Prospectus Supplement dated March 22, 2000 (to Prospectus dated September 10,
1999)
$415,715,000 (APPROXIMATE)
NEW CENTURY HOME EQUITY LOAN TRUST, SERIES 2000-NC1
ASSET BACKED PASS-THROUGH CERTIFICATES
NEW CENTURY MORTGAGE SECURITIES, INC.
DEPOSITOR
NEW CENTURY MORTGAGE CORPORATION
MASTER SERVICER
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-10 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 4 IN THE PROSPECTUS.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
OFFERED CERTIFICATES
The trust created for the Series 2000-NC1 certificates will
hold a pool of one- to four-family residential first lien
mortgage loans. The trust will issue four classes of offered
certificates. You can find a list of these classes, together
with their initial certificate principal balances and
pass-through rates, on Page S-4 of this prospectus
supplement. Credit enhancement for all of the offered
certificates will be provided in the form of subordination
and overcollateralization.
UNDERWRITING
Salomon Smith Barney Inc., as underwriter, will offer to the
public the offered certificates at varying prices to be
determined at the time of sale. The proceeds to the
depositor from the sale of the underwritten certificates
will be 99.625% of the aggregate initial certificate
principal balance of the offered certificates. See "Method
of Distribution."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
SALOMON SMITH BARNEY
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We provide information to you about the offered certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
New Century Mortgage Securities, Inc.'s principal offices are located at 18400
Von Karman, Irvine California 92612 and its phone number is (949) 440-7030.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement...........................................S-3
Risk Factors..............................................................S-10
Use of Proceeds...........................................................S-16
The Mortgage Pool.........................................................S-17
Yield on the Certificates.................................................S-34
Description of the Certificates...........................................S-45
The Seller................................................................S-68
Pooling and Servicing Agreement...........................................S-68
Federal Income Tax Consequences...........................................S-77
Method of Distribution....................................................S-79
Secondary Market..........................................................S-80
Legal Opinions............................................................S-80
Ratings...................................................................S-81
Legal Investment..........................................................S-81
Considerations for Benefit Plan Investors.................................S-82
Annex I....................................................................I-1
S-2
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE CERTIFICATES
OFFERED BY THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERED CERTIFICATES,
READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE ENTIRE ACCOMPANYING
PROSPECTUS.
<TABLE>
<CAPTION>
<S> <C>
Title of Series.............................New Century Home Equity Loan Trust, Series 2000-NC1
Asset Backed Pass-Through Certificates.
Cut-off Date................................March 1, 2000.
Closing Date................................On or about March 24, 2000.
Depositor...................................New Century Mortgage Securities, Inc., a Delaware
corporation. SEE "THE DEPOSITOR" IN THE PROSPECTUS.
Originator and Master Servicer..............New Century Mortgage Corporation, a California
corporation. SEE "POOLING AND SERVICING AGREEMENT--THE
MASTER SERVICER" IN THIS PROSPECTUS SUPPLEMENT.
Seller......................................NC Capital Corporation, a California corporation. SEE
"THE SELLER" IN THIS PROSPECTUS SUPPLEMENT.
Trustee.....................................Firstar Bank, N.A., a national banking association, will be
the trustee of the trust. SEE "POOLING AND SERVICING
AGREEMENT--THE TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT.
Trust Administrator.........................U.S. Bank National Association, a national banking
association, will perform administrative functions on
behalf of the trustee and will act as the initial paying agent,
certificate registrar and custodian. SEE "POOLING AND
SERVICING AGREEMENT--THE TRUST ADMINISTRATOR" IN THIS
PROSPECTUS SUPPLEMENT.
Distribution Dates..........................Distributions on the offered certificates will be made on the
25th day of each month, or, if that day is not a business
day, on the next succeeding business day, beginning in April 2000.
Offered Certificates........................Only the certificates listed in the immediately following
table are being offered by this prospectus supplement.
Each class of offered certificates will have the initial
certificate principal balance and pass-through rate set forth
or described in the immediately following table.
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================================
INITIAL INITIAL
CERTIFICATE PASS- CERTIFICATE PASS-
PRINCIPAL THROUGH PRINCIPAL THROUGH
CLASS BALANCE RATE* CLASS BALANCE RATE*
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A............... $ 335,150,000 Variable M-2................. $27,929,000 Variable
M-1............. $ 33,300,000 Variable M-3................. $19,336,000 Variable
========================================================================================================================
</TABLE>
*The pass-through rate on each class of offered certificates is based on
one-month LIBOR plus an applicable spread, subject to a rate cap equal to the
weighted average net mortgage rate, less the pass-through rate for the Class IO
Certificates, as described in this prospectus supplement under "Description of
the Certificates--Pass-Through Rates."
THE TRUST
The depositor will establish a trust with respect to the certificates under the
pooling and servicing agreement, dated as of the cut-off date, among the
depositor, the master servicer, the trustee and the trust administrator. There
are twelve classes of certificates representing beneficial interests in the
trust. SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and principal on the offered
certificates will be made only from payments received in connection with the
mortgage loans.
THE MORTGAGE LOANS
References to percentages of the mortgage loans under this section are
calculated based on the aggregate principal balance of the mortgage loans as of
the cut-off date.
The trust will contain approximately 3,536 conventional, one- to four-family,
adjustable-rate mortgage loans secured by first liens on residential real
properties.
The mortgage loans have an aggregate principal balance of approximately
$429,680,172 as of the cut-off date. The mortgage loans have original terms to
maturity of not greater than 30 years and the following characteristics as of
the cut-off date:
Range of mortgage
rates: 6.350% to 16.950%.
Weighted average
mortgage rate : 10.253%.
Range of gross
margins: 4.750% to 9.750%.
Weighted average
gross margin: 6.177%.
Range of minimum
mortgage rates: 6.350% to 16.950%.
Weighted average
minimum mortgage
rate: 10.253%.
Range of maximum 13.350% to
mortgage rates: 23.950%.
Weighed average
maximum mortgage
rate: 17.250%.
Weighed average
remaining term to 29 years and 9
stated maturity: months.
S-4
<PAGE>
Range of principal $16,982 to
balances: $841,800.
Average principal
balance: $121,516.
Range of original loan-
to-value ratios: 10.95% to 95.00%.
Weighted average
original loan-to-value
ratio: 77.60%.
Weighted average next
adjustment date: February 2002.
The interest rate on each mortgage loan will adjust semi-annually on each
adjustment date to equal the sum of six-month LIBOR and the related gross
margin, subject to periodic and lifetime limitations, as described under "The
Mortgage Pool--General Description of the Mortgage Loans" in this prospectus
supplement. SEE ALSO "THE MORTGAGE POOL--THE INDEX" IN THIS PROSPECTUS
SUPPLEMENT.
With respect to approximately 98.94% of the mortgage loans, the first adjustment
date will occur only after an initial period of approximately two years or three
years, as more fully described under "The Mortgage Pool--General Description of
the Mortgage Loans" in this prospectus supplement.
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
OFFERED CERTIFICATES. The Class A Certificates, the Class M-1 Certificates, the
Class M-2 Certificates and the Class M-3 Certificates are the only classes of
certificates offered by this prospectus supplement. The offered certificates
will have the characteristics shown in the table on page S-4 and as described in
this prospectus supplement.
The pass-through rate on the Class A Certificates, the Class M-1 Certificates,
the Class M-2 Certificates and the Class M-3 Certificates is variable and will
be calculated for each distribution date as described in this prospectus
supplement under "Description of the Certificates--Pass-Through Rate."
The pass-through rate on the Class A Certificates, the Class M-1 Certificates,
the Class M-2 Certificates and the Class M-3 Certificates is a rate per annum
based on one-month LIBOR plus an applicable spread, subject to a rate cap equal
to the weighted average mortgage rate, less the pass-through rate for the Class
IO Certificates, the servicing fee and the administration fee. The initial
spread relating to the Class A Certificates is 0.27% per annum. The initial
spread relating to the Class M-1 Certificates is 0.46% per annum. The initial
spread relating to the Class M-2 Certificates is 0.87% per annum. The initial
spread relating to the Class M-3 Certificates is 2.10% per annum. Each spread is
subject to increase as more fully described under "Description of the
Certificates--Pass-Through Rates" in this prospectus supplement.
The offered certificates will be sold by the depositor to the underwriter on the
closing date.
The offered certificates will initially be represented by one or more global
certificates registered in the name of a nominee of the Depository Trust Company
in the United States, or Clearstream Banking Luxembourg and the Euroclear
System, in Europe in minimum denominations of $100,000 and
S-5
<PAGE>
integral multiples of $1.00 in excess of the minimum denominations. SEE
"DESCRIPTION OF THE CERTIFICATES --REGISTRATION OF THE OFFERED CERTIFICATES" IN
THIS PROSPECTUS SUPPLEMENT.
CLASS IO CERTIFICATES. The Class IO Certificates are not offered by this
prospectus supplement. The Class IO Certificates are interest-only certificates
and will not have a certificate principal balance. The Class IO Certificates
will have a pass-through rate as set forth under "Description of the
Certificates--Pass- Through Rates" in this prospectus supplement which is
payable on the notional amount described under "Description of the
Certificates--Glossary of Terms" in this prospectus supplement. Interest will be
payable on the Class IO Certificates according to the priorities set forth under
"Description of the Certificates--Interest Distributions on the Offered
Certificates and the Class IO Certificates" in this prospectus supplement. The
Class IO Certificates will be delivered to a wholly-owned bankruptcy remote
subsidiary of the seller as partial consideration for the mortgage loans.
CLASS CE CERTIFICATES. The Class CE Certificates are not offered by this
prospectus supplement. The Class CE Certificates will have an initial
certificate principal balance of approximately $13,965,072, which is equal to
the initial overcollateralization required by the pooling and servicing
agreement. The Class CE Certificates initially evidence an interest of
approximately 3.25% in the trust. The Class CE Certificates will be delivered to
a wholly-owned bankruptcy remote subsidiary of the seller as partial
consideration for the mortgage loans.
CLASS P CERTIFICATES. The Class P Certificates are not offered by this
prospectus supplement. The Class P Certificates will have an initial certificate
principal balance of $100 and will not be entitled to distributions in respect
of interest. The Class P Certificates will be entitled to all prepayment charges
received in respect of the mortgage loans. The Class P Certificates will be
delivered to a wholly-owned bankruptcy remote subsidiary of the seller as
partial consideration for the mortgage loans.
CLASS R-I, CLASS R-II, CLASS R-III, CLASS R- IV AND CLASS R-V CERTIFICATES. The
Class R- I, Class R-II, Class R-III, Class R-IV and Class R-V Certificates, or
Residual Certificates, are not offered by this prospectus supplement and are the
classes of certificates representing the residual interests in the trust. The
Residual Certificates will be delivered to a wholly-owned bankruptcy remote
subsidiary of the seller as partial consideration for the mortgage loans.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Class A
Certificates consists of subordination and overcollateralization, each as
described in this section and under "Description of the Certificates--Credit
Enhancement" and "--Overcollateralization Provisions" in this prospectus
supplement.
SUBORDINATION. The rights of the holders of the Class M-1 Certificates, the
Class M-2 Certificates, the Class M-3 Certificates and the Class CE Certificates
to receive distributions will be subordinated, to the extent described in this
prospectus supplement, to the rights of the holders of the Class A Certificates.
S-6
<PAGE>
In addition, to the extent described in this prospectus supplement,
o the rights of the holders of the Class M-2 Certificates, the Class M-3
Certificates and the Class CE Certificates will be subordinated to the
rights of the holders of the Class M-1 Certificates,
o the rights of the holders of the Class M-3 Certificates and the Class CE
Certificates will be subordinated to the rights of the holders of the Class
M-2 Certificates and
o the rights of the holders of the Class CE Certificates will be subordinated
to the rights of the holders of the Class M-3 Certificates, in each case to
the extent described under "Description of the Certificates--Allocation of
Losses; Subordination" in this prospectus supplement.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
the more senior certificates protection against realized losses on the mortgage
loans, as described under "Description of the Certificates--Allocation of
Losses; Subordination" in this prospectus supplement.
OVERCOLLATERALIZATION. The aggregate principal balance of the mortgage loans as
of the cut-off date will exceed the aggregate certificate principal balance of
the offered certificates and the Class P Certificates on the closing date by
approximately $13,965,072, which is equal to the initial certificate principal
balance of the Class CE Certificates. This amount represents approximately 3.25%
of the aggregate principal balance of the mortgage loans as of the cut-off date,
and is the initial amount of overcollateralization required to be provided by
the mortgage pool under the pooling and servicing agreement. SEE "DESCRIPTION OF
THE CERTIFICATES --OVERCOLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS
SUPPLEMENT.
ALLOCATION OF LOSSES. If, on any distribution date, there is not sufficient
excess interest or overcollateralization, represented by the Class CE
Certificates, to absorb realized losses on the mortgage loans as described under
"DESCRIPTION OF THE CERTIFICATES--OVERCOLLATERALIZATION PROVISIONS" in this
prospectus supplement, then realized losses on the mortgage loans will be
allocated to the Class M-3 Certificates, the Class M-2 Certificates and the
Class M-1 Certificates, in that order. The pooling and servicing agreement does
not permit the allocation of realized losses on the mortgage loans to the Class
A Certificates or the Class P Certificates; however, investors in the Class A
Certificates should realize that under certain loss scenarios, there will not be
enough principal and interest on the mortgage loans to pay the Class A
Certificates all interest and principal amounts to which these certificates are
then entitled. SEE "DESCRIPTION OF THE CERTIFICATES --ALLOCATION OF LOSSES;
SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT.
Once realized losses are allocated to the Class M-3 Certificates, the Class M-2
Certificates or the Class M-1 Certificates, their certificate principal balances
will be permanently reduced by the amount so allocated and no distributions with
respect to the written down amounts will be made on any distribution date.
P&I ADVANCES
The master servicer is required to advance delinquent payments of principal and
interest on the mortgage loans, subject to the
S-7
<PAGE>
limitations described under "DESCRIPTION OF THE CERTIFICATES--P&I ADVANCES" in
this prospectus supplement. The master servicer is entitled to be reimbursed for
these advances, and therefore these advances are not a form of credit
enhancement. SEE "DESCRIPTION OF THE CERTIFICATES--P&I ADVANCES" IN THIS
PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE SECURITIES--ADVANCES BY SERVICER
IN RESPECT OF DELINQUENCIES ON THE TRUST FUND ASSETS" IN THE PROSPECTUS.
OPTIONAL TERMINATION
At its option, the master servicer may purchase all of the mortgage loans,
together with any properties in respect of the mortgage loans acquired on behalf
of the trust, and thereby effect termination and early retirement of the
certificates, after the aggregate principal balance of the mortgage loans, and
properties acquired in respect of the mortgage loans, remaining in the trust has
been reduced to less than 10% of the aggregate principal balance of the mortgage
loans as of the cut-off date. SEE "POOLING AND SERVICING AGREEMENT--
TERMINATION" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE SECURITIES--
TERMINATION OF THE TRUST FUND AND DISPOSITION OF THE TRUST FUND ASSETS" IN THE
PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
Five separate elections will be made to treat designated portions of the trust
as real estate mortgage investment conduits for federal income tax purposes. SEE
"FEDERAL INCOME TAX CONSEQUENCES --REMICS--CHARACTERIZATION OF INVESTMENTS IN
REMIC CERTIFICATES" IN THE PROSPECTUS.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax Consequences" in
this prospectus supplement and in the prospectus.
RATINGS
It is a condition to the issuance of the certificates that the offered
certificates receive the following ratings from Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc.:
OFFERED DUFF &
CERTIFICATES MOODY'S PHELPS FITCH
------------ ------- ------ -----
Class A Aaa AAA AAA
Class M-1 Aa2 AA AA
Class M-2 A2 A A
Class M-3 Baa2 BBB BBB
A security rating does not address the frequency of prepayments on the mortgage
loans or the corresponding effect on yield to investors. SEE "YIELD ON THE
CERTIFICATES" AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "YIELD
CONSIDERATIONS" IN THE PROSPECTUS.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, or SMMEA, for so long as they are rated not lower than
the second highest rating category by one or more nationally recognized
statistical rating organizations and therefore, will be legal investments for
those entities to the extent provided in SMMEA and applicable state laws. The
Class M-2 Certificates and the Class M-3 Certificates will not constitute
"mortgage related
S-8
<PAGE>
securities" for purposes of SMMEA. SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
The Class A Certificates may be purchased by persons investing assets of
employee benefit plans or individual retirement accounts. The Class M-1
Certificates, the Class M-2 Certificates and the Class M-3 Certificates may not
be purchased by persons investing assets of employee benefit plans or individual
retirement accounts, except as described under "Considerations for Benefit Plan
Investors" in this prospectus supplement. A fiduciary of an employee benefit
plan or individual retirement account must determine that the purchase of an
offered certificate is consistent with its fiduciary duties under applicable law
and does not result in a nonexempt prohibited transaction under applicable law.
SEE "CONSIDERATIONS FOR BENEFIT PLAN INVESTORS" IN THIS PROSPECTUS SUPPLEMENT
AND IN THE PROSPECTUS.
S-9
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE CERTIFICATES.
YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" IN THE PROSPECTUS.
THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC WHICH MAY RESULT IN LOSSES ON THE
MORTGAGE LOANS.
The originator's underwriting standards are intended to assess the value of
the mortgaged property and to evaluate the adequacy of the property as
collateral for the mortgage loan and consider, among other things, a mortgagor's
credit history, repayment ability and debt service-to-income ratio, as well as
the type and use of the mortgaged property. The originator provides loans
primarily to borrowers who do not qualify for loans conforming to Fannie Mae and
Freddie Mac guidelines. The originator's underwriting standards do not prohibit
a mortgagor from obtaining, at the time of origination of the originator's first
lien, additional financing which is subordinate to that first lien, which
subordinate financing would reduce the equity the mortgagor would otherwise have
in the related mortgaged property as indicated in the originator's loan-to-value
ratio determination for the originator's first lien.
As a result of the originator's underwriting standards, the mortgage loans
in the mortgage pool are likely to experience rates of delinquency, foreclosure
and bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the mortgage loans in the mortgage pool than on mortgage loans originated in
a more traditional manner. No assurance can be given that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans. SEE "THE
ORIGINATOR --UNDERWRITING STANDARDS OF THE ORIGINATOR AND REPRESENTATIONS
CONCERNING THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT.
MORTGAGE LOANS WITH HIGH LOAN-TO-VALUE RATIOS LEAVE THE RELATED BORROWER WITH
LITTLE OR NO EQUITY IN THE RELATED MORTGAGED PROPERTY, WHICH MAY RESULT IN
LOSSES WITH RESPECT TO THESE MORTGAGE LOANS.
