it does not exceed the REMIC Residual Certificateholder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
exceeds such adjusted basis, it will be treated as gain from the sale of the
REMIC Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC 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 REMIC Residual Certificate (except that the
recognition of loss may be limited under the "wash sale" rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC 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 REMIC Residual
Certificate by a bank or thrift institution to which such section applies would
be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other REMIC Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage pool" (as
defined in Code Section 7701(i)) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject to
the "wash sale" rules of Code Section 1091. In that event, any loss realized by
the REMIC Residual Certificateholder on the sale will not be deductible, but,
instead, will increase such REMIC Residual Certificateholder's adjusted basis in
the newly acquired asset.
C. Prohibited Transactions and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction means
the disposition of a Mortgage Asset, the receipt of income from a source other
than a Mortgage Asset 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 Assets 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 such Trust Fund as a REMIC made after the day on
which such Trust Fund issues all of its interests could result in the imposition
of a tax on the Trust Fund equal to 100% of the value of the contributed
property (the "Contributions Tax"). No Trust Fund for any Series of Certificates
will accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to
treat such Trust Fund as a REMIC may also be subject to federal income tax at
the highest corporate rate on "net income from foreclosure property," determined
by reference to the rules applicable to real estate investment trusts. "Net
income from foreclosure property" generally means income from foreclosure
property other than qualifying income for a real estate investment trust.
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Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax that
may be imposed on a REMIC relating to any Series of Certificates arises out of
or results from (i) a breach of the related Master Servicer's, Trustee's or
Asset Seller's obligations, as the case may be, under the related Agreement for
such Series, such tax will be borne by such Master Servicer, Trustee or Asset
Seller, as the case may be, out of its own funds or (ii) the Asset Seller's
obligation to repurchase a Mortgage Loan, such tax will be borne by the Asset
Seller. In the event that such Master Servicer, Trustee or Asset Seller, as the
case may be, fails to pay or is not required to pay any such tax as provided
above, such tax will be payable out of the Trust Fund for such Series and will
result in a reduction in amounts available to be distributed to the
Certificateholders of such Series.
D. 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 such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC will not be subject to any Prohibited Transaction 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 REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
E. Administrative Matters
Solely for the purpose of the administrative provisions of the Code,
the REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the REMIC
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 REMIC 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 such person and other information.
F. Tax-Exempt Investors
Any REMIC 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 such tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See "--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" above.
G. Residual Certificate Payments--Non-U.S. Persons
Amounts paid to REMIC Residual Certificateholders who are not U.S.
Persons (see "--Taxation of Owners of REMIC Regular Certificates--Non-U.S.
Persons" above) are treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Amounts distributed to holders of REMIC
Residual Certificates should qualify as "portfolio interest," subject to the
conditions described in "--Taxation of Owners of REMIC Regular
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Certificates" above, 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 REMIC Residual Certificate that is excess inclusion income will not
be subject to reduction under any applicable tax treaties. See "--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" above. If the
portfolio interest exemption is unavailable, such amount will be subject to
United States withholding tax when paid or otherwise distributed (or when the
REMIC 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 REMIC Residual
Certificates do not have significant value). See "--Taxation of Owners of REMIC
Residual Certificates--Excess Inclusions" above. If the amounts paid to REMIC
Residual Certificateholders that are not U.S. Persons are effectively connected
with their conduct of a trade or business within the United States, the 30% (or
lower treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see "--Tax-Related Restrictions on Transfers of REMIC Residual
Certificates" below.
REMIC Regular Certificateholders and persons related to such holders
should not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
Tax-Related Restrictions on Transfers of REMIC Residual Certificates
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by "disqualified organizations" (as defined below).