Approximately 33.03% of the mortgage loans, by aggregate principal balance
as of the cut- off date, had a loan-to-value ratio at origination in excess of
80%. No mortgage loan in the mortgage pool will be covered by a primary mortgage
insurance policy. No mortgage loan had a loan-to-value ratio exceeding 95.00% at
origination. Mortgage loans with higher loan-to-value ratios may present a
greater risk of loss. An overall decline in the residential real estate market,
a rise in interest rates over a period of time and the condition of a mortgaged
property, as well as other factors, may have the effect of reducing the value of
the mortgaged property from the appraised value at the time the mortgage loan
was originated. If there is a reduction in value of the mortgaged property, the
loan-to-value ratio may increase over what it was at the time the
S-10
<PAGE>
mortgage loan was originated. An increase of this kind may reduce the likelihood
of liquidation or other proceeds being sufficient to satisfy the mortgage loan,
and any losses to the extent not covered by the credit enhancement may affect
the yield to maturity of your certificates. There can be no assurance that the
value of a mortgaged property estimated in any appraisal or review is equal to
the actual value of that mortgaged property at the time of that appraisal or
review. Investors should note that the values of the mortgaged properties may be
insufficient to cover the outstanding principal balance of the mortgage loans.
There can be no assurance that the loan-to-value ratio of any mortgage loan
determined at any time after origination is less than or equal to its
loan-to-value ratio at origination.
SOME OF THE MORTGAGE LOANS HAVE A FIRST PAYMENT DATE ON OR AFTER FEBRUARY 1,
2000.
None of the mortgage loans were delinquent in their monthly payments as of
February 29, 2000. Investors should note, however, that approximately 93.60% of
the mortgage loans, by aggregate principal balance as of the cut-off date, have
a first payment date occurring on or after February 1, 2000 and, therefore, such
mortgage loans could not have been delinquent as of February 29, 2000.
THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF CALIFORNIA, WHICH MAY
PRESENT A GREATER RISK OF LOSS RELATING TO THESE MORTGAGE LOANS.
Approximately 32.00% of the mortgage loans, by aggregate principal balance
as of the cut- off date, are secured by mortgaged properties located in the
State of California. The aggregate principal balance of mortgage loans in the
California zip code with the largest amount of these mortgage loans, by
aggregate principal balance as of the cut-off date, was approximately
$2,099,528. If the California residential real estate market should experience
an overall decline in property values after the dates of origination of the
mortgage loans, the rates of delinquencies, foreclosures, bankruptcies and
losses on the mortgage loans may increase over historical levels of comparable
type loans, and may increase substantially. In addition, properties located in
California may be more susceptible than homes located in other parts of the
country to certain types of uninsured hazards, such as earthquakes, as well as
floods, mudslides and other natural disasters.
THE CLASS M-1 CERTIFICATES, THE CLASS M-2 CERTIFICATES AND THE CLASS M-3
CERTIFICATES WILL BE MORE SENSITIVE TO LOSSES ON THE MORTGAGE LOANS THAN THE
CLASS A CERTIFICATES BECAUSE THEY ARE SUBORDINATE TO THE CLASS A CERTIFICATES.
The weighted average lives of, and the yields to maturity on, the Class M-1
Certificates, the Class M-2 Certificates and the Class M-3 Certificates will be
progressively more sensitive, in increasing order of their numerical class
designations, to the rate and timing of mortgagor defaults and the severity of
ensuing losses on the mortgage loans. If the actual rate and severity of losses
on the mortgage loans is higher than those assumed by an investor in these
certificates, the actual yield to maturity of these certificates may be lower
than the yield anticipated by the holder. The timing of losses on the mortgage
loans will also affect an investor's yield to maturity, even if the rate of
defaults and severity of losses over the life of the mortgage pool are
consistent with an investor's expectations. In most cases, the earlier a loss
occurs, the greater the effect on an investor's yield to maturity. Realized
losses on the mortgage loans, to the extent
S-11
<PAGE>
they exceed the amount of excess interest and overcollateralization following
distributions of principal on the related distribution date, will reduce the
certificate principal balance of the class of mezzanine certificate then
outstanding with the highest numerical class designation. As a result of these
reductions, less interest will accrue on these classes of certificates than
would be the case if those losses were not so allocated. ONCE A REALIZED LOSS IS
ALLOCATED TO A CLASS M-1 CERTIFICATE, A CLASS M-2 CERTIFICATE OR A CLASS M-3
CERTIFICATE, NO AMOUNTS WILL BE DISTRIBUTED WITH RESPECT TO SUCH WRITTEN DOWN
AMOUNT.
THE CLASS M-1 CERTIFICATES, THE CLASS M-2 CERTIFICATES AND THE CLASS M-3
CERTIFICATES MAY NOT BE ENTITLED TO RECEIVE PRINCIPAL PAYMENTS UNTIL APRIL 2003
WHICH MAY RESULT IN A GREATER RISK OF LOSS RELATING TO THESE CERTIFICATES.
Unless the certificate principal balance of the Class A Certificates has
been reduced to zero, the Class M-1 Certificates, the Class M-2 Certificates and
the Class M-3 Certificates will not be entitled to any principal distributions
until at least April 2003 or a later date as described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement or during any period in which delinquencies on the
mortgage loans exceed the levels set forth under "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement. As a result, the weighted average lives of these
certificates will be longer than would be the case if distributions of principal
were allocated among all of the certificates at the same time. As a result of
the longer weighted average lives of these certificates, the holders of these
certificates have a greater risk of suffering a loss on their investments.
Further, because these certificates might not receive any principal if the
delinquency levels set forth under "Description of the Certificates--Principal
Distributions on the Offered Certificates" in this prospectus supplement are
exceeded, it is possible for these certificates to receive no principal
distributions on a particular distribution date even if no losses have occurred
on the mortgage pool.
YOUR CERTIFICATES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST FUND AND NOT
OF ANY OTHER PARTY.
The offered certificates will not represent an interest in or obligation of
the depositor, the master servicer, the originator, the seller, the trustee, the
trust administrator, or any of their respective affiliates. Neither the
certificates nor the underlying mortgage loans will be guaranteed or insured by
any governmental agency or instrumentality, or by the depositor, the master
servicer, the originator, the seller, the trustee, the trust administrator or
any of their respective affiliates. Proceeds of the assets included in the trust
will be the sole source of payments on the offered certificates, and there will
be no recourse to the depositor, the master servicer, the originator, the
seller, the trustee, the trust administrator or any other entity in the event
that these proceeds are insufficient or otherwise unavailable to make all
payments provided for under the offered certificates.
THE DIFFERENCE BETWEEN THE INTEREST RATES ON THE OFFERED CERTIFICATES AND THE
INTEREST RATES ON THE MORTGAGE LOANS MAY ADVERSELY AFFECT THE YIELD ON YOUR
CERTIFICATES.
The yield to maturity on the offered certificates may be affected by the
resetting of the mortgage rates on the mortgage loans on their related
adjustment dates. In addition, because the
S-12
<PAGE>
mortgage rate for each mortgage loan is based on six-month LIBOR plus a fixed
percentage amount, this rate could be higher than prevailing market interest
rates, and this may result in an increase in the rate of prepayments on the
mortgage loans after their adjustments. Finally, the mortgage rates on the
mortgage loans are based on six-month LIBOR subject to periodic and lifetime
limitations and a number of the mortgage loans will not have their mortgage
rates adjusted for two or three years from the dates of their origination, while
the pass-through rates on the offered certificates are based on one-month LIBOR
subject to a rate cap. The application of that rate cap, which is equal to the
weighted average mortgage rate on the mortgage loans net of certain fees and
interest on the Class IO Certificates, could adversely affect the yield to
maturity on the offered certificates. In addition, the rate cap will decrease if
mortgage loans with relatively high mortgage rates prepay at a faster rate than
mortgage loans with relatively low mortgage rates. IF FOR ANY DISTRIBUTION DATE
THE PASS-THROUGH RATES FOR ANY OF THE OFFERED CERTIFICATES IS LIMITED TO THE
RATE CAP AS DESCRIBED ABOVE, THE HOLDERS OF THE CERTIFICATES WILL NOT BE
ENTITLED TO RECOVER THE RESULTING BASIS RISK SHORTFALL ON ANY FUTURE
DISTRIBUTION DATE. See "Yield on the Certificates--Special Yield Considerations"
in this prospectus supplement.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE PRIORITY OF PAYMENT ON THESE
CERTIFICATES.
The rate and timing of distributions allocable to principal on the offered
certificates will depend on the rate and timing of principal payments, including
prepayments and collections upon defaults, liquidations and repurchases on the
mortgage loans and the allocation thereof to pay principal on the offered
certificates as described in "Description of the Certificates --Principal
Distributions on the Offered Certificates" in this prospectus supplement. As is
the case with mortgage pass-through certificates generally, the offered
certificates are subject to substantial inherent cash-flow uncertainties because
the mortgage loans may be prepaid at any time. However, with respect to
approximately 78.17% of the mortgage loans, by aggregate principal balance as of
the cut-off date, a prepayment may subject the related mortgagor to a prepayment
charge. A prepayment charge may or may not act as a deterrent to prepayment of
the related mortgage loan. SEE "THE MORTGAGE POOL" IN THIS PROSPECTUS
SUPPLEMENT.
Generally, when prevailing interest rates are increasing, prepayment rates
on mortgage loans tend to decrease; a decrease in the prepayment rates on the
mortgage loans will result in a reduced rate of return of principal to investors
in the offered certificates at a time when reinvestment at the higher prevailing
rates would be desirable. Conversely, when prevailing interest rates are
declining, prepayment rates on mortgage loans tend to increase; an increase in
the prepayment rates on the mortgage loans will result in a greater rate of
return of principal to investors in the offered certificates at a time when
reinvestment at comparable yields may not be possible.
Distributions of principal will be made to the holders of the Class M-1
Certificates, the Class M-2 Certificates and the Class M-3 Certificates
according to the priorities described in this prospectus supplement. The timing
of commencement of principal distributions and the weighted average life of each
class of these certificates will be affected by the rates of prepayment on the
mortgage loans experienced both before and after the commencement of principal
distributions on that class. For further information regarding the effect of
principal
S-13
<PAGE>
prepayments on the weighted average lives of the offered certificates, see
"Yield on the Certificates" in this prospectus supplement, including the table
entitled "Percent of Initial Certificate Principal Balance Outstanding at the
Specified Percentages of CPR."
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS.
The yield to maturity on the offered certificates will depend on:
o the applicable pass-through rate thereon from time to time;
o the applicable purchase price;
o the rate and timing of principal payments, including prepayments and
collections upon defaults, liquidations and repurchases, and the
allocation thereof to reduce the certificate principal balance of the
offered certificates; and
o the rate, timing and severity of realized losses on the mortgage
loans; adjustments to the mortgage rates on the mortgage loans, the
amount of excess interest generated by the mortgage loans and the
allocation to the offered certificates of some kinds of interest
shortfalls.
The yield to investors on any class of offered certificates will be
adversely affected by any allocation thereto of interest shortfalls on the
mortgage loans.
If the offered certificates are purchased at a premium and principal
distributions on the offered certificates occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield to maturity
will be lower than that assumed at the time of purchase. Conversely, if the
offered certificates are purchased at a discount and principal distributions on
the offered certificates occur at a rate slower than that anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that originally assumed.
The proceeds to the depositor from the sale of the offered certificates
were determined based on a number of assumptions, including a prepayment
assumption of 28% CPR, as described in this prospectus supplement under "Yield
on the Certificates" and weighted average lives corresponding to that
assumption. No representation is made that the mortgage loans will prepay at
this rate or at any other rate. The yield assumptions for the offered
certificates will vary as determined at the time of sale.
THE YIELD TO MATURITY ON THE CLASS M-1 CERTIFICATES, THE CLASS M-2 CERTIFICATES
AND THE CLASS M-3 CERTIFICATES WILL BE PARTICULARLY SENSITIVE TO THE RATE OF
PREPAYMENTS ON THE MORTGAGE LOANS.
The multiple class structure of the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates causes the yield of these classes to
be particularly sensitive to changes in the rates of prepayment of the mortgage
loans. Because distributions of principal will be made to the holders of these
certificates according to the priorities described in this prospectus
supplement, the yield to maturity on these classes of certificates will be
sensitive to the rates of
S-14
<PAGE>
prepayment on the mortgage loans experienced both before and after the
commencement of principal distributions on these classes. The yield to maturity
on these classes of certificates will also be extremely sensitive to losses due
to defaults on the mortgage loans and the timing of those defaults, to the
extent these losses are not covered by overcollateralization or excess interest
otherwise payable to the Class CE Certificates or a class of mezzanine
certificates with a higher numerical class designation. Furthermore, as
described in this prospectus supplement, the timing of receipt of principal and
interest by the Class M-1 Certificates, the Class M-2 Certificates and the Class
M-3 Certificates may be adversely affected by losses even if these classes of
certificates do not ultimately bear the losses on the mortgage loans.
VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE LOANS
AND YOUR CERTIFICATES.
Applicable state laws regulate interest rates and other charges, require
disclosure, and require licensing of the originator. In addition, other state
laws, public policy and principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt collection practices may
apply to the origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require disclosures to the borrowers regarding the
terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
Approximately 1.41% of the mortgage loans, by aggregate principal balance
as of the cut-off date, will be subject to the Riegle Community Development and
Regulatory Improvement Act of 1994, or the Riegle Act, which incorporates the
Home Ownership and Equity Protection Act of 1994. The Riegle Act adds additional
provisions to Regulation Z, which is the implementing regulation of the Federal
Truth-in-Lending Act. These provisions impose additional disclosure and other
requirements on creditors with respect to non-purchase money mortgage loans with
high interest rates or high up-front fees and charges. In most cases, mortgage
loans covered by the Riegle Act have annual percentage rates over 10% greater
than the yield on treasury securities of comparable maturity and fees and points
which exceed the greater of 8% of the total loan amount or $451. The provisions
of the Riegle Act apply on a mandatory basis to all applicable mortgage loans
originated on or after October 1, 1995. These provisions can impose specific
statutory liabilities upon creditors who fail to comply with their provisions
and may affect the enforceability of the related loans. In addition, any
assignee of the creditor, including the trust, would, in most cases, be subject
to all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
S-15
<PAGE>
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these federal or state laws, policies
and principles may limit the ability of the trust to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the originator
to damages and administrative enforcement.
The originator will represent that as of the closing date, each mortgage
loan is in compliance with applicable federal and state laws and regulations. In
the event of a breach of this representation, the originator will be obligated
to cure the breach or repurchase or replace the affected mortgage loan in the
manner described in the prospectus.
THE LIQUIDITY OF YOUR CERTIFICATES MAY BE LIMITED.
Salomon Smith Barney Inc. has no obligation to make a secondary market in
the classes of offered certificates. There is therefore no assurance that a
secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
offered certificates are likely to fluctuate; these fluctuations may be
significant and could result in significant losses to you.
The secondary markets for asset-backed securities have experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity can have
a severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
ALL CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT WILL HAVE THE
MEANINGS ASSIGNED TO THEM UNDER "DESCRIPTION OF THE CERTIFICATES--DEFINITIONS"
OR IN THE PROSPECTUS UNDER "GLOSSARY."
USE OF PROCEEDS
The seller will sell the mortgage loans to the depositor and the depositor
will convey the mortgage loans to the trust fund in exchange for and
concurrently with the delivery of the certificates. Net proceeds from the sale
of the certificates will be applied by the depositor to the purchase of the
mortgage loans from the seller. The seller will use a portion of these proceeds
to satisfy its obligations under its financing facility in place with an
affiliate of the underwriter with respect to the mortgage loans. The net
proceeds from the sale of the offered certificates, together with the Class IO
Certificates, the Class CE Certificates, the Class P Certificates, the Residual
Certificates, will represent the purchase price to be paid by the depositor to
the seller for the mortgage loans. The mortgage loans were previously purchased
by the seller either directly or indirectly from the originator.
S-16
<PAGE>
THE MORTGAGE POOL
GENERAL DESCRIPTION OF THE MORTGAGE LOANS
The mortgage pool will consist of approximately 3,536 conventional, one- to
four-family, adjustable-rate mortgage loans secured by first liens on
residential real properties and having an aggregate principal balance as of the
cut-off date of approximately $429,680,172 after application of scheduled
payments due on or before the cut-off date whether or not received and subject
to a permitted variance of plus or minus 5%. The mortgage loans have original
terms to maturity of not greater than 30 years.
References to percentages of the mortgage loans, unless otherwise noted,
are calculated based on the aggregate principal balance of the mortgage loans as
of the cut-off date.
The mortgage loans are secured by first mortgages or deeds of trust or
other similar security instruments creating first liens on residential
properties. The mortgaged properties in the mortgage pool consist of attached,
detached or semi-detached, one- to four-family dwelling units, townhouses,
individual condominium units, individual units in planned unit developments and
manufactured housing. The mortgage loans to be included in the mortgage pool
will be acquired by the depositor from the seller, who acquired the mortgage
loans either directly or indirectly from the originator. The originator will act
as the master servicer under the pooling and servicing agreement.
The mortgage rate on each mortgage loan is the per annum rate of interest
specified in the related mortgage note. Each mortgage loan provides for
semi-annual adjustment to its mortgage rate; provided, however, that in the case
of approximately 95.36% and approximately 3.58% of the mortgage loans, the first
adjustment will not occur until after an initial period of approximately two
years and three years, respectively, from the date of origination of those
mortgage loans. The mortgage loans whose mortgage rates do not adjust for an
initial period of approximately two years and three years from the date of
origination are referred to in this prospectus supplement as "delayed first
adjustment mortgage loans." In connection with each mortgage rate adjustment,
the mortgage loans have corresponding adjustments to their monthly payment
amount, in each case on each applicable adjustment date. On each adjustment
date, the mortgage rate on each mortgage loan will be adjusted to equal the sum,
rounded to the nearest multiple of 0.125%, of the index and a fixed percentage
amount, or gross margin for that mortgage loan specified in the related mortgage
note; provided, however, that the mortgage rate on each mortgage loan will
generally not increase or decrease by more than the periodic rate cap specified
in the related mortgage note, which is a percentage ranging from 1.00% to 1.50%
per annum, on any related adjustment date and will not exceed a specified
maximum mortgage rate over the life of the mortgage loan or be less than a
specified minimum mortgage rate over the life of the mortgage loan. Effective
with the first monthly payment due on each mortgage loan after each related
adjustment date, the monthly payment amount will be adjusted to an amount that
will amortize fully the outstanding principal balance of that mortgage loan over
its remaining term and pay interest at the mortgage rate as so adjusted. Due to
the application of the periodic rate caps and the maximum mortgage rates, the
mortgage rate on each mortgage loan, as adjusted on any related adjustment date,
may be less than the sum of the index, calculated as described in this
prospectus supplement, and the related gross margin. See "--The
S-17
<PAGE>
Index" in this prospectus supplement. None of the mortgage loans permits the
related mortgagor to convert the adjustable mortgage rate thereon to a fixed
mortgage rate.
Twenty mortgage loans, representing approximately 0.51% of the mortgage
loans by aggregate principal balance as of the cut-off date, have a first
payment date occurring in May 2000. With respect to these mortgage loans, no
principal amortization payments will be distributed in April 2000 unless
principal payments thereon are received in the prepayment period applicable to
the distribution date occurring in April 2000. On the closing date, however,
cash will be deposited with the trustee in an amount equal to interest accrued
on these mortgage loans, net of the servicing fee for the related Interest
Accrual Period for inclusion, net of certain fees payable by the trust, in the
Available Funds on the first distribution date.
The mortgage loans have scheduled monthly payments due on the first day of
the month and that day will be referred to in this prospectus supplement as the
"due date." Each mortgage loan will contain a customary due-on-sale clause which
provides that the mortgage loan must be repaid at the time of a sale of the
related mortgaged property or assumed by a creditworthy purchaser of the related
mortgaged property.
Approximately 78.17% of the mortgage loans, by aggregate principal balance
as of the cut- off date, provide for payment by the mortgagor of a prepayment
charge in limited circumstances on prepayments as provided in the related
mortgage note. These mortgage loans provide for payment of a prepayment charge
on some partial prepayments and all prepayments in full made within a specified
period not in excess of five years from the date of origination of the mortgage
loan, as provided in the related mortgage note. The amount of the prepayment
charge is as provided in the related mortgage note, but, in most cases, is equal
to six month's interest on any amounts prepaid in excess of 20% of the original
principal balance of the related mortgage loan in any 12 month period, as
permitted by law. The holders of the Class P Certificates will be entitled to
all prepayment charges received on the mortgage loans, and these amounts will
not be available for distribution on the other classes of certificates. Under
the limited instances described under the terms of the pooling and servicing
agreement, the master servicer may waive the payment of any otherwise applicable
prepayment charge. Investors should conduct their own analysis of the effect, if
any, that the prepayment charges, and decisions by the master servicer with
respect to the waiver of the prepayment charges, may have on the prepayment
performance of the mortgage loans. The depositor makes no representation as to
the effect that the prepayment charges, and decisions by the master servicer
with respect to the waiver of the prepayment charges, may have on the prepayment
performance of the mortgage loans.
None of the mortgage loans are buydown mortgage loans.
The average principal balance of the mortgage loans at origination was
approximately $121,600. No mortgage loan had a principal balance at origination
greater than approximately $841,800 or less than approximately $17,000. The
average principal balance of the mortgage loans as of the cut-off date was
approximately $121,516. No mortgage loan had a principal balance as of the
cut-off date greater than approximately $841,800 or less than approximately
$16,982.
S-18
<PAGE>
The mortgage loans had mortgage rates as of the cut-off date ranging from
approximately 6.350% per annum to approximately 16.950% per annum, and the
weighted average mortgage rate was approximately 10.253% per annum. As of the
cut-off date, the mortgage loans had gross margins ranging from approximately
4.750% to approximately 9.750%, minimum mortgage rates ranging from
approximately 6.350% per annum to approximately 16.950% per annum and maximum
mortgage rates ranging from approximately 13.350% per annum to approximately
23.950% per annum. As of the cut-off date, the weighted average gross margin was
approximately 6.177%, the weighted average minimum mortgage rate was
approximately 10.253% per annum and the weighted average maximum mortgage rate
was approximately 17.250% per annum. The latest first adjustment date following
the cut-off date on any mortgage loan occurs in March 2003 and the weighted
average next adjustment date for all of the mortgage loans following the cut-off
date is February 2002.
The weighted average loan-to-value ratio of the mortgage loans at
origination was approximately 77.60%. At origination, no mortgage loan had a
loan-to-value ratio greater than approximately 95.00% or less than approximately
10.95%.
The weighted average remaining term to stated maturity of the mortgage
loans was approximately 29 years and 9 months as of the cut-off date. None of
the mortgage loans will have a first due date prior to April 1999 or after May
2000, or will have a remaining term to stated maturity of less than 14 years and
8 months or greater than 30 years as of the cut-off date. The latest maturity
date of any mortgage loan is April 2030.
The mortgage loans are expected to have the following characteristics as of
the cut-off date, but investors should note that the sum in any column may not
equal the total indicated due to rounding:
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<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER ORIGINAL ORIGINAL
OF PRINCIPAL PRINCIPAL
RANGE ($) LOANS BALANCE BALANCE
--------- ----- ------- -------
<S> <C> <C> <C>
0.01 - 50,000.00 . . . . . . 621 $ 23,707,539.00 5.51%
50,000.01 - 100,000.00 . . . . . . 1,276 93,379,240.00 21.72
100,000.01 - 150,000.00 . . . . . . 728 89,010,197.00 20.70
150,000.01 - 200,000.00 . . . . . . 393 68,080,596.00 15.83
200,000.01 - 250,000.00 . . . . . . 203 45,453,852.80 10.57
250,000.01 - 300,000.00 . . . . . . 127 34,796,140.00 8.09
300,000.01 - 350,000.00 . . . . . . 66 21,545,100.00 5.01
350,000.01 - 400,000.00 . . . . . . 51 19,299,694.23 4.49
400,000.01 - 450,000.00 . . . . . . 30 12,957,600.00 3.01
450,000.01 - 500,000.00 . . . . . . 25 12,066,475.00 2.81
500,000.01 - 550,000.00 . . . . . . 5 2,562,600.00 0.60
550,000.01 - 600,000.00 . . . . . . 4 2,261,500.00 0.53
600,000.01 - 650,000.00 . . . . . . 2 1,254,500.00 0.29
650,000.01 - 700,000.00 . . . . . . 2 1,344,000.00 0.31
700,000.01 - 750,000.00 . . . . . . 2 1,415,250.00 0.33
800,000.01 - 850,000.00 . . . . . . 1 841,800.00 0.20
----- --------------- ------
Total............................... 3,536 $429,976,084.03 100.00%
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF OUTSTANDING AS OF OUTSTANDING AS OF
RANGE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------- ----- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 50,000.00. . . 621 $ 23,687,264.67 5.51%
50,000.01 - 100,000.00. . . 1,276 93,315,196.44 21.72
100,000.01 - 150,000.00. . . 728 88,961,992.22 20.70
150,000.01 - 200,000.00. . . 393 68,022,663.64 15.83
200,000.01 - 250,000.00. . . 203 45,426,933.90 10.57
250,000.01 - 300,000.00. . . 127 34,770,965.34 8.09
300,000.01 - 350,000.00. . . 66 21,530,074.34 5.01
350,000.01 - 400,000.00. . . 51 19,286,885.71 4.49
400,000.01 - 450,000.00. . . 30 12,948,889.24 3.01
450,000.01 - 500,000.00. . . 25 12,057,791.53 2.81
500,000.01 - 550,000.00. . . 5 2,561,169.32 0.60
550,000.01 - 600,000.00. . . 4 2,258,420.40 0.53
600,000.01 - 650,000.00. . . 2 1,253,334.29 0.29
650,000.01 - 700,000.00. . . 2 1,343,017.26 0.31
700,000.01 - 750,000.00. . . 2 1,413,773.29 0.33
800,000.01 - 850,000.00. . . 1 841,800.00 0.20
----- --------------- ------
Total...................... 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
S-20
<PAGE>
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ----------------- -----------------
6.000 - 6.499....... 1 $ 104,804.04 0.02%
6.500 - 6.999....... 3 361,606.02 0.08
7.000 - 7.499....... 3 520,334.00 0.12
7.500 - 7.999....... 111 14,206,622.10 3.31
8.000 - 8.499....... 48 8,352,891.41 1.94
8.500 - 8.999....... 236 42,098,673.61 9.80
9.000 - 9.499....... 277 44,741,541.49 10.41
9.500 - 9.999....... 635 92,321,679.53 21.49
10.000 - 10.499...... 381 46,453,486.29 10.81
10.500 - 10.999...... 670 77,312,375.69 17.99
11.000 - 11.499...... 387 38,483,203.91 8.96
11.500 - 11.999...... 307 29,079,000.64 6.77
12.000 - 12.499...... 148 11,573,993.55 2.69
12.500 - 12.999...... 170 12,685,083.65 2.95
13.000 - 13.499...... 65 5,051,707.94 1.18
13.500 - 13.999...... 50 3,596,600.98 0.84
14.000 - 14.499...... 32 2,043,743.45 0.48
14.500 - 14.999...... 9 560,903.80 0.13
15.000 - 15.499...... 1 49,000.00 0.01
15.500 - 15.999...... 1 57,151.21 0.01
16.500 - 16.999...... 1 25,768.28 0.01
----- --------------- ------
Total................ 3,536 $429,680,171.59 100.00%
===== =============== ======
GROSS MARGINS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- -------- ----------------- -----------------
4.750 - 4.999........... 2 $ 173,646.81 0.04%
5.000 - 5.249........... 3 255,704.70 0.06
5.250 - 5.499........... 5 498,453.04 0.12
5.500 - 5.749........... 104 12,670,090.67 2.95
5.750 - 5.999........... 1,049 147,929,736.93 34.43
6.000 - 6.249........... 818 109,100,234.78 25.39
6.250 - 6.499........... 81 8,347,978.99 1.94
6.500 - 6.749........... 759 88,618,466.51 20.62
6.750 - 6.999........... 700 60,383,729.94 14.05
7.000 - 7.249........... 11 1,393,882.89 0.32
7.250 - 7.499........... 1 72,000.00 0.02
7.500 - 7.749........... 2 180,172.52 0.04
9.750 - 9.999........... 1 56,073.81 0.01
----- --------------- ------
Total.............. 3,536 $429,680,171.59 100.00%
===== =============== ======
S-21
<PAGE>
MAXIMUM MORTGAGE RATES OF THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
MAXIMUM NUMBER OUTSTANDING AS OF OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ------------------ -----------------
13.000 - 13.499.......... 1 $ 104,804.04 0.02%
13.500 - 13.999.......... 3 361,606.02 0.08
14.000 - 14.499.......... 3 520,334.00 0.12
14.500 - 14.999.......... 111 14,206,622.10 3.31
15.000 - 15.499.......... 49 8,491,500.73 1.98
15.500 - 15.999.......... 238 42,460,862.00 9.88
16.000 - 16.499.......... 276 44,602,932.17 10.38
16.500 - 16.999.......... 637 92,258,728.50 21.47
17.000 - 17.499.......... 382 46,528,312.02 10.83
17.500 - 17.999.......... 669 77,154,494.68 17.96
18.000 - 18.499.......... 388 38,578,328.73 8.98
18.500 - 18.999.......... 304 28,864,169.02 6.72
19.000 - 19.499.......... 147 11,536,003.95 2.68
19.500 - 19.999.......... 169 12,626,597.97 2.94
20.000 - 20.499.......... 65 5,051,707.94 1.18
20.500 - 20.999.......... 50 3,596,600.98 0.84
21.000 - 21.499.......... 32 2,043,743.45 0.48
21.500 - 21.999.......... 9 560,903.80 0.13
22.000 - 22.499.......... 1 49,000.00 0.01
22.500 - 22.999.......... 1 57,151.21 0.01
23.500 - 23.999.......... 1 25,768.28 0.01
----- --------------- ------
Total............... 3,536 $429,680,171.59 100.00%
===== =============== ======
MINIMUM MORTGAGE RATES OF THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
MINIIMUM NUMBER OUTSTANDING AS OF OF
MORTGAGE RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------- -------- ------------------ -----------------
6.000 - 6.499........... 1 $ 104,804.04 0.02%
6.500 - 6.999........... 3 361,606.02 0.08
7.000 - 7.499........... 3 520,334.00 0.12
7.500 - 7.999........... 111 14,206,622.10 3.31
8.000 - 8.499........... 48 8,352,891.41 1.94
8.500 - 8.999........... 236 42,098,673.61 9.80
9.000 - 9.499........... 277 44,741,541.49 10.41
9.500 - 9.999........... 635 92,321,679.53 21.49
10.000 - 10.499......... 381 46,453,486.29 10.81
10.500 - 10.999......... 670 77,312,375.69 17.99
11.000 - 11.499......... 387 38,483,203.91 8.96
11.500 - 11.999......... 307 29,079,000.64 6.77
12.000 - 12.499......... 148 11,573,993.55 2.69
12.500 - 12.999......... 170 12,685,083.65 2.95
13.000 - 13.499......... 65 5,051,707.94 1.18
13.500 - 13.999......... 50 3,596,600.98 0.84
14.000 - 14.499......... 32 2,043,743.45 0.48
14.500 - 14.999......... 9 560,903.80 0.13
15.000 - 15.499......... 1 49,000.00 0.01
15.500 - 15.999......... 1 57,151.21 0.01
16.500 - 16.999......... 1 25,768.28 0.01
----- --------------- ------
Total.............. 3,536 $429,680,171.59 100.00%
===== =============== ======
S-22
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
LOAN-TO-VALUE RATIO(%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
Less than or equal to 25.00......... 7 $ 688,965.17 0.16%
25.01 - 30.00....................... 10 828,818.46 0.19
30.01 - 35.00....................... 14 762,057.69 0.18
35.01 - 40.00....................... 11 486,309.19 0.11
40.01 - 45.00....................... 23 1,595,142.60 0.37
45.01 - 50.00....................... 54 3,702,181.48 0.86
50.01 - 55.00....................... 57 5,401,542.22 1.26
55.01 - 60.00....................... 105 9,802,412.90 2.28
60.01 - 65.00....................... 271 26,121,039.19 6.08
65.01 - 70.00....................... 395 41,144,350.46 9.58
70.01 - 75.00....................... 625 73,368,583.94 17.08
75.01 - 80.00....................... 977 123,866,737.32 28.83
80.01 - 85.00....................... 672 91,156,966.08 21.22
85.01 - 90.00....................... 306 49,145,641.53 11.44
90.01 - 95.00....................... 9 1,609,423.36 0.37
----- --------------- ------
Total.......................... 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
S-23
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
LOCATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------- -------- ------------------ -----------------
<S> <C> <C> <C>
Alabama................................ 22 $1,360,088.82 0.32%
Arizona................................ 57 6,773,836.15 1.58
Arkansas............................... 13 878,007.50 0.20
California............................. 701 137,485,153.32 32.00
Colorado............................... 129 15,582,491.82 3.63
Connecticut............................ 17 1,560,904.70 0.36
Delaware............................... 4 217,327.55 0.05
District of Columbia................... 1 85,400.00 0.02
Florida................................ 220 20,250,247.88 4.71
Georgia................................ 107 12,276,829.53 2.86
Hawaii................................. 7 1,614,174.90 0.38
Idaho.................................. 24 2,242,995.56 0.52
Illinois............................... 352 43,567,908.06 10.14
Indiana................................ 71 5,063,230.65 1.18
Iowa................................... 28 2,133,217.93 0.50
Kansas................................. 23 1,465,991.62 0.34
Kentucky............................... 15 1,078,073.40 0.25
Louisiana.............................. 40 3,451,120.82 0.80
Maine.................................. 5 289,721.67 0.07
Maryland............................... 26 3,277,817.03 0.76
Massachusetts.......................... 94 14,218,853.16 3.31
Michigan............................... 212 17,768,486.08 4.14
Minnesota.............................. 106 12,321,563.29 2.87
Mississippi............................ 6 327,296.43 0.08
Missouri............................... 55 4,030,713.99 0.94
Montana................................ 12 1,101,642.54 0.26
Nebraska............................... 7 344,680.42 0.08
Nevada................................. 64 10,793,583.11 2.51
New Hampshire.......................... 9 1,012,812.45 0.24
New Jersey............................. 29 4,201,841.71 0.98
New Mexico............................. 39 4,505,139.80 1.05
North Carolina......................... 65 5,790,230.66 1.35
North Dakota........................... 1 33,978.63 0.01
Ohio................................... 139 10,882,056.89 2.53
Oklahoma............................... 36 3,811,028.84 0.89
Oregon................................. 54 7,687,151.99 1.79
Pennsylvania........................... 99 6,674,066.65 1.55
Rhode Island........................... 15 1,492,820.90 0.35
South Carolina......................... 42 3,680,954.78 0.86
Tennessee.............................. 56 4,422,738.72 1.03
Texas.................................. 313 25,685,696.09 5.98
Utah................................... 35 4,212,576.73 0.98
Vermont................................ 4 579,217.95 0.13
Virginia............................... 11 2,172,089.87 0.51
Washington............................. 106 16,139,090.13 3.76
West Virginia.......................... 9 819,230.34 0.19
Wisconsin.............................. 52 4,057,792.61 0.94
Wyoming................................ 4 258,297.92 0.06
----- --------------- ------
Total............................. 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
S-24
<PAGE>
MORTGAGED PROPERTY TYPES OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------- -------- ------------------ -----------------
<S> <C> <C> <C>
Single Family.............................. 2,945 $347,134,039.87 80.79%
Two- to Four-Family........................ 201 25,945,621.11 6.04
Condominium................................ 145 18,703,901.06 4.35
Planned Unit Development................... 204 35,272,786.43 8.21
Manufactured Housing....................... 41 2,623,823.12 0.61
----- --------------- ------
Total................................. 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY OCCUPANCY STATUS OF THE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
OCCUPANCY STATUS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------- -------- ------------------ -----------------
<S> <C> <C> <C>
Owner-Occupied......................... 3,225 $404,056,116.00 94.04%
Non-Owner Occupied..................... 301 24,242,748.18 5.64
Secondary.............................. 10 1,381,307.41 0.32
----- --------------- ------
Total............................. 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
PURPOSE OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
LOAN PURPOSE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
Purchase................................... 589 $77,889,333.82 18.13%
Equity-out Refinance....................... 2,152 259,806,916.07 60.47
Rate-term Refinance........................ 795 91,983,921.70 21.41
----- --------------- ------
Total................................. 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
LOAN PROGRAMS OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
LOAN PROGRAM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
Full Documentation Program.................. 2,379 $271,815,655.75 63.26%
Stated Income Documentation Program......... 1,157 157,864,515.84 36.74
----- -------------- ------
Total.................................. 3,536 $429,680,171.59 100.00%
===== ============== ======
</TABLE>
S-25
<PAGE>
RISK CATEGORIES OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------- -------- ------------------ -----------------
<S> <C> <C> <C>
A+....................................... 733 $109,332,530.56 25.45%
A+MO*.................................... 104 11,091,564.80 2.58
A-....................................... 934 129,768,859.18 30.20
A-MO*.................................... 105 9,501,471.91 2.21
AAA...................................... 54 5,385,506.48 1.25
B........................................ 754 91,906,107.46 21.39
C........................................ 563 49,203,966.61 11.45
C-....................................... 113 10,384,574.54 2.42
C-HS**................................... 176 13,105,590.05 3.05
----- --------------- ------
Total............................... 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
- -------------------------
* Underwritten pursuant to the Mortgage Credit Only program. ** Underwritten
pursuant to the Home Saver program.