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 (i) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated "excess inclusions" with respect to such interest for
periods after the transfer and (ii) 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 such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A "disqualified
organization" means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) 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 such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) 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 such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) 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 such
interest, be treated as a pass-through entity. The tax on pass-through entities
is generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common trust
funds and publicly-traded partnerships the tax shall apply only to taxable years
of such entities beginning after December 31, 1988. Under the Taxpayer Relief
Act of 1997, large partnerships
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(generally with 250 or more partners) will be taxable on excess inclusion income
as if all partners were disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC 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 such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified organization and (ii) 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 REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a Noneconomic REMIC
Residual Certificate to a "U.S. Person," as defined above, unless no significant
purpose of the transfer is to enable the transferor to impede the assessment or
collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC 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, (i) the
present value of the expected future distributions on the REMIC 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 (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) 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 such taxes associated with the residual interest as they become
due. If a transfer of a Noneconomic REMIC Residual Certificate is disregarded,
the transferor would continue to be treated as the owner of the REMIC 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
REMIC 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 such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United States trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expect that the REMIC will distribute to the
transferee amounts that will equal at least 30 percent of each excess inclusion,
and that such 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 REMIC 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
provisions in the REMIC Regulations regarding transfers of REMIC Residual
Certificates that have tax avoidance potential to foreign persons are effective
for all transfers after June 30, 1992. The Agreement will provide that no record
or beneficial ownership interest in a REMIC Residual Certificate may be
transferred, directly or indirectly, to a non-U.S. Person unless such person
provides the Trustee with a duly completed IRS Form 4224 and the Trustee
consents to such 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 REMIC Residual Certificates are advised to
consult their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
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Tax Characterization of a Trust Fund as a Partnership
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the nature of the income of the Trust Fund
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or (2) the issuance of the Certificates has been
structured as a private placement under an IRS safe harbor, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
A. Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. Special counsel to the Depositor will,
except as otherwise provided in the related Prospectus Supplement, advise the
Depositor that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, etc. The discussion below assumes that all payments on the Notes
are denominated in U.S. dollars. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 1/4% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
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Sale or Other Disposition. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note.
The adjusted tax basis of a Note to a particular Noteholder will equal
the holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Noteholder with respect to such Note. Any such gain or loss will be
capital gain or loss if the Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Such gain or loss generally will be long-term capital gain or loss if
the Note were held for more than one year. Long-term capital gains of
non-corporate taxpayers are subject to reduced maximum rates while short-term
capital gains are taxable at ordinary rates. The use of capital losses is
subject to limitations. Prospective investors should consult their own tax
advisors concerning the treatment of capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio interest",
and generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Depositor (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust Fund or the Asset Seller is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note 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 foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of special counsel to the Depositor, the IRS successfully asserted that
one or more of the Notes did not represent debt for federal income tax purposes,
the Notes might be treated as equity interests in the Trust Fund. If so treated,
the Trust Fund would likely be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
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B. Tax Consequences to Holder of the Certificates
Treatment of the Trust Fund as a Partnership. The Depositor will agree,
and the Certificateholders will agree by their purchase of Certificates, to
treat the Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Trust Fund, the
partners of the partnership being the Certificateholders, and the Notes being
debt of the partnership. However, the proper characterization of the arrangement
involving the Trust Fund, the Certificates, the Notes, the Trust Fund and the
Master Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each Certificateholder will be required
to separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such month,
including interest accruing at the Pass-Through Rate for such month and interest
on amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Mortgage Loans that corresponds to
any excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Company.
Based on the economic arrangement of the parties, this approach for allocating
Trust Fund income should be permissible under applicable treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to Certificateholders. Moreover, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
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An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Mortgage Loans may be greater or
less than the remaining principal balance of the Loans at the time of purchase.
If so, the Loan will have been acquired at a premium or discount, as the case
may be. (As indicated above, the Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Mortgage Loan by
Mortgage Loan basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. Pursuant to formal Treasury regulations issued May 8, 1997
under section 708 of the Code, if such a termination occurs, the Trust Fund (the
"old partnership") would be deemed to contribute its assets to a new partnership
(the "new partnership") in exchange for interests in the new partnership. Such
interests would be deemed distributed to the partners of the old partnership in
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Mortgage Loans would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust Fund does not expect to have any
other assets that would give rise to such special reporting requirements. Thus,
to avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day
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of such month. As a result, a holder purchasing Certificates may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Company will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to
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withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust Fund to change its
withholding procedures. In determining a holder's withholding status, the Trust
Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be enticed to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
New Withholding Regulations. On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the withholding, backup withholding and information reporting
rules described above. The New Regulations attempt to unify certification
requirements and modify reliance standards. The New regulations will generally
be effective for payments made after December 31, 1999, subject to certain
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the New Regulations.