NEXT ADJUSTMENT DATES FOR THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
MONTH OF NEXT ADJUSTMENT DATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
May 2000............................ 1 $ 170,763.42 0.04%
July 2000........................... 19 2,884,829.21 0.67
August 2000......................... 6 659,786.25 0.15
September 2000...................... 7 833,200.00 0.19
March 2001.......................... 1 164,323.63 0.04
April 2001.......................... 1 25,784.63 0.01
September 2001...................... 3 451,745.52 0.11
October 2001........................ 7 1,273,474.92 0.30
November 2001....................... 13 1,788,381.41 0.42
December 2001....................... 159 21,186,041.43 4.93
January 2002........................ 1,491 181,875,603.55 42.33
February 2002....................... 741 86,446,583.45 20.12
March 2002.......................... 936 114,368,409.47 26.62
April 2002.......................... 20 2,179,465.00 0.51
September 2002...................... 1 112,062.14 0.03
October 2002........................ 1 71,810.45 0.02
November 2002....................... 4 666,144.77 0.16
December 2002....................... 8 1,604,753.47 0.37
January 2003........................ 32 3,916,666.98 0.91
February 2003....................... 35 3,835,050.89 0.89
March 2003.......................... 50 5,165,291.00 1.20
----- --------------- ------
Total.......................... 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
S-26
<PAGE>
PERIODIC RATE CAPS ON THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
PERIODIC RATE CAP (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
1.000............................... 61 $ 7,191,039.29 1.67%
1.500............................... 3,475 422,489,132.30 98.33
----- -------------- ------
Total.......................... 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
ORIGINAL TERM TO STATED MATURITY OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL
AGGREGATE BALANCE
PRINCIPAL BALANCE OUTSTANDING AS
NUMBER OUTSTANDING AS OF OF
ORIGINAL TERM TO STATED MATURITY (MONTHS) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ----------------------------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
180.................................... 48 $ 2,953,384.81 0.69%
360.................................... 3,488 426,726,786.78 99.31
----- -------------- ------
Total............................. 3,536 $429,680,171.59 100.00%
===== =============== ======
</TABLE>
THE INDEX
As of any adjustment date, the index applicable to the determination of the
mortgage rate on each mortgage loan will be the average of the interbank offered
rates for six-month United States dollar deposits in the London market as
published in THE WALL STREET JOURNAL and as most recently available as specified
in the related mortgage note either:
o as of the first business day 45 days prior to that adjustment date or
o as of the first business day of the month preceding the month of the
adjustment date.
In the event that the index becomes unavailable or otherwise unpublished,
the master servicer will select a comparable alternative index over which it has
no direct control and which is readily verifiable.
UNDERWRITING STANDARDS OF THE ORIGINATOR AND REPRESENTATIONS CONCERNING THE
MORTGAGE LOANS
The information set forth in this section with regard to the originator's
underwriting standards has been provided to the depositor or compiled from
information provided to the depositor by the originator. None of the depositor,
the trustee, the trust administrator, the seller, the underwriter or any of
their respective affiliates has made any independent investigation of this
information or has made or will make any representation as to the accuracy or
completeness of this information.
The originator commenced receiving applications for mortgage loans under
its regular lending program in February 1996. Accordingly, other than to the
limited extent as described
S-27
<PAGE>
below under "--The Master Servicer," the originator, whether as an originator or
acquirer of mortgage loans, does not have representative historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of examining the originator's performance in servicing mortgage loans
similar to the mortgage loans.
The mortgage loans will be acquired on the closing date by the depositor
from the seller, who in turn will have acquired the mortgage loans prior to the
closing date from the originator. All of the mortgage loans were originated or
acquired by the originator in accordance with the underwriting criteria
described in this section.
The originator's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of the property
as collateral for the mortgage loan. All of the mortgage loans in the mortgage
pool were also underwritten with a view toward the resale of the mortgage loans
in the secondary mortgage market. While the originator's primary consideration
in underwriting a mortgage loan is the value of the mortgaged property, the
originator also considers, among other things, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the mortgaged property. The mortgage loans, in most cases, bear higher rates
of interest than mortgage loans that are originated in accordance with Fannie
Mae and Freddie Mac standards, which is likely to result in rates of
delinquencies and foreclosures that are higher, and that may be substantially
higher, than those experienced by portfolios of mortgage loans underwritten in a
more traditional manner.
As a result of the originator's underwriting criteria, changes in the
values of mortgaged properties may have a greater effect on the delinquency,
foreclosure and loss experience on the mortgage loans than these changes would
be expected to have on mortgage loans that are originated in a more traditional
manner. No assurance can be given that the values of the related mortgaged
properties have remained or will remain at the levels in effect on the dates of
origination of the related mortgage loans. In addition, there can be no
assurance that the value of a mortgaged property estimated in any appraisal or
review is equal to the actual value of that mortgaged property at the time of
that appraisal or review.
The mortgage loans will have been originated in accordance with the
underwriting guidelines of the originator which will be referred to in this
prospectus supplement as the underwriting guidelines. On a case-by-case basis,
exceptions to the underwriting guidelines are made where compensating factors
exist. It is expected that a substantial portion of the mortgage loans in the
mortgage pool will represent these exceptions.
Each applicant completes an application which includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The underwriting guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to matters such as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments. Mortgaged properties that
are to secure mortgage loans generally are appraised by qualified independent
appraisers. These appraisers inspect and appraise the subject property and
verify that the property is in acceptable condition. Following each appraisal,
the appraiser prepares a report which includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
S-28
<PAGE>
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation and are generally on forms acceptable to Fannie Mae and
Freddie Mac. The underwriting guidelines require a review of the appraisal by a
qualified employee of the originator or by an appraiser retained by the
originator. If the appraised value of a mortgaged property as determined by a
review is more than 7% but less than 25% lower than the value as determined by
the appraisal, then the originator uses the value as determined by the review in
computing the loan-to-value ratio or combined loan-to-value ratio of the related
mortgage loan. If the appraised value of a mortgaged property as determined by a
review is 25% or more lower than the value as determined by the appraisal, then
the originator obtains a new appraisal and repeats the review process.
The mortgage loans in the mortgage pool were originated consistent with and
generally conform to the underwriting guidelines' full documentation and stated
income documentation residential loan programs. Under each of the programs, the
originator reviews the applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar documentation,
reviews the credit history of the applicant, calculates the debt
service-to-income ratio to determine the applicant's ability to repay the loan,
reviews the type and use of the property being financed, and reviews the
property. In determining the ability of the applicant to repay the loan, a
qualifying rate has been created under the underwriting guidelines that
generally is equal to the mortgage rate on that loan, in the case of fixed-rate
loans. The underwriting guidelines require that mortgage loans be underwritten
in a standardized procedure which complies with applicable federal and state
laws and regulations and requires the originator's underwriters to be satisfied
that the value of the property being financed, as indicated by an appraisal and
a review of the appraisal, currently supports the outstanding loan balance. In
most cases, the maximum loan amount for mortgage loans originated under the
programs is $600,000. The underwriting guidelines may permit loans on one- to
four-family residential properties to have
o a loan-to-value ratio at origination of up to 95% with respect to first
liens loans and
o a combined loan-to-value ratio at origination of up to 90% with respect to
second lien loans.
In each case, the maximum loan-to-value ratio depends on, among other
things, the purpose of the mortgage loan, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the property. With respect to mortgage loans in the mortgage pool secured by
mortgaged properties acquired by a mortgagor under a "lease option purchase,"
the loan-to-value ratio of the related mortgage loan is based on the lower of
the appraised value at the time of origination of the mortgage loan or the sale
price of the related mortgaged property if the "lease option purchase price" was
set less than 12 months prior to origination and is based on the appraised value
at the time of origination if the "lease option purchase price" was set 12
months or more prior to origination.
The underwriting guidelines require that the income of each applicant for a
mortgage loan under the full documentation program be verified. The specific
income documentation required for the originator's various programs is as
follows: under the full documentation program, applicants usually are required
to submit one written form of verification of stable income for at least 12
months; under the stated income documentation program, an applicant may be
qualified
S-29
<PAGE>
based upon monthly income as stated on the mortgage loan application if the
applicant meets certain criteria. All the foregoing programs require that, with
respect to salaried employees, there be a telephone verification of the
applicant's employment. Verification of the source of funds, if any, required to
be deposited by the applicant into escrow in the case of a purchase money loan
is required.
In evaluating the credit quality of borrowers, the originator utilizes
credit bureau risk scores, or a FICO score, a statistical ranking of likely
future credit performance developed by Fair, Isaac & Company and the three
national credit data repositories--Equifax, TransUnion and Experian.
The underwriting guidelines have the following categories and criteria for
grading the potential likelihood that an applicant will satisfy the repayment
obligations of a mortgage loan:
FIRST LIEN MORTGAGE LOANS:
"AAA" RISK. Under the "AAA" risk category, the applicant must have
excellent repayment history for installment or revolving debt and must have a
FICO score of at least 660. A maximum of one 30-day late payment and no 60-day
late payments within the last 24 months is acceptable on an existing mortgage
loan. An existing mortgage loan is required to be current at the time the
application is submitted. No bankruptcy or notice of default filings may have
occurred during the preceding four years. The mortgaged property must be in at
least average condition. A maximum loan-to-value ratio of 95%, or 90% for
mortgage loans originated under the stated income documentation program for rate
and term refinances only, is permitted for a mortgage loan on a single family
owner-occupied property. Non- owner occupied properties are not allowed. A
maximum loan-to-value ratio of 90% is permitted for a mortgage loan on an owner
occupied condominium or a two- to four-family residential property. Rural,
remote or unique properties are not allowed. The maximum combined loan-to-value
ratio, including any related subordinate lien, is 95% for either a refinance
loan or a purchase money loan. The debt service-to-income ratio is generally 42%
or less.
"A+" RISK. Under the "A+" risk category, the applicant must have generally
repaid installment or revolving debt according to its terms or must have a FICO
score of 640 or higher. A maximum of one 30-day late payment and no 60-day late
payments within the last 12 months is acceptable on an existing mortgage loan.
An existing mortgage loan is required to be current at the time the application
is submitted. No open collection accounts or open charge-offs may remain open
after the funding of the loan. No bankruptcy or notice of default filings may
have occurred during the preceding three years. The mortgaged property must be
in at least average condition. A maximum loan-to-value ratio of 90%, or 85% for
mortgage loans originated under the stated income documentation program, is
permitted for a mortgage loan on a single family owner-occupied property. A
maximum loan-to-value ratio of 85% is permitted for a mortgage loan on a
non-owner occupied property, an owner-occupied condominium or a two- to
four-family residential property. The maximum loan-to-value ratio for rural,
remote or unique properties is 85%. The maximum combined loan-to-value ratio,
including any related subordinate lien, is 100% for either a refinance loan or a
purchase money loan. The debt service-to-income ratio is usually 45% or less.
"A-" RISK. Under the "A-" risk category, an applicant must have generally
repaid installment or revolving debt according to its terms or must have a FICO
score of 620 or higher.
S-30
<PAGE>
A maximum of three 30-day late payment and no 60-day late payments within the
last 12 months is acceptable on an existing mortgage loan. An existing mortgage
loan is required to be current at the time of funding of the loan. Minor
derogatory items are allowed as to non-mortgage credit. Medical derogatories are
not considered. Open collection accounts or open charge-offs affecting title
with balances of less than $500 may remain open after funding of the loan. No
bankruptcy may have occurred during the preceding two years. No notice of
default filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. A maximum
loan-to-value ratio of 90%, or 80% for mortgage loans originated under the
stated income documentation program, is permitted for a mortgage loan on a
single family owner-occupied property. A maximum loan-to-value ratio of 80%, or
70% for mortgage loans originated under the stated income documentation program,
is permitted for a mortgage loan on a non-owner-occupied property. A maximum
loan-to-value ratio of 85%, or 75% for mortgage loans originated under the
stated income documentation program, is permitted for a mortgage loan on an
owner- occupied condominium or a two- to four-family residential property. The
maximum loan-to-value ratio for rural, remote, or unique properties is 80%. The
maximum combined loan-to-value ratio, including any related subordinate lien, is
95% for a refinance loan and 95% for a purchase money loan. The debt
service-to-income ratio is usually 50% or less, or 45% or less for loans with a
loan-to-value ratio greater than 85%.
"B" RISK. Under the "B" risk category, an applicant may have experienced
isolated credit problems, but should have generally repaid installment or
revolving debt according to its terms or must have a FICO score of 600 or
higher. Unlimited 30-day late payments and a maximum of one 60-day late payment
within the last 12 months is acceptable on an existing mortgage loan. An
existing mortgage loan must be less than 60 days late at the time of funding of
the loan. As to non-mortgage credit, some prior defaults may have occurred.
Medical derogatories are not considered. In most cases, open charge-offs or
collection accounts with balances of less than $1,000 may remain open after the
funding of the loan. No bankruptcy or notice of default filings by the applicant
may have occurred during the preceding two years. The mortgaged property must be
in at least average condition. A maximum loan-to-value ratio of 80%, or 75% for
mortgage loans originated under the stated income documentation program, is
permitted for a mortgage loan on an owner-occupied detached property originated
under the full documentation program. A maximum loan-to-value ratio of 75% is
permitted for a mortgage loan on a non-owner-occupied property, an
owner-occupied condominium or a two- to four-family residential property, or 65%
for a mortgage loan on a non-owner occupied property and 70% for a mortgage loan
on an owner-occupied condominium or a two- to four-family residential property
originated under the stated income documentation program. The maximum
loan-to-value ratio for rural, remote or unique properties is 70%. The maximum
combined loan-to-value ratio, including any related subordinate lien, is 90% for
a refinance loan and for a purchase money loan. The debt service-to-income ratio
is usually 55% or less.
"C" RISK. Under the "C" risk category, an applicant may have experienced
significant credit problems in the past. Unlimited 30-day and 60-day late
payments and a maximum of one 90-day late payment within the last 12 months is
acceptable on an existing mortgage loan. An existing mortgage loan must be less
than 90 days late at the time of funding of the loan. As to non-mortgage credit,
significant prior defaults may have occurred. Open charge-offs or collection
accounts with balances of less than $2,500 may remain open after the funding of
the loan. No bankruptcy or notice of default filings by the applicant may have
occurred during the
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<PAGE>
preceding 12 months. The mortgaged property must be in average condition. In
most cases, a maximum loan-to-value ratio of 75% for a mortgage loan on a single
family, owner-occupied property for a full documentation program, or 70% for
mortgage loans originated under the stated income documentation program, is
permitted. A maximum loan-to-value ratio of 70% is permitted for a mortgage loan
on a non-owner-occupied property, an owner-occupied condominium or a two-
to-four family residential property, or 60% for a mortgage loan on a
non-owner-occupied property and 65% for a mortgage loan on an owner-occupied
condominium or a two- to four-family residential property originated under the
stated income documentation program. Rural, remote or unique properties are not
allowed. The maximum combined loan-to-value ratio, including any related
subordinate lien, is 85% for a refinance loan and for a purchase money loan. The
debt service-to-income ratio is usually 59% or less.
"C-" RISK. Under the "C-" risk category, an applicant may have experienced
significant credit problems in the past. A maximum of two 90-day late payments
and one 120-day late payment is acceptable on an existing mortgage loan. An
existing mortgage loan must be less than 90 days late at the time of funding of
the loan. As to non-mortgage credit, significant prior defaults may have
occurred. Open charge-offs or collection accounts with balances less than $5,000
may remain open after the funding of the loan. There may be no current notice of
default and any bankruptcy must be discharged. The mortgaged property may
exhibit some deferred maintenance. A maximum loan-to-value ratio of 70%, or 55%
for mortgage loans originated under the stated income documentation program, is
permitted for a mortgage loan on a single family owner-occupied property. A
maximum loan-to-value ratio of 65% is permitted for a mortgage loan on a
non-owner occupied property, an owner-occupied condominium or a two- to
four-family residential property, or 45% for a mortgage loan on a
non-owner-occupied property and 50% for a mortgage loan on an owner-occupied
condominium or a two- to four-family residential property originated under the
stated income documentation program. Rural, remote or unique properties are not
allowed. The maximum combined loan- to-value ratio, including any related
subordinate lien, is 80% for a refinance loan and 80% for a purchase money loan.
The debt service-to-income ratio is usually 59% or less.
MORTGAGE CREDIT ONLY ("MO") AAA RISK. Under the MO "AAA" risk category, the
applicant is allowed a maximum of one 30-day late payment and no 60-day late
payments within the last 12 months on an existing mortgage loan. An existing
mortgage loan is required to be current at the time the application is
submitted. No bankruptcy or notice of default filings may have occurred during
the preceding three years. The mortgaged property must be in at least average
condition. A maximum loan-to-value ratio of 85% for mortgage loans originated
under the full documentation program is permitted for a mortgage loan on a
single family owner-occupied property. MO "AAA" loans are not made available
under the stated income documentation program. A maximum loan-to-value ratio of
80% is permitted for a mortgage loan on a non-owner occupied property,
owner-occupied condominium, or two- to four-family residential property. The MO
"AAA" program is not available for rural, remote or unique properties. The
maximum combined loan-to-value ratio, including any related subordinate lien, is
100% for a refinance loan. The debt service-to-income ratio is generally equal
to or less than 45%. The maximum loan amount is $250,000.
MORTGAGE CREDIT ONLY ("MO") A+ RISK. Under the MO "A+" risk category, the
applicant is allowed a maximum of two 30-day late payments and no 60-day late
payments within the last 12 months on an existing mortgage loan. An existing
mortgage loan is required to be current at the
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<PAGE>
time the application is submitted. No bankruptcy or notice of default filings
may have occurred during the preceding three years. The mortgaged property must
be in at least average condition. A maximum loan-to-value ratio of 80% for
mortgage loans originated under the full documentation program is permitted for
a mortgage loan on a single family owner-occupied property. MO "A+" loans are
not made available under the stated income documentation program. A maximum
loan-to-value ratio of 80% is permitted for a mortgage loan on a non-owner
occupied property, owner-occupied condominium, or two- to four-family
residential property. The MO "A+" program is not available for rural, remote or
unique properties. The maximum combined loan-to-value ratio, including any
related subordinate lien, is 100% for a refinance loan. The debt
service-to-income ratio is generally equal to or less than 45%. The maximum loan
amount is $250,000.
MORTGAGE CREDIT ONLY ("MO") A- RISK. The MO "A-" risk category allows for
three 30-day late payments and no 60-day late payments within the last 12 months
on an existing mortgage loan. An existing mortgage loan is not required to be
current at the time the application is submitted. Derogatory items are allowed
as to non-mortgage credit. No bankruptcy or notice of default filings may have
occurred during the preceding two years. The mortgaged property must be in at
least average condition. A maximum loan-to-value ratio of 75% for mortgage loans
originated under the full documentation program is permitted for a mortgage loan
on a single family owner-occupied property. MO "A-" loans are not made available
under the stated income documentation program. A maximum loan-to-value ratio of
70% is permitted for a mortgage loan on a non-owner occupied property,
owner-occupied condominium, or two- to four-family residential property. The MO
"A-" program is not available for rural, remote or unique properties. The
maximum combined loan-to-value ratio, including any related subordinate lien, is
90% for a refinance loan. The debt service-to-income ratio is generally equal to
or less than 55%. The maximum loan amount is $250,000.
HOME SAVER PROGRAM. The originator originates loans under a program called
"Home Saver" to enable borrowers with an existing delinquent loan to preserve
their home ownership. The existing loan may be over 90 days delinquent, but any
bankruptcy proceeding must be dismissed before the loan is funded. The
loan-to-value ratio may not exceed 65%. Home Saver loans are not made available
under the stated income documentation program. A maximum loan-to-value ratio of
60% is permitted for a mortgage loan on a non-owner occupied property,
owner-occupied condominium or a two- to four-family residential property. The
Home Saver program is not available for rural, remote or unique properties. The
maximum combined loan-to-value ratio, including any related subordinate lien, is
80% for a refinance loan. The maximum loan amount is $300,000.
EXCEPTIONS. As described above, the foregoing categories and criteria are
guidelines only. On a case-by-case basis, it may be determined that an applicant
warrants a debt service-to-income ratio exception, a pricing exception, a
loan-to-value exception, an exception from certain requirements of a particular
risk category, etc. An exception may be allowed if the application reflects
compensating factors, such as: low loan-to-value ratio; pride of ownership; a
maximum of one 30-day late payment on all mortgage loans during the last 12
months; and stable employment or ownership of current residence of four or more
years. An exception may also be allowed if the applicant places a down payment
through escrow of at least 20% of the purchase price of the mortgaged property
or if the new loan reduces the applicant's monthly aggregate mortgage payment by
25% or more. Accordingly, a mortgagor may qualify in a more
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<PAGE>
favorable risk category that, in the absence of compensating factors, would
satisfy only the criteria of a less favorable risk category. It is expected that
a substantial portion of the first lien mortgage loans in the mortgage pool will
represent these kinds of exceptions.
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
The description in this prospectus supplement of the mortgage pool and the
mortgaged properties is based upon the mortgage pool as constituted as of the
close of business on the cut- off date, as adjusted for the scheduled principal
payments due on or before the cut-off date. Prior to the issuance of the
certificates, mortgage loans may be removed from the mortgage pool as a result
of incomplete documentation or otherwise if the depositor deems the removal
necessary or desirable, and may be prepaid at any time. A limited number of
other mortgage loans may be included in the mortgage pool prior to the issuance
of the certificates unless including these mortgage loans would materially alter
the characteristics of the mortgage pool as described in this prospectus
supplement. The depositor believes that the information set forth in this
prospectus supplement will be representative of the characteristics of the
mortgage pool as it will be constituted at the time the certificates are issued,
although the range of mortgage rates and maturities and other characteristics of
the mortgage loans may vary.
YIELD ON THE CERTIFICATES
SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period from the due date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial principal prepayment is made on a mortgage loan, the
mortgagor is not charged interest on the amount of the prepayment for the month
in which the prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended, which we refer to as the
Relief Act, to any mortgage loan will adversely affect, for an indeterminate
period of time, the ability of the master servicer to collect full amounts of
interest on mortgage loans affected by application of the Relief Act. The master
servicer is obligated to pay from its own funds only those interest shortfalls
attributable to full and partial prepayments by the mortgagors on the mortgage
loans, but only to the extent of its aggregate servicing fee for the related due
period. Accordingly, the effect of:
o any principal prepayments on the mortgage loans, to the extent
that Prepayment Interest Shortfalls exceed Compensating Interest
or
o any shortfalls resulting from the application of the Relief Act
will be to reduce the aggregate amount of interest collected that is available
for distribution to certificateholders.
Any of these shortfalls will be allocated among the certificates as
provided under "Description of the Certificates--Interest Distributions on the
Offered Certificates and the Class IO Certificates" and "--Overcollateralization
Provisions" in this prospectus supplement. See
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<PAGE>
"Legal Aspects of the Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of
1940" in the prospectus.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the offered certificates, the aggregate
amount of distributions on the offered certificates and the yield to maturity of
the offered certificates will be related to the rate and timing of payments of
principal on the mortgage loans. The rate of principal payments on the mortgage
loans will in turn be affected by the amortization schedules of the mortgage
loans as they change from time to time to accommodate changes in the mortgage
rates and by the rate of principal prepayments on the mortgage loans, including
for this purpose, payments resulting from refinancings, liquidations of the
mortgage loans due to defaults, casualties, condemnations and repurchases,
whether optional or required, by the depositor, the originator or the master
servicer. The mortgage loans may be prepaid by the mortgagors at any time;
however, as described under "The Mortgage Pool" in this prospectus supplement,
with respect to approximately 78.17% of the mortgage loans, by aggregate
principal balance as of the cut-off date, a prepayment may subject the related
mortgagor to a prepayment charge.
Prepayments, liquidations and repurchases of the mortgage loans will result
in distributions in respect of principal to the holders of the class or classes
of offered certificates then entitled to receive distributions that otherwise
would be distributed over the remaining terms of the mortgage loans. Since the
rates of payment of principal on the mortgage loans will depend on future events
and a variety of factors, no assurance can be given as to that rate or the rate
of principal prepayments. The extent to which the yield to maturity of any class
of offered certificates may vary from the anticipated yield will depend upon the
degree to which the offered certificates are purchased at a discount or premium
and the degree to which the timing of payments on the offered certificates is
sensitive to prepayments on the mortgage loans. Further, an investor should
consider, in the case of any offered certificate purchased at a discount, the
risk that a slower than anticipated rate of principal payments on the mortgage
loans could result in an actual yield to the investor that is lower than the
anticipated yield. In the case of any offered certificate purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to the investor that is lower than the
anticipated yield.
It is highly unlikely that the mortgage loans will prepay at any constant
rate until maturity or that all of the mortgage loans will prepay at the same
rate. Moreover, the timing of prepayments on the mortgage loans may
significantly affect the yield to maturity on the offered certificates, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. In most cases, the earlier a prepayment of principal
is made on the mortgage loans, the greater the effect on the yield to maturity
of the offered certificates. As a result, 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 the period immediately following the issuance of the
offered certificates would not be fully offset by a subsequent like reduction or
increase in the rate of principal payments.
The rate of payments, including prepayments, on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the mortgage rates on the
mortgage loans, the rate of prepayment and
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<PAGE>
refinancing would be expected to increase. Conversely, if prevailing mortgage
rates rise significantly above the mortgage rates on the mortgage loans in the
mortgage pool, the rate of prepayment on the mortgage loans would be expected to
decrease. Other factors affecting prepayment of mortgage loans include changes
in mortgagors' housing needs, job transfers, unemployment, mortgagors' net
equity in the mortgaged properties and servicing decisions. The prepayment
experience of the delayed first adjustment mortgage loans may differ from that
of the other mortgage loans. The delayed first adjustment mortgage loans may be
subject to greater rates of prepayments as they approach their initial
adjustment dates even if market interest rates are only slightly higher or lower
than the mortgage rates on the delayed first adjustment mortgage loans as
borrowers seek to avoid changes in their monthly payments. In addition, the
existence of the applicable periodic rate cap, maximum mortgage rate and minimum
mortgage rate may affect the likelihood of prepayments resulting from
refinancings. There can be no certainty as to the rate of prepayments on the
mortgage loans in the mortgage pool during any period or over the life of the
certificates. See "Yield Considerations" and "Maturity and Prepayment
Considerations" in the prospectus.
Because principal distributions are paid to more senior classes of offered
certificates before other classes, holders of classes of offered certificates
having a later priority of payment bear a greater risk of losses than holders of
classes having earlier priorities for distribution of principal. This is because
the certificates having later priority will represent an increasing percentage
interest in the trust fund during the period prior to the commencement of
distributions of principal on these certificates. As described under
"Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement, prior to the Stepdown Date, all
principal payments on the mortgage loans will be allocated to the Class A
Certificates. Thereafter, as further described in this prospectus supplement,
during certain periods, subject to certain delinquency triggers described in
this prospectus supplement, all principal payments on the mortgage loans will be
allocated to the offered certificates in the priorities described under
"Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement.
Defaults on mortgage loans may occur with greater frequency in their early
years. In addition, default rates may be higher for mortgage loans used to
refinance an existing mortgage loan. In the event of a mortgagor's default on a
mortgage loan in the mortgage pool, there can be no assurance that recourse will
be available beyond the specific mortgaged property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards of the Originator and
Representations Concerning the Mortgage Loans" in this prospectus supplement.
SPECIAL YIELD CONSIDERATIONS
The mortgage rates on the mortgage loans adjust semi-annually, subject to
periodic and lifetime limitations, based upon six-month LIBOR, after an initial
period of two or three years with respect to delayed first adjustment mortgage
loans. The pass-through rates on the offered certificates adjust monthly based
upon one-month LIBOR determined as described under "Description of the
Certificates--Calculation of One-Month LIBOR" in this prospectus supplement,
with the result that increases in the pass-through rates on the offered
certificates may be limited for extended periods in a rising interest rate
environment. Investors should note that approximately 98.94% of the mortgage
loans, by aggregate principal balance as of the cut-off date, are delayed first
adjustment mortgage loans. The interest due on the mortgage
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<PAGE>
loans during any due period, net of the expenses of the trust, may not equal the
amount of interest that would accrue at one-month LIBOR plus the applicable
spread on the offered certificates during the related Interest Accrual Period.
In addition, six-month LIBOR and one-month LIBOR may respond differently to
economic and market factors. Thus, it is possible, for example, that if both
one-month LIBOR and six-month LIBOR rise during the same period, one-month LIBOR
may rise more rapidly than six-month LIBOR, potentially resulting in the
application of the Net WAC Pass-Through Rate on the offered certificates.
Application of the Net WAC Pass-Through Rate would adversely affect the yield to
maturity on these certificates, and the holders of these certificates WILL NOT
be entitled to interest not received as a result of the Net WAC Pass-Through
Rate on any future distribution date. The pass-through rate on the Class IO
Certificates will increase with decreases in one-month LIBOR unless one-month
LIBOR equals or falls below 2.500% per annum. As a result, at the same time that
the pass- through rates on the offered certificates are reducing due to
decreases in one-month LIBOR, the Net WAC Pass-Through Rate may decrease due to
the increase in the pass-through rate on the Class IO Certificates. In addition,
the Net WAC Pass-Through Rate will be reduced by the prepayment of mortgage
loans with high mortgage rates. The holders of the offered certificates WILL NOT
be entitled to interest in excess of the Net WAC Pass-Through Rate on any future
distribution date.
As described under "Description of the Certificates--Allocation of Losses;
Subordination," amounts otherwise distributable to holders of the Class M-1
Certificates, the Class M-2 Certificates, the Class M-3 Certificates and the
Class CE Certificates may be made available to protect the holders of the Class
A Certificates against interruptions in distributions due to certain mortgagor
delinquencies, to the extent not covered by P&I advances. Such delinquencies may
affect the yield to investors in these certificates and, even if subsequently
cured, will affect the timing of the receipt of distributions by the holders of
these certificates. In addition, the rate of delinquencies or losses will affect
the rate of principal payments on the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates. See "Description of the
Certificates--Principal Distributions on the Offered Certificates" in this
prospectus supplement.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of that
security will be repaid to the investor. The weighted average life of each class
of offered certificates will be influenced by the rate at which principal on the
mortgage loans is paid, which may be in the form of scheduled payments or
prepayments, including repurchases and prepayments of principal by the borrower
as well as amounts received by virtue of condemnation, insurance or foreclosure
with respect to the mortgage loans, and the timing of these payments.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement
assumes a prepayment rate for the mortgage loans of 28% CPR. To assume 28% CPR
or any other CPR percentage is to assume that the stated percentage of the
outstanding principal balance of the pool is prepaid over the course of a year.
No representation is made that the mortgage loans will prepay at 28% CPR or any
other rate.
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<PAGE>
The tables entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Specified Percentages of CPR" in this prospectus supplement
indicate the percentage of the initial Certificate Principal Balance of the
offered certificates that would be outstanding after each of the dates shown at
various percentages of CPR and the corresponding weighted average lives of these
certificates. The tables are based on the following assumptions:
o the mortgage pool consists of six mortgage loans with the characteristics
set forth in the immediately following table entitled "Assumed Mortgage
Loan Characteristics";
o distributions on these certificates are received, in cash, on the 25th day
of each month, commencing in April 2000;
o the mortgage loans prepay at the percentages of CPR indicated;
o no defaults or delinquencies occur in the payment by mortgagors of
principal and interest on the mortgage loans and no shortfalls due to the
application of the Relief Act are incurred;
o none of the depositor, the master servicer or any other person purchases
from the trust fund any mortgage loan under any obligation or option under
the pooling and servicing agreement, except as indicated in the second
sentence following the tables entitled "Percent of Initial Certificate
Principal Balance Outstanding at the Specified Percentages of CPR";
o scheduled monthly payments on the mortgage loans are received on the first
day of each month commencing in April 2000, and are computed prior to
giving effect to any prepayments received in the prior month;
o prepayments representing payment in full of individual mortgage loans are
received on the last day of each month commencing in March 2000, and
include 30 days' interest on the mortgage loan;
o the scheduled monthly payment for each mortgage loan is calculated based on
its principal balance, mortgage rate, original term to stated maturity and
remaining term to stated maturity so that the mortgage loan will amortize
in amounts sufficient to repay the remaining principal balance of the
mortgage loan by its remaining term to stated maturity;
o the certificates are purchased on March 24, 2000;
o the servicing fee rate is equal to 0.50% per annum and the administration
fee rate is equal to 0.0070% per annum;
o the index remains constant at 6.42% per annum and the mortgage rate on each
mortgage loan is adjusted on the next adjustment date and on subsequent
adjustment dates, if necessary, to equal the index plus the applicable
gross margin, subject to the applicable periodic rate cap and lifetime
limitations;
o one-month LIBOR remains constant at 6.12% per annum; and
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<PAGE>
o the monthly payment on each mortgage loan is adjusted on the due date
immediately following the next adjustment date and on subsequent adjustment
dates, if necessary, to equal a fully amortizing monthly payment.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL REMAINING
PRINCIPAL BALANCE GROSS TERM TERM FIRST MAXIMUM MINIMUM PERIODIC
AS OF THE MORTGAGE TO MATURITY TO MATURITY ADJUSTMENT GROSS MORTGAGE MORTGAGE RATE
CUT-OFF DATE RATE(%) (MONTHS) (MONTHS) DATE MARGIN(%) RATE(%) RATE(%) CAP(%)
------------ ------- -------- -------- ---------- --------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) $2,398,089 10.165% 347 345 July 2000 6.076% 17.125% 10.165% 1.444%
(2) $89,442,975 10.652% 357 356 February 6.165% 17.648% 10.652% 1.492%
2002
(3) $1,975,756 10.809% 360 359 February 6.089% 17.797% 10.809% 1.494%
2003
(4) $2,150,490 9.708% 360 359 August 2000 6.172% 16.708% 9.708% 1.500%
February
(5) $320,316,838 10.147% 359 358 2002 6.180% 17.145% 10.147% 1.492%
(6) $13,396,024 10.127% 360 359 February 6.192% 17.121% 10.127% 1.491%
2003
</TABLE>
The first and fourth hypothetical mortgage loans above are mortgage loans
that are not delayed first adjustment mortgage loans. The second and fifth
hypothetical mortgage loans above are mortgage loans that are delayed first
adjustment mortgage loans with their first adjustment date occurring after an
initial period of approximately two years from the date of origination thereof.
The third and sixth hypothetical mortgage loans above are mortgage loans that
are delayed first adjustment mortgage loans with their first adjustment date
occurring after an initial period of approximately three years from the date of
origination thereof. The first, second and third hypothetical mortgage loans
above are mortgage loans that DO NOT by their terms have prepayment charges, and
the fourth, fifth and sixth hypothetical mortgage loans above are mortgage loans
that by their terms DO have prepayment charges.
There will be discrepancies between the characteristics of the actual
mortgage loans in the mortgage pool and the characteristics assumed in preparing
the tables entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Specified Percentages of CPR"in this prospectus supplement.
Any discrepancy may have an effect upon the percentages of the initial
Certificate Principal Balance outstanding, and the weighted average lives, of
the offered certificates set forth in the tables. In addition, since the actual
mortgage loans included in the mortgage pool will have characteristics that
differ from those assumed in preparing the tables entitled "Percent of Initial
Certificate Principal Balance Outstanding at the Specified Percentages of CPR"in
this prospectus supplement and since it is not likely the level of the index or
one-month LIBOR will remain constant as assumed, the offered certificates may
mature earlier or later than indicated by the tables. In addition, as described
under "Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement, the occurrence of the Stepdown Date
or a Trigger Event will have the effect of accelerating or decelerating the
amortization of the offered certificates, affecting the weighted average lives
of the offered certificates. Based on the foregoing assumptions, the tables
indicate the weighted average lives of the offered certificates and sets forth
the percentages of the initial Certificate Principal Balance of the offered
certificates that would be outstanding after each of the distribution dates
shown, at various percentages of CPR. Neither the prepayment model used in this
prospectus supplement nor any other prepayment model or assumption purports to
be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans included in the mortgage pool. Variations in the prepayment
experience and the balance of the mortgage loans
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<PAGE>
that prepay may increase or decrease the percentages of initial Certificate
Principal Balances, and weighted average lives, shown in the following table.
These variations may occur even if the average prepayment experience of all the
mortgage loans included in the mortgage pool equals any of the specified
percentages of CPR shown in the immediately following tables.
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------
Distribution Date 0% 15% 28% 35% 45%
- -------------------------------------- ---------- --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Initial Percentage.................... 100% 100% 100% 100% 100%
March 25, 2001........................ 99 80 64 55 42
March 25, 2002........................ 99 63 38 25 10
March 25, 2003........................ 98 49 19 6 0
March 25, 2004........................ 97 37 19 6 0
March 25, 2005........................ 97 31 14 6 0
March 25, 2006........................ 96 26 10 5 0
March 25, 2007........................ 95 22 7 3 0
March 25, 2008........................ 94 19 5 2 0
March 25, 2009........................ 93 16 4 1 0
March 25, 2010........................ 92 13 3 1 0
March 25, 2011........................ 90 11 2 * 0
March 25, 2012........................ 88 9 1 0 0
March 25, 2013........................ 87 8 1 0 0
March 25, 2014........................ 84 6 * 0 0
March 25, 2015........................ 82 5 0 0 0
March 25, 2016........................ 79 4 0 0 0
March 25, 2017........................ 76 4 0 0 0
March 25, 2018........................ 73 3 0 0 0
March 25, 2019........................ 69 2 0 0 0
March 25, 2020........................ 64 2 0 0 0
March 25, 2021........................ 59 2 0 0 0
March 25, 2022........................ 53 1 0 0 0
March 25, 2023........................ 47 1 0 0 0
March 25, 2024........................ 39 * 0 0 0
March 25, 2025........................ 33 * 0 0 0
March 25, 2026........................ 28 0 0 0 0
March 25, 2027........................ 22 0 0 0 0
March 25, 2028........................ 15 0 0 0 0
March 25, 2029........................ 7 0 0 0 0
March 25, 2030........................ 0 0 0 0 0
Weighted Average Life in Years(1)..... 21.1 4.7 2.4 1.6 1.0
Weighted Average Life in Years(1)(2).. 21.1 4.4 2.2 1.5 1.0
</TABLE>
- ---------------
* Represents less than one-half of one percent.
(1)The weighted average life of 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 the certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of the certificate.
(2)Assumes the master servicer exercises its option to purchase the mortgage
loans on the earliest possible distribution date on which it is permitted to
exercise this option. See "Pooling and Servicing Agreement--Termination" in this
prospectus supplement.