Tax Treatment of Certificates as Debt for Tax Purposes
A. Characterization of the Certificates as Indebtedness
If the related Prospectus Supplement indicates that the Certificates
will be treated as indebtedness for federal income tax purposes, then based on
the application of existing law to the facts as set forth in the Trust Agreement
and other relevant documents and assuming compliance with the terms of the Trust
Agreement as in effect on the date of issuance of the Certificates, Brown & Wood
LLP, special tax counsel to the Depositor ("Tax Counsel"), will deliver its
opinion that the Certificates will be treated as debt instruments for federal
income tax purposes as of such date.
The Depositor and the Certificateholders will express in the related
Trust Agreement their intent that, for applicable tax purposes, the Certificates
will be indebtedness secured by the related Assets. The Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate Owner by
its acquisition of a beneficial interest in a Certificate, have agreed to treat
the Certificates as indebtedness for U.S. federal income tax purposes. However,
because different criteria are used to determine the non-tax accounting
characterization of the transaction, the Depositor may treat this transaction as
a sale of an interest in the related Assets for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be take into account in determining whether the substance of a transaction is
a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has
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assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel will analyze and
rely on several factors in reaching its opinion that the weight of the benefits
and burdens of ownership of the Mortgage Loans will be retained by the Depositor
and not transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
B. Taxation of Interest Income of Certificate Owners
Assuming that the Certificate Owners are holders of debt obligations
for U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimus discount, under the OID Regulations it is
possible that the Certificates could nevertheless be deemed to have been issued
with OID if the interest were not treated as "unconditionally payable" under the
OID Regulations. If such regulations were to apply, all of the taxable income to
be recognized with respect to the Certificates would be includible in income of
Certificate owners as OID, but would not be includible again when the interest
is actually received.
C. Possible Classification of the Trust Fund as a Partnership or
Association Taxable as a Corporation
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as a
corporation. The opinion of Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest therein)
to the Certificate Owners and that the proper classification of the legal
relationship between the Depositor and the Certificate Owners resulting form
this transaction is that of a partnership (including a publicly traded
partnership treated as a corporation), or an association taxable as a
corporation. Since Tax Counsel will advise that the Certificates will be treated
as indebtedness in the hands of the Certificateholders for U.S. federal income
tax purposes and that the entity constituted by the Trust will not be a publicly
traded partnership treated as a corporation or an association taxable as a
corporation, the Depositor will not attempt to comply with U.S. federal income
tax reporting requirements applicable to partnerships or corporations as such
requirements would apply if the Certificates were treated as indebtedness.
If it were determined that this transaction created an entity
classified as a corporation (including a publicly traded partnership taxable as
a corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives form the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor and
each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
D. Possible Classification as a Taxable Mortgage Pool
In relevant part, Section 7701(i) of the Code provides that any entity
(or portion of an entity) that is a "taxable mortgage pool" will be classified
as a taxable corporation and will not be permitted to file a consolidated
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U.S. federal income tax return with another corporation. Any entity (or portion
of any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that
all of the provisions of the Trust Agreement, as in effect on the date of
issuance, will be complied with, Tax Counsel will deliver its opinion that the
arrangement created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If
the IRS were to contend successfully (or future regulations were to provide)
that the arrangement created by the Trust Agreement is a taxable mortgage pool,
such arrangement would be subject to U.S. federal corporate income tax on its
taxable income generated by ownership of the Mortgage Loans. Such a tax might
reduce amounts available for distributions to Certificate Owners. The amount of
such a tax would depend upon whether distributions to Certificate Owners would
be deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
E. Foreign Investors
In general, subject to certain exception, interest (including OID) paid
on a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
F. Backup Withholding
Certain Certificate owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance of the Certificates, fail to supply the Trustee or the
Certificate Owners' brokers with their respective taxpayer identification
numbers, furnish an incorrect taxpayer identification number, fail to report
interest, dividends, or other "reportable payments" (as defined in the Code)
properly, or, under certain circumstances, fail to provide the Trustee of the
Certificate Owners' brokers with certified statements, under penalty of perjury,
that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only "Certificateholder" of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a
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statement that he or she is not to subject to backup withholding. Should a
non-exempt Certificate Owner fail to provide the required certification, the
Participants or Indirect Participants (or the Paying Agent) will be required to
withhold 31% of the interest (and principal) otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
federal income tax liability.