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<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS M-1
--------------------------------------------------------------------
Distribution Date 0% 15% 28% 35% 45%
- -------------------------------------- ---------- --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Initial Percentage................... 100% 100% 100% 100% 100%
March 25, 2001....................... 100 100 100 100 100
March 25, 2002....................... 100 100 100 100 100
March 25, 2003....................... 100 100 100 100 27
March 25, 2004....................... 100 100 53 96 27
March 25, 2005....................... 100 86 38 39 27
March 25, 2006....................... 100 73 27 15 25
March 25, 2007....................... 100 62 19 9 9
March 25, 2008....................... 100 52 14 6 1
March 25, 2009....................... 100 44 10 1 0
March 25, 2010....................... 100 37 7 0 0
March 25, 2011....................... 100 31 4 0 0
March 25, 2012....................... 100 26 * 0 0
March 25, 2013....................... 100 22 0 0 0
March 25, 2014....................... 100 18 0 0 0
March 25, 2015....................... 100 15 0 0 0
March 25, 2016....................... 100 12 0 0 0
March 25, 2017....................... 100 10 0 0 0
March 25, 2018....................... 100 8 0 0 0
March 25, 2019....................... 100 7 0 0 0
March 25, 2020....................... 100 6 0 0 0
March 25, 2021....................... 100 3 0 0 0
March 25, 2022....................... 100 * 0 0 0
March 25, 2023....................... 100 0 0 0 0
March 25, 2024....................... 100 0 0 0 0
March 25, 2025....................... 92 0 0 0 0
March 25, 2026....................... 77 0 0 0 0
March 25, 2027....................... 60 0 0 0 0
March 25, 2028....................... 41 0 0 0 0
March 25, 2029....................... 19 0 0 0 0
March 25, 2030....................... 0 0 0 0 0
Weighted Average Life in Years(1).... 27.4 9.7 5.4 5.2 3.9
Weighted Average Life in Years(1)(2). 27.4 8.9 4.9 4.8 3.1
</TABLE>
* Represents less than one-half of one percent.
(1)The weighted average life of 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 the certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of the certificate.
(2)Assumes the master servicer exercises its option to purchase the mortgage
loans on the earliest possible distribution date on which it is permitted to
exercise this option. See "Pooling and Servicing Agreement--Termination" in this
prospectus supplement.
S-41
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS M-2
--------------------------------------------------------------------
Distribution Date 0% 15% 28% 35% 45%
- -------------------------------------- ---------- --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Initial Percentage................... 100% 100% 100% 100% 100%
March 25, 2001....................... 100 100 100 100 100
March 25, 2002....................... 100 100 100 100 100
March 25, 2003....................... 100 100 100 100 100
March 25, 2004....................... 100 100 53 35 84
March 25, 2005....................... 100 86 38 23 31
March 25, 2006....................... 100 73 27 15 *
March 25, 2007....................... 100 62 19 9 0
March 25, 2008....................... 100 52 14 2 0
March 25, 2009....................... 100 44 10 0 0
March 25, 2010....................... 100 37 4 0 0
March 25, 2011....................... 100 31 0 0 0
March 25, 2012....................... 100 26 0 0 0
March 25, 2013....................... 100 22 0 0 0
March 25, 2014....................... 100 18 0 0 0
March 25, 2015....................... 100 15 0 0 0
March 25, 2016....................... 100 12 0 0 0
March 25, 2017....................... 100 10 0 0 0
March 25, 2018....................... 100 7 0 0 0
March 25, 2019....................... 100 4 0 0 0
March 25, 2020....................... 100 1 0 0 0
March 25, 2021....................... 100 0 0 0 0
March 25, 2022....................... 100 0 0 0 0
March 25, 2023....................... 100 0 0 0 0
March 25, 2024....................... 100 0 0 0 0
March 25, 2025....................... 92 0 0 0 0
March 25, 2026....................... 77 0 0 0 0
March 25, 2027....................... 60 0 0 0 0
March 25, 2028....................... 41 0 0 0 0
March 25, 2029....................... 19 0 0 0 0
March 25, 2030....................... 0 0 0 0 0
Weighted Average Life in Years(1).... 27.4 9.5 5.1 4.5 4.7
Weighted Average Life in Years(1)(2). 27.4 8.9 4.7 4.2 3.8
</TABLE>
* Represents less than one-half of one percent.
(1)The weighted average life of 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 the certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of the certificate.
(2)Assumes the master servicer exercises its option to purchase the mortgage
loans on the earliest possible distribution date on which it is permitted to
exercise this option. See "Pooling and Servicing Agreement--Termination" in this
prospectus supplement.
S-42
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS M-3
--------------------------------------------------------------------
Distribution Date 0% 15% 28% 35% 45%
- -------------------------------------- ---------- --------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Initial Percentage.................. 100% 100% 100% 100% 100%
March 25, 2001...................... 100 100 100 100 100
March 25, 2002...................... 100 100 100 100 100
March 25, 2003...................... 100 100 100 100 100
March 25, 2004...................... 100 100 53 35 14
March 25, 2005...................... 100 86 38 22 *
March 25, 2006...................... 100 73 27 8 0
March 25, 2007...................... 100 62 17 0 0
March 25, 2008...................... 100 52 7 0 0
March 25, 2009...................... 100 44 * 0 0
March 25, 2010...................... 100 37 0 0 0
March 25, 2011...................... 100 31 0 0 0
March 25, 2012...................... 100 26 0 0 0
March 25, 2013...................... 100 21 0 0 0
March 25, 2014...................... 100 14 0 0 0
March 25, 2015...................... 100 9 0 0 0
March 25, 2016...................... 100 5 0 0 0
March 25, 2017...................... 100 1 0 0 0
March 25, 2018...................... 100 0 0 0 0
March 25, 2019...................... 100 0 0 0 0
March 25, 2020...................... 100 0 0 0 0
March 25, 2021...................... 100 0 0 0 0
March 25, 2022...................... 100 0 0 0 0
March 25, 2023...................... 100 0 0 0 0
March 25, 2024...................... 100 0 0 0 0
March 25, 2025...................... 92 0 0 0 0
March 25, 2026...................... 77 0 0 0 0
March 25, 2027...................... 60 0 0 0 0
March 25, 2028...................... 41 0 0 0 0
March 25, 2029...................... 17 0 0 0 0
March 25, 2030...................... 0 0 0 0 0
Weighted Average Life in Years(1)... 27.4 9.1 4.8 4.1 3.7
Weighted Average Life in Years(1)(2) 27.4 8.8 4.7 4.0 3.6
</TABLE>
- -----------------
* Represents less than one-half of one percent.
(1) The weighted average life of 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 the certificate to the related distribution date, (b) adding
the results and (c) dividing the sum by the initial Certificate Principal
Balance of the certificate.
(2)Assumes the master servicer exercises its option to purchase the mortgage
loans on the earliest possible distribution date on which it is permitted to
exercise this option. See "Pooling and Servicing Agreement--Termination" in this
prospectus supplement.
S-43
<PAGE>
There is no assurance that prepayments of the mortgage loans included in
the mortgage pool will conform to any of the levels of CPR indicated in the
immediately preceding tables, or to any other level, or that the actual weighted
average lives of the offered certificates will conform to any of the weighted
average lives set forth in the immediately preceding tables. Furthermore, the
information contained in the tables with respect to the weighted average lives
of the offered certificates is not necessarily indicative of the weighted
average lives that might be calculated or projected under different or varying
prepayment assumptions.
The characteristics of the mortgage loans included in the mortgage pool
will differ from those assumed in preparing the immediately preceding tables. In
addition, it is unlikely that any mortgage loan will prepay at any constant
percentage until maturity, that all of the mortgage loans included in the
mortgage pool will prepay at the same rate. The timing of changes in the rate of
prepayments may significantly affect the actual yield to maturity to investors,
even if the average rate of principal prepayments is consistent with the
expectations of investors.
YIELD SENSITIVITY OF THE CLASS M-1 CERTIFICATES, THE CLASS M-2 CERTIFICATES AND
THE CLASS M-3 CERTIFICATES
If the Certificate Principal Balances of the Class CE Certificates, the
Class M-3 Certificates and the Class M-2 Certificates have been reduced to zero,
the yield to maturity on the Class M-1 Certificates will become extremely
sensitive to losses on the mortgage loans and the timing of those losses that
are covered by subordination, because the entire amount of any realized losses
to the extent not covered by Net Monthly Excess Cashflow will be allocated to
the Class M-1 Certificates. If the Certificate Principal Balances of the Class
CE Certificates and the Class M-3 Certificates have been reduced to zero, the
yield to maturity on the Class M-2 Certificates will become extremely sensitive
to losses on the mortgage loans and the timing of those losses that are covered
by subordination, because the entire amount of any realized losses to the extent
not covered by Net Monthly Excess Cashflow will be allocated to the Class M-2
Certificates. If the Certificate Principal Balance of the Class CE Certificates
has been reduced to zero, the yield to maturity on the Class M-3 Certificates
will become extremely sensitive to losses on the mortgage loans and the timing
of those losses that are covered by subordination, because the entire amount of
any realized losses to the extent not covered by Net Monthly Excess Cashflow
will be allocated to the Class M-3 Certificates. The initial undivided interests
in the trust fund evidenced by the Class M-1 Certificates, the Class M-2
Certificates, the Class M-3 Certificates and the Class CE Certificates are
approximately 7.75%, approximately 6.50%, approximately 4.50% and approximately
3.25%, respectively. Investors in these certificates should fully consider the
risk that realized losses on the mortgage loans could result in the failure of
investors to fully recover their investments. In addition, once realized losses
have been allocated to the Class M-1 Certificates, the Class M-2 Certificates
and the Class M-3 Certificates, their Certificate Principal Balances will be
permanently reduced by the amounts so allocated. Therefore, these amounts of
realized losses allocated to these certificates will no longer accrue interest
nor will these amounts be reinstated or otherwise reimbursed thereafter.
Unless the Certificate Principal Balance of the Class A Certificates has
been reduced to zero, the Class M-1 Certificates, the Class M-2 Certificates and
the Class M-3 Certificates will not be entitled to any principal distributions
until the Stepdown Date or during any period in which a
S-44
<PAGE>
Trigger Event is in effect. As a result, the weighted average lives of the Class
M-1 Certificates, the Class M-2 Certificates and the Class M-3 Certificates will
be longer than would otherwise be the case if distributions of principal were
allocated on a PRO RATA basis among all of the offered certificates. As a result
of the longer weighted average lives of the Class M-1 Certificates, the Class
M-2 Certificates and the Class M-3 Certificates, the holders of these
certificates have a greater risk of suffering a loss on their investments.
Further, because a Trigger Event is based on delinquencies and not losses, it is
possible for the Class M-1 Certificates, the Class M-2 Certificates and the
Class M-3 Certificates to receive no principal distributions, unless the
Certificate Principal Balance of the Class A Certificates has been reduced to
zero, on and after the Stepdown Date even if no losses have occurred on the
mortgage pool. For additional considerations relating to the yield on the Class
M-1 Certificates, the Class M-2 Certificates and the Class M-3 Certificates, see
"Yield Considerations" and "Maturity and Prepayment Considerations" in the
prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL DESCRIPTION OF THE CERTIFICATES
The New Century Home Equity Loan Trust, Series 2000-NC1, Asset Backed
Pass-Through Certificates will consist of twelve classes of certificates,
designated as:
o the Class A Certificates;
o the Class M-1 Certificates, the Class M-2 Certificates and the
Class M-3 Certificates;
o the Class IO Certificates;
o the Class CE Certificates;
o the Class P Certificates; and
o the Residual Certificates.
Only the Class A Certificates, the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates are offered by this prospectus
supplement. The Class IO Certificates, the Class CE Certificates, the Class P
Certificates, the Residual Certificates, which are not being offered by this
prospectus supplement, will be delivered to a wholly-owned bankruptcy remote
subsidiary of the seller as partial consideration for the mortgage loans.
Distributions on the offered certificates will be made on the 25th day of
each month, or, if that day is not a business day, on the next succeeding
business day, beginning in April 2000.
The certificates represent in the aggregate the entire beneficial ownership
interest in a trust fund consisting primarily of the mortgage pool of
conventional, one- to four-family, adjustable- rate, first lien mortgage loans
having original terms to maturity of not greater than 30 years. The certificates
have an aggregate principal balance as of the cut-off date of approximately
S-45
<PAGE>
$429,680,172, subject to a permitted variance as described under "The Mortgage
Pool" in this prospectus supplement.
Each class of offered certificates will have the initial Certificate
Principal Balance and pass- through rate as set forth in the table appearing in
the summary of this prospectus supplement. The pass-through rates on the offered
certificates are adjustable and will be calculated for each distribution date as
described under "--Pass-Through Rates" below in this prospectus supplement. The
Class A Certificates evidence an initial undivided interest of approximately
78.00% in the trust fund, the Class M-1 Certificates, the Class M-2 Certificates
and the Class M- 3 Certificates evidence initial undivided interests of
approximately 7.75%, approximately 6.50% and approximately 4.50%, respectively,
in the trust fund and the Class CE Certificates evidence an initial undivided
interest of approximately 3.25% in the trust fund.
All distributions to holders of the certificates, other than the final
distribution on any class of certificates, will be made by the trust
administrator to the persons in whose names the certificates are registered at
the close of business on each record date. The "record date" for each
distribution date:
o with respect to any book-entry certificate will be the close of
business on the business day immediately preceding such distribution
date or
o with respect to any other certificates, including any definitive
certificates, will be the close of business on the last business day
of the month preceding the month in which the distribution date
occurs.
BOOK-ENTRY CERTIFICATES
The offered certificates will be book-entry certificates. Persons acquiring
beneficial ownership interests in the offered certificates, or certificate
owners, will hold the certificates through The Depository Trust Company or DTC
in the United States, or Clearstream Banking Luxembourg, or Clearstream,
formerly known as Cedelbank SA, or Euroclear in Europe, if they are participants
of these systems, or indirectly through organizations which are participants in
these systems. The book-entry certificates will be issued in one or more
certificates which equal the aggregate Certificate Principal Balance of the
certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. Clearstream and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in Clearstream's
and Euroclear's names on the books of their respective depositaries which in
turn will hold positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Clearstream and
The Chase Manhattan Bank will act as depositary for Euroclear. Citibank and The
Chase Manhattan Bank will be referred to individually in this prospectus
supplement as the "Relevant Depositary" and will be referred to collectively in
this prospectus supplement as the "European Depositaries". Investors may hold
beneficial interests in the book-entry certificates in minimum denominations of
$100,000 and integral multiples of $1.00 in excess of the minimum denominations.
Except as described in this section, no person acquiring a book-entry
certificate will be entitled to receive a physical or definitive certificate
representing that certificate. Unless and until definitive certificates are
S-46
<PAGE>
issued, it is anticipated that the only "certificateholder" of the offered
certificates will be Cede & Co., as nominee of DTC. Certificate owners will not
be certificateholders as that term is used in the pooling and servicing
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 that maintains the beneficial owner's account for that
purpose. In turn, the financial intermediary's ownership of the 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 Clearstream or
Euroclear, as appropriate.
Certificate owners will receive all distributions of principal of and
interest on the book-entry certificates from the trust administrator through DTC
and DTC participants. While the book- entry certificates are outstanding, 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 certificates and is required
to receive and transmit distributions of principal of, and interest on, the
book-entry certificates. Participants and indirect participants with whom
certificate owners have accounts with respect to book-entry certificates are
similarly required to make book-entry transfers and receive and transmit
distributions on behalf of their respective certificate owners. Accordingly,
although certificate owners will not possess certificates representing their
respective interests in the book- entry certificates, the DTC rules provide a
mechanism by which certificate owners will receive distributions and will be
able to transfer their interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the book-entry certificates, except
under the limited circumstances described under this section. Unless and until
definitive certificates are issued, certificateholders who are not participants
may transfer ownership of book-entry certificates only through participants and
indirect participants by instructing these participants and indirect
participants to transfer book-entry certificates, by book-entry transfer,
through DTC for the account of the purchasers of the book-entry certificates,
which account is maintained with their respective participants. Under the DTC
rules and in accordance with DTC's normal procedures, transfers of ownership of
book-entry 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
certificateholders.
Because of time zone differences, credits of securities received in
Clearstream 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. These credits or any transactions in
these securities settled during this processing will be reported to the relevant
Euroclear or Clearstream participants on the business day following the DTC
settlement date. Cash received in Clearstream or Euroclear as a result of sales
of securities by or through a Clearstream participant or Euroclear participant
to a DTC participant will be received with value
S-47
<PAGE>
on the DTC settlement date but will be available in the relevant Clearstream 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 "Federal Income Tax Considerations--REMICs--Backup Withholding
With Respect to REMIC Certificates" and "--Foreign Investors in REMIC
Certificates" in the prospectus and "Global Clearance and Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I of this prospectus supplement.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream 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 Clearstream
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, these types of cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines, based on
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. Clearstream 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 directly or indirectly 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 DTC rules, as in
effect from time to time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and therefore is subject
to regulation by the Institute Monetaire Luxembourgeois or "IML", the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers, which are referred to in
this prospectus supplements as Clearstream participants, and facilitates the
clearance and settlement of securities transactions by electronic book-entry
transfers between their accounts. Clearstream provides various services,
including safekeeping, administration, clearance and settlement of
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<PAGE>
internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in several countries
through established depository and custodial relationships. Clearstream has
established an electronic bridge with Morgan Guaranty Trust as the Euroclear
operator in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
The Euroclear system was created in 1968 to hold securities for its
participants which are referred to in this prospectus supplement as 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 29 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries 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, which is referred to in this prospectus supplement as the Euroclear
operator, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation, or simply, 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, 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,
which are referred to in this prospectus supplement as 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
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<PAGE>
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 trust administrator to DTC. DTC will be responsible for
crediting the amount of these payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC participant
will be responsible for disbursing these payments to the beneficial owners of
the book-entry certificates that it represents and to each financial
intermediary for which it acts as agent. Each financial intermediary will be
responsible for disbursing funds to the beneficial owners of the book-entry
certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry certificates
may experience some delay in their receipt of payments, since these payments
will be forwarded by the trust administrator to Cede & Co. Distributions with
respect to certificates held through Clearstream or Euroclear will be credited
to the cash accounts of Clearstream participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. These distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Considerations--REMICs--Backup Withholding With Respect
to REMIC Certificates" and "--Foreign Investors in REMIC Certificates" 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 the book-entry certificates, may be limited due to the
lack of physical certificates for the book-entry certificates. In addition,
issuance of the book-entry certificates in book-entry form may reduce the
liquidity of the certificates in the secondary market since 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 the beneficial owners are credited.
DTC has advised the depositor 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 pooling and servicing agreement
only at the direction of one or more financial intermediaries to whose DTC
accounts the book-entry certificates are credited, to the extent that actions
are taken on behalf of financial intermediaries whose holdings include the
book-entry certificates. Clearstream or the Euroclear operator, as the case may
be, will take any other action permitted to be taken by a certificateholder
under the pooling and servicing agreement on behalf of a Clearstream participant
or Euroclear participant only in accordance with its relevant rules and
procedures and subject to the ability of the Relevant Depositary to effect
actions on its behalf through DTC. DTC may take actions, at the direction of the
related participants, with respect to some book-entry certificates which
conflict with actions taken with respect to other book-entry certificates.
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<PAGE>
Definitive certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if:
o DTC or the depositor advises the trust administrator 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 trust administrator is unable to
locate a qualified successor;
o the depositor, at its sole option, with the consent of the trust
administrator, elects to terminate a book-entry system through DTC or
o after the occurrence of an event of default, beneficial owners having
percentage interests aggregating not less than 51% of the book-entry
certificates advise the trust administrator 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 to DTC, is no longer in the
best interests of beneficial owners.
Upon the occurrence of any of the events described above, the trust
administrator will be required to notify all beneficial owners of the occurrence
of the 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 trust
administrator will issue definitive certificates, and thereafter the trust
administrator will recognize the holders of the definitive certificates as
certificateholders under the pooling and servicing agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of book-entry certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform these procedures and these procedures may be
discontinued at any time.
None of the depositor, the master servicer, the trust administrator or 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 those beneficial ownership
interests.
PASS-THROUGH RATES
The pass-through rate on the Class A Certificates will be a rate per annum
equal to the lesser of (i) one-month LIBOR plus 0.27% in the case of each
distribution date through and including the distribution date on which the
aggregate principal balance of the mortgage loans and properties acquired in
respect thereof remaining in the trust fund is reduced to less than 10% of the
aggregate principal balance of the mortgage loans as of the cut-off date, or
one-month LIBOR plus 0.54%, in the case of any distribution date thereafter and
(ii) the Net WAC Pass-Through Rate for the distribution date.
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The pass-through rate on the Class M-1 Certificates will be a rate per
annum equal to the lesser of (i) one-month LIBOR plus 0.46% in the case of each
distribution date through and including the distribution date on which the
aggregate principal balance of the mortgage loans and properties acquired in
respect thereof remaining in the trust fund is reduced to less than 10% of the
aggregate principal balance of the mortgage loans as of the cut-off date, or
one-month LIBOR plus 0.69%, in the case of any distribution date thereafter and
(ii) the Net WAC Pass- Through Rate for the distribution date.
The pass-through rate on the Class M-2 Certificates will be a rate per
annum equal to the lesser of (i) one-month LIBOR plus 0.87% in the case of each
distribution date through and including the distribution date on which the
aggregate principal balance of the mortgage loans and properties acquired in
respect thereof remaining in the trust fund is reduced to less than 10% of the
aggregate principal balance of the mortgage loans as of the cut-off date, or
one-month LIBOR plus 1.305%, in the case of any distribution date thereafter and
(ii) the Net WAC Pass- Through Rate for the distribution date.
The pass-through rate on the Class M-3 Certificates will be a rate per
annum equal to the lesser of (i) one-month LIBOR plus 2.10% in the case of each
distribution date through and including the distribution date on which the
aggregate principal balance of the mortgage loans and properties acquired in
respect thereof remaining in the trust fund is reduced to less than 10% of the
aggregate principal balance of the mortgage loans as of the cut-off date, or
one-month LIBOR plus 3.15%, in the case of any distribution date thereafter and
(ii) the Net WAC Pass- Through Rate for the distribution date.
The pass-through rate on the Class IO Certificates will be a rate per annum
equal to the greater of:
o 0.000% per annum; and
o 6.000% per annum minus the greater of (i) one-month LIBOR as in effect
for the related distribution date and (ii) 2.500% per annum.
The pass-through rate on the offered certificates for the current related
Interest Accrual Period, to the extent it has been determined, and for the
immediately preceding Interest Accrual Period may be obtained by telephoning the
trust administrator at (800) 934-6802.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the certificates:
AVAILABLE DISTRIBUTION AMOUNT: The Available Distribution Amount for any
distribution date is equal to the sum, net of amounts reimbursable therefrom to
the master servicer, the trust administrator or the trustee, of an amount equal
to:
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o the aggregate amount of scheduled monthly payments on the mortgage
loans due on the related due date and received on or prior to the
related determination date, after deduction of the servicing fee and
the administration fee,
o unscheduled payments in respect of the mortgage loans, including
prepayments, insurance proceeds, liquidation proceeds and proceeds
from repurchases of and substitutions for the mortgage loans occurring
during the preceding calendar month;
o all payments of Compensating Interest made by the master servicer with
respect to the mortgage loans; and
o all P&I advances with respect to the mortgage loans received for the
distribution date.
CERTIFICATE PRINCIPAL BALANCE: The Certificate Principal Balance of an offered
certificate outstanding at any time represents the then maximum amount that the
holder of the offered certificate is entitled to receive as distributions
allocable to principal from the cash flow on the mortgage loans and the other
assets in the trust fund. The Certificate Principal Balance of any class of
offered certificates as of any date of determination is equal to the initial
Certificate Principal Balance of the offered certificate reduced by the
aggregate of:
o all amounts allocable to principal previously distributed with respect
to that certificate and
o with respect to any Class M-1 Certificate, Class M-2 Certificate or
Class M-3 Certificate, any reductions in the Certificate Principal
Balance of the offered certificate deemed to have occurred in
connection with allocations of realized losses in the manner described
in this prospectus supplement.
The Certificate Principal Balance of the Class CE Certificates as of any
date of determination is equal to the excess, if any, of:
o the then aggregate principal balance of the mortgage loans over
o the then aggregate Certificate Principal Balance of the offered
certificates and the Class P Certificates.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT: The Class A Principal Distribution Amount
is an amount equal to the excess of:
o the Certificate Principal Balance of the Class A Certificates
immediately prior to the distribution date over
o the lesser of (A) the product of (i) 56.00% and (ii) the aggregate
principal balance of the mortgage loans as of the last day of the
related due period and (B) the aggregate principal balance of the
mortgage loans as of the last day of the related due period minus
$3,222,601.
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CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT: The Class M-1 Principal Distribution
Amount is an amount equal to the excess of:
o the sum of (i) the Certificate Principal Balance of the Class A
Certificates after taking into account the payment of the Class A
Principal Distribution Amount on the distribution date and (ii) the
Certificate Principal Balance of the Class M-1 Certificates
immediately prior to the distribution date over
o the lesser of (A) the product of (i) 71.50% and (ii) the aggregate
principal balance of the mortgage loans as of the last day of the
related due period and (B) the aggregate principal balance of the
mortgage loans as of the last day of the related due period minus
$3,222,601.
CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT: The Class M-2 Principal Distribution
Amount is an amount equal to the excess of:
o the sum of (i) the Certificate Principal Balance of the Class A
Certificates after taking into account the payment of the Class A
Principal Distribution Amount on the distribution date, (ii) the
Certificate Principal Balance of the Class M-1 Certificates after
taking into account the payment of the Class M-1 Principal
Distribution Amount on the distribution date and (iii) the Certificate
Principal Balance of the Class M-2 Certificates immediately prior to
the distribution date over
o the lesser of (A) the product of (i) 84.50% and (ii) the aggregate
principal balance of the mortgage loans as of the last day of the
related due period and (B) the aggregate principal balance of the
mortgage loans as of the last day of the related due period minus
$3,222,601.
CLASS M-3 PRINCIPAL DISTRIBUTION AMOUNT: The Class M-3 Principal Distribution
Amount is an amount equal to the excess of:
o the sum of (i) the Certificate Principal Balance of the Class A
Certificates after taking into account the payment of the Class A
Principal Distribution Amount on the distribution date, (ii) the
Certificate Principal Balance of the Class M-1 Certificates after
taking into account the payment of the Class M-1 Principal
Distribution Amount on the distribution date, (iii) the Certificate
Principal Balance of the Class M-2 Certificates after taking into
account the payment of the Class M-2 Principal Distribution Amount on
the distribution date and (iv) the Certificate Principal Balance of
the Class M-3 Certificates immediately prior to the distribution date
over
o the lesser of (A) the product of (i) 93.50% and (ii) the aggregate
principal balance of the mortgage loans as of the last day of the
related due period and (B) the aggregate principal balance of the
mortgage loans as of the last day of the related due period minus
$3,222,601.
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COMPENSATING INTEREST: With respect to any principal prepayments in full, any
payments made by the master servicer from its own funds to cover Prepayment
Interest Shortfalls, but only to the extent of its servicing fee for the related
due period.
CREDIT ENHANCEMENT PERCENTAGE: The Credit Enhancement Percentage for any
distribution date is the percentage obtained by dividing
o the aggregate Certificate Principal Balance of the Class M-1
Certificates, the Class M-2 Certificates, the Class M-3 Certificates
and the Class CE Certificates by
o the aggregate principal balance of the mortgage loans, calculated
after taking into account distributions of principal on the mortgage
loans and distribution of the Principal Distribution Amount to the
holders of the certificates then entitled to distributions of
principal on the distribution date.
EXPENSE ADJUSTED MORTGAGE RATE: The Expense Adjusted Mortgage Rate on any
mortgage loan is equal to the then applicable mortgage rate on the mortgage loan
MINUS the sum of the administration fee rate of 0.0070% per annum and the
servicing fee rate of 0.50% per annum.
INTEREST ACCRUAL PERIOD: The Interest Accrual Period for any distribution date
and the offered certificates is the period commencing on the distribution date
of the month immediately preceding the month in which the distribution date
occurs or, in the case of the first period, commencing on the closing date, and
ending on the day preceding the distribution date. All distributions of interest
on the certificates will be based on a 360-day year and the actual number of
days in the applicable Interest Accrual Period.
INTEREST CARRY FORWARD AMOUNT: The Interest Carry Forward Amount with respect to
any class of offered certificates and any distribution date is equal to the
amount, if any, by which the Interest Distribution Amount for that class of
certificates for the immediately preceding distribution date exceeded the actual
amount distributed on the certificates in respect of interest on the immediately
preceding distribution date, together with any Interest Carry Forward Amount
with respect to the certificates remaining unpaid from the previous distribution
date, plus interest accrued thereon at the related pass-through rate on the
certificates for the most recently ended Interest Accrual Period.
INTEREST DISTRIBUTION AMOUNT: The Interest Distribution Amount for the offered
certificates of any class and the Class IO Certificates on any distribution date
is equal to interest accrued during the related Interest Accrual Period on the
Certificate Principal Balance or Notional Amount, as applicable, of that class
immediately prior to the distribution date at the pass-through rate for that
class, reduced, to not less than zero, in the case of each class, by the
allocable share, if any, for that class of Prepayment Interest Shortfalls to the
extent not covered by Compensating Interest paid by the master servicer and
shortfalls resulting from the application of the Relief Act.
INTEREST REMITTANCE AMOUNT: The Interest Remittance Amount for any distribution
date is that portion of the Available Distribution Amount for that distribution
date that represents interest received or advanced on the mortgage loans.
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NET MONTHLY EXCESS CASHFLOW: The Net Monthly Excess Cashflow for any
distribution date is equal to the sum of:
o any Overcollateralization Reduction Amount and
o the excess of:
o the Available Distribution Amount for the distribution date OVER
o the sum for the distribution date of the aggregate of the Senior
Interest Distribution Amount and the Interest Distribution Amount
payable to the holders of the Class M-1 Certificates, the Class
M-2 Certificates and the Class M-3 Certificates and the sum of
the amounts described in clauses (b)(i) through (iii) of the
definition of Principal Distribution Amount.
NET WAC PASS-THROUGH RATE: The Net WAC Pass-Through Rate for any distribution
date is a rate per annum equal to the weighted average of the Expense Adjusted
Mortgage Rates on the then outstanding mortgage loans, weighted based on their
Scheduled Principal Balances as of the first day of the calendar month preceding
the month in which the distribution date occurs, net of the Pass-Through Rate
for the Class IO Certificates for the related distribution date, multiplied by a
fraction, the numerator of which is 30 and the denominator of which is the
actual number of days elapsed in the related Interest Accrual Period.
NOTIONAL AMOUNT: The Notional Amount of the Class IO Certificates as of any date
of determination is equal to the aggregate principal balance of the then
outstanding mortgage loans. Reference to the Notional Amount of the Class IO
Certificates is solely for convenience in certain calculations and does not
represent the right to receive any distributions allocable to principal.
OVERCOLLATERALIZATION INCREASE AMOUNT: An Overcollateralization Increase Amount
with respect to the offered certificates and any distribution date is any amount
of Net Monthly Excess Cashflow actually applied as an accelerated payment of
principal to the extent the required Overcollateralized Amount exceeds the
Overcollateralized Amount.
OVERCOLLATERALIZATION REDUCTION AMOUNT: An Overcollateralization Reduction
Amount for any distribution date is the amount by which the Overcollateralized
Amount exceeds the required Overcollateralized Amount after taking into account
all other distributions to be made on the distribution date.
OVERCOLLATERALIZED AMOUNT: The Overcollateralized Amount with respect to any
distribution date is the excess, if any, of:
o the aggregate stated principal balance of the mortgage loans, as
defined in the pooling and servicing agreement, immediately following
the related distribution date over
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o the sum of the aggregate Certificate Principal Balances of the offered
certificates and the Class P Certificates, after taking into account
the payment of the amounts described in clauses (b)(i) through (iv) of
the definition of Principal Distribution Amount on the related
distribution date.
PREPAYMENT INTEREST SHORTFALL: With respect to any principal prepayments on the
mortgage loans, any resulting interest shortfall.
PRINCIPAL DISTRIBUTION AMOUNT: The Principal Distribution Amount for any
distribution date will be the lesser of:
(a) the excess of the Available Distribution Amount over the aggregate of
the Senior Interest Distribution Amount and the Interest Distribution
Amount payable to the Class M-1 Certificates, the Class M-2 Certificates
and the Class M-3 Certificates; and
(b) THE SUM OF:
(i) the principal portion of all scheduled monthly payments on the
mortgage loans actually received or advanced on or prior to the related
determination date;
(ii) the principal portion of all proceeds received in respect of the
repurchase of a mortgage loan, or, in the case of a substitution,
amounts representing a principal adjustment, as required by the pooling
and servicing agreement during the related prepayment period;
(iii) the principal portion of all other unscheduled collections,
including insurance proceeds, liquidation proceeds and all full and
partial principal prepayments, received during the related prepayment
period net of reimbursements, including reimbursements to the trustee,
the trust administrator and the master servicer, to the extent applied
as recoveries of principal on the mortgage loans;
(iv) the principal portion of any realized losses incurred or deemed to
have been incurred on any mortgage loans in the calendar month
preceding the distribution date to the extent covered by Net Monthly
Excess Cashflow for the distribution date; and
(v) the amount of any Overcollateralization Increase Amount for the
distribution date;
MINUS
(vi) the amount of any Overcollateralization Reduction Amount for the
distribution date.
SCHEDULED PRINCIPAL BALANCE: The Scheduled Principal Balance of any mortgage
loan as of any date of determination is equal to the principal balance of the
mortgage loan as of the cut-off date, after application of all scheduled
principal payments due on or before the cut-off date, whether or not received,
reduced by:
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o the principal portion of all monthly payments due on or before the
date of determination, whether or not received,
o all amounts allocable to unscheduled principal that were received
prior to the calendar month in which the date of determination occurs
and
o any bankruptcy loss occurring out of a deficient valuation that was
incurred prior to the calendar month in which the date of
determination occurs.
SENIOR INTEREST DISTRIBUTION AMOUNT: The Senior Interest Distribution Amount for
any distribution date is equal to the Interest Distribution Amount for that
distribution date for the Class A Certificates and the Class IO Certificates and
the Interest Carry Forward Amount, if any, for that distribution date for the
Class A Certificates and the Class IO Certificates.
STEPDOWN DATE: The Stepdown Date is the later to occur of:
o the distribution date occurring in April 2003 and
o the first distribution date on which the Credit Enhancement
Percentage, calculated for this purpose only after taking into account
distributions of principal on the mortgage loans, but prior to any
distribution of the Principal Distribution Amount to the holders of
the certificates then entitled to distributions of principal on the
distribution date, is greater than or equal to 44.00%.
TRIGGER EVENT: With respect to any distribution date, a Trigger Event is in
effect if the percentage obtained by dividing
o the principal amount of mortgage loans delinquent 60 days or more by
o the aggregate principal balance of the mortgage loans, in each case,
as of the last day of the previous calendar month
exceeds the lesser of:
o 40.00% of the Credit Enhancement Percentage and
o 17.60%.
DISTRIBUTIONS--GENERAL
The "due period" with respect to any distribution date commences on the
second day of the month immediately preceding the month in which the
distribution date occurs and ends on the first day of the month in which the
distribution date occurs. The "prepayment period" with respect to any
distribution date is the calendar month immediately preceding the month in which
the distribution date occurs. The "determination date" with respect to any
distribution date is on
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the 15th day of the month in which the distribution date occurs or, if that day
is not a business day, on the immediately preceding business day.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES AND THE CLASS IO CERTIFICATES
Holders of the offered certificates will be entitled to receive on each
distribution date, interest distributions in an aggregate amount equal to
interest accrued during the related Interest Accrual Period on the Certificate
Principal Balances thereof at the then-applicable pass-through rates thereon, in
the priorities set forth below.
On each distribution date, the Interest Remittance Amount will be
distributed in the following order of priority:
first, concurrently to the holders of the Class A Certificates and the
Class IO Certificates, the related Senior Interest Distribution Amount for each
class with any shortfall being allocated between the Class A Certificates and
the Class IO Certificates PRO RATA on the basis of their respective Senior
Interest Distribution Amounts before reduction;
second, to the holders of the Class M-1 Certificates, the Interest
Distribution Amount allocable to the Class M-1 Certificates;
third, to the holders of the Class M-2 Certificates, the Interest
Distribution Amount allocable to the Class M-2 Certificates; and
fourth, to the holders of the Class M-3 Certificates, the Interest
Distribution Amount allocable to the Class M-3 Certificates.
On any distribution date, any shortfalls resulting from the application of
the Relief Act and any Prepayment Interest Shortfalls to the extent not covered
by Compensating Interest paid by the master servicer will be allocated in the
following order:
first, to Net Monthly Excess Cashflow according to the priorities set forth
under "Description of the Certificates--Overcollateralization Provisions" in
this prospectus supplement,
second, to the Class M-3 Certificates,
third, to the Class M-2 Certificates,
fourth, to the Class M-1 Certificates, and
fifth, to the Class A Certificates and the Class IO Certificates PRO RATA
on the basis of their respective Senior Interest Distribution Amounts before
reduction.
The holders of the offered certificates will be entitled to reimbursement
for any of these interest shortfalls, subject to available funds, in the
priorities described under "--Overcollateralization Provisions"in this
prospectus supplement.
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With respect to any distribution date, to the extent that the aggregate
Interest Distribution Amount exceeds the Interest Remittance Amount, a shortfall
in interest distributions on one or more classes of offered certificates will
result. The Interest Carry Forward Amount with respect to the Class A
Certificates and the Class IO Certificates, if any, is distributed as part of
the Senior Interest Distribution Amount on each Distribution Date. The Interest
Carry Forward Amount with respect to the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates, if any, may be carried forward to
succeeding distribution dates and, subject to available funds, will be
distributed in the manner set forth in "--Overcollateralization Provisions" in
this prospectus supplement.
Except as otherwise described in this prospectus supplement, on any
distribution date, distributions of the Interest Distribution Amount for a class
of certificates will be made in respect of that class of certificates, to the
extent provided in this prospectus supplement, on a PARI PASSU basis, based on
the Certificate Principal Balance or Notional Amount of the certificates of each
class.