G. New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
FASIT Securities
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for that Series and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature of
the Securityholders' interest in the FASIT are met on a continuing basis, and
(iii) the Trust Fund is not a regulated investment company as defined in Section
851(a) of the Code.
Asset Composition. In order for a Trust Fund (or one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ("IO") type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on FASIT interests, (v) contract rights to acquire qualifying debt
instruments or qualifying hedging instruments, (vi) FASIT regular interests, and
(vii) REMIC regular interests. Permitted assets do not include any debt
instruments issued by the holder of the FASIT's ownership interest or by any
person related to such holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic
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corporation. In the case of Series that include FASIT Ownership Securities, the
ownership interest will be represented by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates
- --Variable Rate REMIC Regulation Certificate.
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"High-Yield Interest." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Material Federal Income Tax Consequences--FASIT
Securities--Tax Treatment of FASIT Regular Securities --Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of holders of REMIC Regular
Securities, holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Securityholder and a
principal payment on such Security will be treated as a return of capital to the
extent that the Securityholder's basis is allocable to that payment. FASIT
Regular Securities issued with original issue discount or acquired with market
discount or premium generally will treat interest and principal payments on such
Securities in the same manner described for REMIC Regular Securities. See
"Material Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates" "--Original Issue Discount and Premium" and "--Market
Discount" and "--Premium" above. High-Yield Securities may be held only by fully
taxable domestic corporations, other FASITs, and certain securities dealers.
Holders of High-Yield Securities are subject to limitations on their ability to
use current losses or net operating loss carryforwards or carrybacks to offset
any income derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Sale,
Exchange or Redemption." In addition, if a FASIT Regular Security becomes wholly
or partially worthless as a result of Default and
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Delinquencies of the underlying Assets, the holder of such Security should be
allowed to deduct the loss sustained (or alternatively be able to report a
lesser amount of income). See "Material Federal Income Tax Consequences
- --REMICs--Taxation of Owners of REMIC Regular Certificates", "--Effects of
Default and Delinquencies" and "--Treatment of Realized Losses."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Material Federal Income Tax Consequences--REMICs." In
addition, FASIT Regular Securities held by a financial institution to which
Section 585 of the Code applies will be treated as evidences of indebtedness for
purposes of Section 582(c)(1) of the Code. FASIT Securities will not qualify as
"Government Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See "Material Federal Income Tax Consequences--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
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The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders of
REMIC Securities would be subject. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Information Reporting and Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Offered Securities. 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 should consult their own tax
advisors with respect to the various state and local tax consequences of an
investment in the Offered Securities.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under Section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Securities without
regard to the ERISA considerations described below, subject to other applicable
federal and state law. However, any such governmental or church plan which is
qualified under Section 401(a) of the Code and exempt from taxation under
Section 501(a) of the Code is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
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.
Prohibited Transactions
General
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions involving a Plan and its assets
unless a statutory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes (or, in some cases, a
civil penalty may be assessed pursuant to Section 502(i) of ERISA) on parties in
interest which engage in non-exempt prohibited transactions.
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The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trust Fund. In such an event, the Asset Seller, the Master Servicer,
the Trustee, any insurer of the Assets and other persons, in providing services
with respect to the assets of the Trust Fund, may be parties in interest,
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of Section 406 of ERISA (and of
Section 4975 of the Code), with respect to transactions involving such assets
unless such transactions are subject to a statutory or administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity participation
in the entity will be significant if immediately after any acquisition of any
equity interest in the entity, "benefit plan investors" in the aggregate, own at
least 25% of the value of any class of equity interest. "Benefit plan investors"
are defined as Plans as well as employee benefit plans not subject to ERISA
(e.g., governmental plans). The 25% limitation must be met with respect to each
class of certificates, regardless of the portion of total equity value
represented by such class, on an ongoing basis.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be "equity interest" under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21459 (1990) (the "Exemption") which exempts from the application of
the prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Merrill Lynch, Pierce, Fenner & Smith Incorporated or any of its affiliates is
the sole underwriter or the manager or co-manager of the underwriting syndicate;
and (2) the servicing, operation and management of such asset-backed
pass-through trusts, provided that the general conditions and certain other
conditions set forth in the Exemption are satisfied. With respect to a series of
Notes, the related Prospectus Supplement will discuss whether the Exemption may
be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates or a
transaction in connection with the servicing, operation and management of the
Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as
favorable to the investing Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three
highest generic rating categories from any of Duff & Phelps Credit
Rating Co.,
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Fitch IBCA, Inc., Moody's Investors Service, Inc. and Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc.
(4) The Trustee is not an affiliate of the Underwriter, the
Asset Seller, the Master Servicer, any insurer of the Mortgage Assets,
any borrower whose obligations under one or more Assets constitute more
than 5% of the aggregate unamortized principal balance of the assets in
the Trust Fund, or any of their respective affiliates (the "Restricted
Group");
(5) The sum of all payments made to and retained by the
Underwriter in connection with the distribution of the Certificates
represents not more than reasonable compensation for underwriting such
Certificates; the sum of all payments made to and retained by the Asset
Seller pursuant to the sale of the Assets to the Trust Fund represents
not more than the fair market value of such Assets; the sum of all
payments made to and retained by the Master Servicer represent not more
than reasonable compensation for the Master Servicer's services under
the Agreement and reimbursement of the Master Servicer's reasonable
expenses in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933 as
amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any Securities on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Securities, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions. In
particular, in connection with a contemplated purchase of Securities
representing a beneficial ownership interest in a pool of single family
residential first mortgage loans, such Plan fiduciary should consider the
availability of the Exemption or Prohibited Transaction Class Exemption 83-1
("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. The Prospectus Supplement with respect to a series of Securities may
contain additional information regarding the application of the Exemption, PTCE
83-1, or any other exemption, with respect to the Securities offered thereby.
PTCE 83-1 is not applicable to manufactured housing contract pool investment
trusts or multifamily mortgage pool investment trusts.
Purchasers that are insurance companies should consult with their
counsel with respect to the recent United States Supreme Court case interpreting
the fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance
Co. v. Harris Trust & Savings Bank (decided December 13, 1993). In John Hancock,
the Supreme Court ruled that assets held in an insurance company's general
account may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers should determine whether the decision
affects their ability to make purchases of the Securities. In particular, such
an insurance company should consider the exemptive relief granted by Labor for
transactions involving insurance company general accounts in Prohibited
Transactions Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance
in one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which classes of the Securities, if
any, will constitute "mortgage related securities" ("SMMEA Securities") for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
SMMEA Securities will constitute legal investments for
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persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including, but not limited to, state chartered savings banks,
commercial banks, savings and loan associations and insurance companies, as well
as trustees and state government employee retirement systems) created pursuant
to or existing under the laws of the United States or of any state (including
the District of Columbia and Puerto Rico) whose authorized investments are
subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
such entities. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Maryland, Michigan, Missouri, Nebraska, New
Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia and West
Virginia enacted legislation before the October 4, 1991 cutoff established by
SMMEA for such enactments, limiting to varying extents the ability of certain
entities (in particular, insurance companies) to invest in mortgage related
securities, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA. Investors affected by such legislation
will be authorized to invest in SMMEA Certificates only to the extent provided
in such legislation. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
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
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities 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 such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, federal credit unions should review the National Credit Union
Administration ("NCUA") 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 NCUA's
regulation "Investment and Deposit Activities" (12 C.F.R. Part 703), which sets
forth certain restrictions on investment by federal credit unions in mortgage
related securities.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of Offered
Securities. Any financial institution which is subject to the jurisdiction of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift
Supervision ("OTS"), the NCUA or other federal or state agencies with similar
authority should review any applicable rules, guidelines and regulations prior
to purchasing any Offered Security. The Federal Financial Institutions
Examination Council, for example, has issued a Supervisory Policy Statement on
Securities Activities effective February 10, 1992 (the "Policy Statement")
setting forth guidelines for and significant restrictions on investments in
"high-risk mortgage securities." The Policy Statement has been adopted by the
Comptroller of the Currency, the Federal Reserve Board, the FDIC, the OTS and
the NCUA (with certain modifications), with respect to the depository
institutions that they regulate. The Policy Statement generally indicates that a
mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance that any classes of Offered Securities will not be treated
as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps", which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set
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aside or superseded by the FDIC. Similar policy statements have been issued by
regulators having jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance industry. Institutions subject to
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of
Offered Securities offered pursuant to this Prospectus will not constitute
"mortgage related securities" under SMMEA. The appropriate characterization of
this Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
The Depositor will make no representations as to the proper
characterization of the Offered Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors to
purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Offered Securities) may adversely affect the liquidity of
the Offered Securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Securities
of any class constitute legal investments or are subject to investment, capital
or other restrictions.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") acting as underwriter with other
underwriters, if any, named therein. Merrill Lynch is an affiliate of the
Depositor. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Offered Securities agreed to
be purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of Offered Securities
in the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch and/or any other person or
persons named therein acting as agent or in some cases as principal with respect
to Offered Securities that it has previously purchased or agreed to purchase. If
Merrill Lynch or such persons act as agents in the sale of Offered Securities,
they will receive a selling commission with respect to such Offered Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance or notional amount of such Offered Securities as of the
Cut-off Date. The exact percentage for each series of Securities will be
disclosed in the related Prospectus Supplement. To the extent that Merrill Lynch
or such persons elect to purchase Offered Securities as principal, they may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through
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underwriters will contain information regarding the nature of such offering and
any agreements to be entered into between the Depositor and purchasers of
Offered Securities of such series.
This Prospectus may be used, to the extent required, by Merrill Lynch
or any other Underwriter in connection with offers and sales related to market
making transactions.
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and its affiliates
may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's or Asset
Seller's Assets pending the sale of such Assets or interests therein, including
the Securities.
As to each series of Securities, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any non-investment-grade class may be initially retained by the Depositor or
Asset Seller, and may be sold by the Depositor or Asset Seller at any time.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Securities, including
certain federal income tax consequences, will be passed upon for the Depositor
by Brown & Wood LLP, New York, New York. Certain matters with respect to
Delaware law will be passed upon for the Depositor by Richards, Layton & Finger,
P.A., Wilmington, Delaware.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities
that they shall have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by a Rating Agency.
Ratings on asset backed securities address the likelihood of receipt by
securityholders of all distributions on the underlying assets. These ratings
address the structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying assets and the credit quality of the
guarantor, if any. Ratings on asset backed securities do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, securityholders might suffer a lower than anticipated yield, and,
in addition, holders of stripped interest certificates in extreme cases might
fail to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
1986 Act..................................................... 70, 74
Accrual Securities........................................... 9, 27
Accrued Security Interest.................................... 29
adjusted issue price......................................... 71, 83
Agreement.................................................... 36
Agreements................................................... 9
Amortizable Bond Premium Regulations......................... 67
an accrual period............................................ 76
Applicable Amount............................................ 83
ARM Loans.................................................... 20, 70
Asset Seller................................................. 19
Assets....................................................... 1, 6, 18
Available Distribution Amount................................ 28
Balloon Mortgage Loans....................................... 17
benefit plan investors....................................... 100
Book-Entry Securities........................................ 28
Buydown Mortgage Loans....................................... 26
Buydown Period............................................... 26
capital asset................................................ 72, 79
Cash Flow Agreement.......................................... 8, 22
Cash Flow Agreements......................................... 1
Cede......................................................... 3, 33
CEDEL........................................................ 34
CEDEL Participants........................................... 34
Certificateholder............................................ 95
Certificates................................................. 1, 6, 101
clearing agency.............................................. 33
clearing corporation......................................... 33, 38
Closing Date................................................. 74
Code......................................................... 11
Collection Account........................................... 40
Commission................................................... 3
Contributions Tax............................................ 84
Cooperative.................................................. 35, 56
Cooperative Loans............................................ 56
Cooperatives................................................. 19
Covered Trust................................................ 16, 53
CPR.......................................................... 25
Credit Support............................................... 1, 8, 22
Crime Control Act............................................ 64
Cut-off Date................................................. 10
daily accruals............................................... 83
Daily portions............................................... 71, 75
Deferred Interest............................................ 71
Definitive Securities........................................ 28, 36
Depositor.................................................... 6, 19
Determination Date........................................... 28
disqualified organization.................................... 86
Distribution Date............................................ 10
DTC.......................................................... 3, 33
105
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PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
Due Period................................................... 28
Eligible Corporations........................................ 97
equity of redemption......................................... 59
ERISA........................................................ 12, 99
Euroclear.................................................... 34
Euroclear operator........................................... 34
Euroclear Participants....................................... 34
Events of Default............................................ 49
Evidences of indebtedness.................................... 72, 73, 79, 84
Excess inclusion............................................. 83
excess inclusions............................................ 86
excess servicing............................................. 69
Exchange Act................................................. 4
Exemption.................................................... 100
FASIT Qualification Test..................................... 96
FDIC......................................................... 40, 102
Federal long-term rate....................................... 83
FHLMC........................................................ 47
foreign person............................................... 87, 89
Government Securities........................................ 1, 7, 19, 73, 98
Grantor Trust Certificates................................... 11
High-Yield Interest.......................................... 97
Home Equity Loans............................................ 7, 20
Home Improvement Contracts................................... 7, 20
Indenture.................................................... 27, 36
Indenture Trustee............................................ 36
Indirect Participants........................................ 34
Insurance Proceeds........................................... 40
L/C Bank..................................................... 54
Labor........................................................ 100
Legislative History.......................................... 70
Liquidation Proceeds......................................... 40
Loan-to-Value Ratio.......................................... 19
Mark-to-Market Regulations................................... 82
Master REMIC................................................. 73
Master Servicer.............................................. 6
MBS.......................................................... 1, 6, 18
MBS Agreement................................................ 21
MBS Issuer................................................... 21
MBS Servicer................................................. 21
MBS Trustee.................................................. 21
Merrill Lynch................................................ 103
Model Law.................................................... 103
Mortgage Assets.............................................. 1, 19
Mortgage Loan Group.......................................... 9, 27
Mortgage Loans............................................... 1, 6, 18
Mortgage Notes............................................... 19
Mortgage Rate................................................ 7, 20
Mortgage related securities.................................. 101-103
Mortgages.................................................... 19, 56
mortgagor.................................................... 56
NCUA......................................................... 102
new partnership.............................................. 91
New Regulations.............................................. 72, 81, 93, 96
Nonrecoverable Advance....................................... 31
Notes........................................................ 1, 6
106
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PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
Offered Securities........................................... 1
OID.......................................................... 65, 67
OID Regulations.............................................. 67
Old partnership.............................................. 91
Originator................................................... 19
OTS.......................................................... 102
Ownership interests.......................................... 96
Participants................................................. 33, 35
Parties in interest.......................................... 99
pass-through entity.......................................... 86
pass-through interest holder................................. 83
pass-through interest holders................................ 80
Pass-Through Rate............................................ 9, 29
passive losses............................................... 81
Payment Lag Certificates..................................... 79
Permitted Investments........................................ 40
phantom income............................................... 81
plan assets.................................................. 101
Plans........................................................ 99
Policy Statement............................................. 102
Pooling and Servicing Agreement.............................. 36
portfolio income............................................. 81
portfolio interest........................................... 85, 89, 93
Pre-Funded Amount............................................ 8, 22
pre-issuance accrued interest................................ 79
prepayment................................................... 24
Prepayment Assumption........................................ 70
Prohibited Transactions...................................... 84, 99
Prohibited Transactions Tax.................................. 84
PTCE 83-1.................................................... 101
Purchase Price............................................... 39
qualified mortgage........................................... 73
qualified stated interest.................................... 74, 88
Rating Agency................................................ 13
real estate assets........................................... 11, 69, 73, 74, 98
Record Date.................................................. 28
Refinance Loans.............................................. 19
Regular interests............................................ 11, 96
Related Proceeds............................................. 31
Relief Act................................................... 64
REMIC........................................................ 11
REMIC Certificates........................................... 73
REMIC Regular Certificateholders............................. 74
REMIC Regular Certificates................................... 11, 73
REMIC Regulations............................................ 65
REMIC Residual Certificateholder............................. 80
REMIC Residual Certificates.................................. 11, 73
Restricted Group............................................. 101
Retained Interest............................................ 47
RICO......................................................... 64
Securities................................................... 1, 6
Securities Act............................................... 3
Security..................................................... 37
Security Balance............................................. 9, 30
Security Owners.............................................. 34
Securityholder............................................... 34
107
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PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
Securityholders.............................................. 3, 18
senior lien.................................................. 16
Senior Securities............................................ 9, 27
Servicing Agreement.......................................... 36
Servicing Standard........................................... 43
Short-Term Note.............................................. 88
Single Family Mortgage Loan.................................. 19
Single Family Properties..................................... 6
Single Family Property....................................... 19
single family residences..................................... 73
single-class REMIC........................................... 80
SMMEA........................................................ 13, 101
SMMEA Securities............................................. 101
SPA.......................................................... 25
Stripped ARM Obligations..................................... 71
Stripped Bond Certificates................................... 68
stripped bonds............................................... 66, 68
Stripped Coupon Certificates................................. 68
stripped coupons............................................. 66, 68
Stripped Interest Securities................................. 9, 27
Stripped Principal Securities................................ 9, 27
Sub-Servicer................................................. 43
Sub-Servicing Agreement...................................... 43
Subordinate Securities....................................... 9, 27
Subsequent Assets............................................ 8, 22
Subsidiary REMIC............................................. 73
Super-Premium Certificates................................... 75
tax avoidance potential...................................... 87
Tax Counsel.................................................. 93
taxable mortgage pool........................................ 84, 94
Terms and Conditions......................................... 35
Title V...................................................... 63
Title VIII................................................... 64
Trust Agreement.............................................. 36
Trust Assets................................................. 3
Trust Fund................................................... 1, 6
Trustee...................................................... 6
U.S. Person.................................................. 65, 87
UCC.......................................................... 33
Underlying MBS............................................... 19
Underlying Mortgage Loans.................................... 19
Value........................................................ 19
Voting Rights................................................ 49
Warranting Party............................................. 38
Whole Loans.................................................. 19
108
<PAGE>
$275,556,000
BANC ONE FINANCIAL SERVICES HOME EQUITY LOAN TRUST 1999-1,
HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1999-1
BANC ONE FINANCIAL SERVICES, INC.
SELLER
BANK ONE, INDIANA, NATIONAL ASSOCIATION
MASTER SERVICER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
------------------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------------------
MERRILL LYNCH & CO. FIRST CHICAGO CAPITAL MARKETS, INC.
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus supplement or the
prospectus and, if given or made, such information or representation must not be
relied upon. This prospectus supplement and the prospectus do not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
Class A Certificates offered hereby, nor an offer of the Class A Certificates in
any state or jurisdiction in which, or to any person to whom, such offer would
be unlawful. The delivery of this prospectus supplement or the prospectus at any
time does not imply that information herein or therein is correct as of any time
subsequent to its date; however, if any material change occurs while this
prospectus supplement or the prospectus is required by law to be delivered, this
prospectus supplement or the prospectus will be amended or supplemented
accordingly.
Until the expiration of 90 days after the date of this prospectus
supplement, all dealers selling the Class A Certificates, whether or not
participating in this distribution, will deliver a prospectus supplement and the
prospectus to which it relates. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus supplement and prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
MARCH 23, 1999