CALCULATION OF ONE-MONTH LIBOR
On each "interest determination date" which is the second LIBOR business
day preceding the commencement of each Interest Accrual Period with respect to
the offered certificates following the initial Accrual Period, the trust
administrator will determine "one-month LIBOR" which is the London interbank
offered rate for one-month United States dollar deposits as this rate appears on
the Telerate Page 3750, as of 11:00 a.m. London time on the LIBOR determination
date. As used in this section, "LIBOR business day" means a day on which banks
are open for dealing in foreign currency and exchange in London and New York
City; "Telerate Page 3750" means the display page currently so designated on the
Telerate Service or other page as may replace that page on that service for the
purpose of displaying comparable rates or prices. If that rate does not appear
on that page, the trust administrator will determine one-month LIBOR, in the
manner set forth in the pooling and servicing agreement, on the basis of the
rates at which one month United States dollar deposits are offered by three
major banks in the London interbank market as of 11:00 a.m. London time on the
interest determination date.
The establishment of one-month LIBOR on each interest determination date by
the trust administrator and the trust administrator's calculation of the rate of
interest applicable to the offered certificates for the related Interest Accrual
Period will, absent manifest error, be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each distribution date, the Principal Distribution Amount will be
distributed to the holders of the offered certificates then entitled to
distributions. In no event will the Principal Distribution Amount with respect
to any distribution date be:
o less than zero or
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o greater than the then outstanding aggregate Certificate Principal
Balance of the offered certificates.
On each distribution date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Principal Distribution Amount shall be
distributed:
first, to the Class A Certificates, until the Certificate Principal Balance
of the Class A Certificates has been reduced to zero;
second, to the Class M-1 Certificates, until the Certificate Principal
Balance of the Class M-1 Certificates has been reduced to zero;
third, to the Class M-2 Certificates, until the Certificate Principal
Balance of the Class M-2 Certificates has been reduced to zero; and
fourth, to the Class M-3 Certificates, until the Certificate Principal
Balance of the Class M-3 Certificates has been reduced to zero.
On each distribution date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of each class of offered
certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Distribution Amount in the following amounts and
order of priority:
first, the lesser of (x) the Principal Distribution Amount and (y) the
Class A Principal Distribution Amount, shall be distributed to the holders of
the Class A Certificates, until the Certificate Principal Balance of the Class A
Certificates has been reduced to zero;
second, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the holders of the Class A
Certificates under clause first above, and (y) the Class M-1 Principal
Distribution Amount, shall be distributed to the holders of the Class M-1
Certificates, until the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero;
third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the Class
A Certificates under clause first above and to the holders of the Class M-1
Certificates under clause second above, and (y) the Class M-2 Principal
Distribution Amount, shall be distributed to the holders of the Class M-2
Certificates, until the Certificate Principal Balance of the Class M-2
Certificates has been reduced to zero; and
fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amounts distributed to the holders of the Class
A Certificates under clause first above, to the holders of the Class M-1
Certificates under clause second above and to the holders of the Class M-2
Certificates under clause third above, and (y) the Class M-3 Principal
Distribution Amount, shall be distributed to the holders of the Class M-3
Certificates, until the Certificate Principal Balance of the Class M-3
Certificates has been reduced to zero.
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The allocation of distributions in respect of principal to the Class A
Certificates on each distribution date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of realized
losses, increasing the respective percentage interest in the principal balance
of the mortgage loans evidenced by the Class M-1 Certificates, the Class M-2
Certificates, the Class M-3 Certificates and the Class CE Certificates.
Increasing the respective percentage interest in the trust fund of the Class M-1
Certificates, the Class M-2 Certificates and the Class M-3 Certificates relative
to that of the Class A Certificates is intended to preserve the availability of
the subordination provided by these certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Class
A Certificates consists of subordination, as described in this section, and
overcollateralization, as described under "--Overcollateralization Provisions"
in this prospectus supplement.
The rights of the holders of the Class M-1 Certificates, the Class M-2
Certificates, the Class M-3 Certificates and the Class CE Certificates to
receive distributions will be subordinated, to the extent described in this
section, to the rights of the holders of the Class A Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Class A Certificates of the full amount of their scheduled
monthly payments of interest and principal and to afford these holders
protection against realized losses.
The protection afforded to the holders of the Class A Certificates by means
of the subordination of the Class M-1 Certificates, the Class M-2 Certificates,
the Class M-3 Certificates and the Class CE Certificates will be accomplished
by:
o the preferential right of the holders of the Class A Certificates to
receive on any distribution date, distributions in respect of interest
and principal, subject to available funds, and
o if necessary, the right of the holders of the Class A Certificates to
receive future distributions of amounts that would otherwise be
payable to the holders of the Class M-1 Certificates, the Class M-2
Certificates, the Class M-3 Certificates and the Class CE
Certificates.
In addition:
o the rights of the holders of the Class M-1 Certificates will be senior
to the rights of holders of the Class M-2 Certificates, the Class M-3
Certificates and the Class CE Certificates,
o the rights of the holders of the Class M-2 Certificates to receive
distributions in respect of the mortgage loans will be senior to the
rights of the holders of the Class M-3 Certificates and the Class CE
Certificates and
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o the rights of the holders of the Class M-3 Certificates to receive
distributions in respect of the mortgage loans will be senior to the
rights of the holders of the Class CE Certificates.
This subordination is intended to enhance the likelihood of regular receipt
by the holders of more senior certificates of distributions in respect of
interest and principal and to afford these holders protection against realized
losses.
OVERCOLLATERALIZATION PROVISIONS
The weighted average Expense Adjusted Mortgage Rate for the mortgage loans
is expected to be higher than the weighted average of the pass-through rates on
the offered certificates and the Class IO Certificates, thus generating excess
interest collections which, in the absence of realized losses, will not be
necessary to fund interest distributions on the offered certificates and the
Class IO Certificates. Additional excess interest will be generated by the
portion of the mortgage pool represented by the Overcollateralized Amount. The
pooling and servicing agreement requires that, on each distribution date, the
Net Monthly Excess Cashflow, if any, be applied on the related distribution date
as an accelerated payment of principal on the class or classes of offered
certificates then entitled to receive distributions in respect of principal, but
only to the limited extent described in this section.
With respect to any distribution date, any Net Monthly Excess Cashflow, or,
in the case of clause first below, the Net Monthly Excess Cashflow exclusive of
any Overcollateralization Reduction Amount, shall be paid as follows:
first, to the holders of the class or classes of certificates then entitled
to receive distributions in respect of principal, in an amount equal to the
principal portion of any realized losses incurred on the mortgage loans;
second, to the holders of the class or classes of certificates then
entitled to receive distributions in respect of principal, in an amount equal to
the Overcollateralization Increase Amount;
third, to the holders of the Class M-1 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class M-1 Certificates;
fourth, to the holders of the Class M-2 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class M-2 Certificates;
fifth, to the holders of the Class M-3 Certificates, in an amount equal to
the Interest Carry Forward Amount allocable to the Class M-3 Certificates;
sixth, concurrently to the holders of the Class A Certificates and the
Class IO Certificates PRO RATA, in an amount equal to each Certificates'
allocated share of any Prepayment Interest Shortfalls on the mortgage loans to
the extent not covered by Compensating Interest paid by the master servicer and
any shortfalls resulting from the application of the Relief Act with respect to
the mortgage loans, together with any amounts in respect of Prepayment Interest
Shortfalls and
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shortfalls resulting from application of the Relief Act with respect to the
Class A Certificates and the Class IO Certificates remaining unpaid from any
previous distribution dates;
seventh, to the holders of the Class M-1 Certificates, in an amount equal
to the Class M-1 Certificates' allocated share of any Prepayment Interest
Shortfalls on the mortgage loans to the extent not covered by Compensating
Interest paid by the master servicer and any shortfalls resulting from the
application of the Relief Act with respect to the mortgage loans, together with
any amounts in respect of Prepayment Interest Shortfalls and shortfalls
resulting from application of the Relief Act with respect to the Class M-1
Certificates remaining unpaid from any previous distribution dates;
eighth, to the holders of the Class M-2 Certificates, in an amount equal to
the Class M-2 Certificates' allocated share of any Prepayment Interest
Shortfalls on the mortgage loans to the extent not covered by Compensating
Interest paid by the master servicer and any shortfalls resulting from the
application of the Relief Act with respect to the mortgage loans, together with
any amounts in respect of Prepayment Interest Shortfalls and shortfalls
resulting from application of the Relief Act with respect to the Class M-2
Certificates remaining unpaid from any previous distribution dates;
ninth, to the holders of the Class M-3 Certificates, in an amount equal to
the Class M-3 Certificates' allocated share of any Prepayment Interest
Shortfalls on the mortgage loans to the extent not covered by Compensating
Interest paid by the master servicer and any shortfalls resulting from the
application of the Relief Act with respect to the mortgage loans, together with
any amounts in respect of Prepayment Interest Shortfalls and shortfalls
resulting from application of the Relief Act with respect to the Class M-3
Certificates remaining unpaid from any previous distribution dates;
tenth, to the holders of the Class CE Certificates as provided in the
pooling and servicing agreement; and
eleventh, to the holders of the Residual Certificates, any remaining
amounts; provided that if such distribution date is the distribution date
immediately following the expiration of the latest prepayment charge term or any
distribution date thereafter, then any such remaining amounts will be
distributed first, to the holders of the Class P Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and second, to
the holders of the Residual Certificates.
As of the closing date, the aggregate principal balance of the mortgage
loans as of the cut-off date will exceed the sum of the aggregate Certificate
Principal Balances of the offered certificates and the Class P Certificates by
an amount equal to approximately $13,965,072, which is equal to the initial
Certificate Principal Balance of the Class CE Certificates. This amount
represents approximately 3.25% of the aggregate principal balance of the
mortgage loans as of the cut-off date, which is the initial amount of
overcollateralization required to be provided by the mortgage pool under the
pooling and servicing agreement. Under the pooling and servicing agreement, the
Overcollateralized Amount is required to be maintained at the "required
Overcollateralized Amount." In the event that realized losses are incurred on
the mortgage loans, these realized losses may result in an overcollateralization
deficiency since, in the absence of Net Monthly
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Excess Cashflow applied pursuant to clause first above, the realized losses will
reduce the principal balance of the mortgage loans without a corresponding
reduction to the aggregate Certificate Principal Balances of the offered
certificates. In the event of an overcollateralization deficiency, the pooling
and servicing agreement requires the payment from Net Monthly Excess Cashflow,
subject to available funds, of an amount equal to the overcollateralization
deficiency, which shall constitute a principal distribution on the offered
certificates in reduction of the Certificate Principal Balances of the offered
certificates. This has the effect of accelerating the amortization of the
offered certificates relative to the amortization of the mortgage loans, and of
increasing the Overcollateralized Amount.
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the required Overcollateralized Amount may be permitted to decrease, or
step down, below the initial $13,965,072 level to a level equal to 6.50% of the
then current aggregate outstanding principal balance of the mortgage loans after
giving effect to principal payments to be distributed on the related
distribution date, subject to a floor of $3,222,601. In the event that the
required Overcollateralized Amount is permitted to step down on any distribution
date, the pooling and servicing agreement provides that a portion of the
principal which would otherwise be distributed to the holders of the offered
certificates on the related distribution date shall be distributed to the
holders of the Class CE Certificates pursuant to the priorities set forth in
this section.
With respect to each distribution date, the Overcollateralization Reduction
Amount, after taking into account all other distributions to be made on the
related distribution date, shall be distributed as Net Monthly Excess Cashflow
pursuant to the priorities set forth in this section. This has the effect of
decelerating the amortization of the offered certificates relative to the
amortization of the mortgage loans, and of reducing the Overcollateralized
Amount. However, if on any distribution date a Trigger Event is in effect, the
required Overcollateralized Amount will not be permitted to step down on the
related distribution date.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted mortgage loan that is finally liquidated
through foreclosure sale, disposition of the related mortgaged property, if
acquired on behalf of the certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which the related mortgage loan was finally liquidated,
after application of all amounts recovered, net of amounts reimbursable to the
master servicer for P&I advances, servicing advances and other related expenses,
including attorney's fees, towards interest and principal owing on the mortgage
loan. The amount of loss realized and any bankruptcy losses are referred to in
this prospectus supplement as "realized losses." In the event that amounts
recovered in connection with the final liquidation of a defaulted mortgage loan
are insufficient to reimburse the master servicer for P&I advances and servicing
advances, these amounts may be reimbursed to the master servicer out of any
funds in the certificate account prior to the distribution on the certificates.
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Any realized losses on the mortgage loans will be allocated on any
distribution date:
first, to Net Monthly Excess Cashflow,
second, to the Class CE Certificates, until the Certificate Principal
Balance of the Class CE Certificates has been reduced to zero,
third, to the Class M-3 Certificates,
fourth, to the Class M-2 Certificates, and
fifth, to the Class M-1 Certificates.
The pooling and servicing agreement does not permit the allocation of
realized losses to the Class A Certificates or the Class P Certificates.
Investors in the Class A Certificates should note, however, that although
realized losses cannot be allocated to the Class A Certificates, under certain
loss scenarios there will not be enough principal and interest on the mortgage
loans to pay the Class A Certificates all interest and principal amounts to
which they are then entitled.
Once realized losses have been allocated to a Class M-1 Certificate, a
Class M-2 Certificate or a Class M-3 Certificate, these amounts with respect to
these certificates will no longer accrue interest nor will these amounts be
reinstated or otherwise reimbursed thereafter.
Any allocation of a realized loss to a certificate will be made by reducing
the Certificate Principal Balance of that certificate by the amount so allocated
as of the distribution date in the month following the calendar month in which
the realized loss was incurred. Notwithstanding anything to the contrary
described in this prospectus supplement, in no event will the Certificate
Principal Balance of any certificate be reduced more than once in respect of any
particular amount both:
o allocable to the certificate in respect of realized losses and
o payable as principal to the holder of the certificate from Net Monthly
Excess Cashflow.
A "bankruptcy loss" is a deficient valuation or a debt service reduction.
With respect to any mortgage loan, a "deficient valuation" is a valuation by a
court of competent jurisdiction of the mortgaged property in an amount less than
the then outstanding indebtedness under the mortgage loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
"debt service reduction" is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a mortgage loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a deficient valuation.
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P&I ADVANCES
Subject to the limitations set forth in the following paragraph, the master
servicer will be obligated to advance or cause to be advanced on or before each
distribution date its own funds, or funds in the certificate account that are
not included in the Available Distribution Amount for the distribution date. The
amount of the master servicer's advance will be equal to the aggregate of all
payments of principal and interest, net of the servicing fee, that were due
during the related due period on the mortgage loans and that were delinquent on
the related determination date, plus amounts representing assumed payments not
covered by any current net income on the mortgaged properties acquired by
foreclosure or deed in lieu of foreclosure. These advances are referred to in
this prospectus supplement as "P&I advances."
P&I advances are required to be made only to the extent they are deemed by
the master servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making the P&I advances is to
maintain a regular cash flow to the certificateholders, rather than to guarantee
or insure against losses. The master servicer will not be required to make any
P&I advances with respect to reductions in the amount of the monthly payments on
the mortgage loans due to bankruptcy proceedings or the application of the
Relief Act.
All P&I advances will be reimbursable to the master servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage loan
as to which the unreimbursed P&I advance was made. In addition, any P&I advances
previously made in respect of any mortgage loan that are deemed by the master
servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the master servicer out of any
funds in the certificate account prior to the distributions on the certificates.
In the event that the master servicer fails in its obligation to make any
required advance, the trust administrator will be obligated to make the advance,
and in the event the trust administrator fails in its obligation to make the
advance, the trustee will be obligated to make the advance, in each case, to the
extent required in the pooling and servicing agreement.
The pooling and servicing agreement provides that the master servicer may
enter into a facility with any person which provides that such person may fund
P&I advances or servicing advances, although no such facility shall reduce or
otherwise affect the master servicer's obligation to fund such P&I advances or
servicing advances. Any P&I advances or servicing advances made by an advancing
person will be reimbursed to the advancing person in the same manner as
reimbursements would be made to the master servicer.
RESTRICTIONS ON TRANSFER OF THE CLASS M-1 CERTIFICATES, THE CLASS M-2
CERTIFICATES AND THE CLASS M-3 CERTIFICATES
Because the Class M-1 Certificates, the Class M-2 Certificates and the
Class M-3 Certificates are subordinate to the Class A Certificates, any benefit
plan purchasing these certificates will be deemed to have represented that
certain conditions have been satisfied in connection with the purchase. See
"ERISA Considerations" in this prospectus supplement.
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<PAGE>
THE SELLER
The seller obtained the mortgage loans from the originator. The seller will
transfer the mortgage loans to the depositor pursuant to a mortgage loan
purchase agreement, dated as of March 22, 2000, among the seller, the originator
and the depositor.
POOLING AND SERVICING AGREEMENT
GENERAL DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The certificates will be issued under the pooling and servicing agreement,
dated as of March 1, 2000 among the depositor, the master servicer, the trust
administrator and the trustee, a form of which is filed as an exhibit to the
registration statement. A Current Report on Form 8-K relating to the
certificates containing a copy of the pooling and servicing agreement as
executed will be filed by the depositor with the Securities and Exchange
Commission within fifteen days of the initial issuance of the certificates. The
trust fund created under the pooling and servicing agreement will consist of:
o all of the depositor's right, title and interest in the mortgage
loans, the related mortgage notes, mortgages and other related
documents;
o all payments on or collections in respect of the mortgage loans due
after the cut-off date, together with any proceeds of the mortgage
loans;
o any mortgaged properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues
received on these mortgaged properties;
o the rights of the trustee under all insurance policies required to be
maintained under the pooling and servicing agreement; and
o the rights of the depositor under the mortgage loan purchase agreement
among the depositor, the originator and the seller.
Reference is made to the prospectus for important information in addition
to that set forth in this prospectus supplement regarding the trust fund, the
terms and conditions of the pooling and servicing agreement and the offered
certificates. The offered certificates will be transferable and exchangeable at
the corporate trust offices of the trust administrator, located in St. Paul,
Minnesota. The depositor will provide to a prospective or actual
certificateholder without charge, on written request, a copy, without exhibits,
of the pooling and servicing agreement. Requests should be addressed to the
Secretary, New Century Mortgage Securities, Inc., 18400 Von Karman, Irvine,
California 92612.
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ASSIGNMENT OF THE MORTGAGE LOANS
The depositor will deliver to the trust administrator, as custodian for the
trustee, with respect to each mortgage loan:
o the mortgage note endorsed without recourse to the trustee to reflect
the transfer of the mortgage loan,
o the original mortgage with evidence of recording indicated on the
mortgage loan and
o an assignment of the mortgage in recordable form to the trustee,
reflecting the transfer of the mortgage loan. These assignments of
mortgage loans are required to be recorded by or on behalf of the
depositor in the appropriate offices for real property records;
provided, however, that assignments of mortgage are not required to be
recorded if the seller furnishes to the trustee, on or before the
closing date, at the seller's expense, an opinion of counsel with
respect to the relevant jurisdictions that recording is not necessary
to perfect the trustee's interest in the related mortgage loan;
provided, further, however, notwithstanding the delivery of such
opinion of counsel, upon the occurrence of certain events set forth in
the pooling and servicing agreement, each assignment of mortgage shall
be recorded by the trustee as set forth in the pooling and servicing
agreement.
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided by
the master servicer. None of the depositor, the trustee, the trust administrator
or the underwriter or any of their respective affiliates has made or will make
any representation as to the accuracy or completeness of this information.
The master servicer is a wholly-owned subsidiary of New Century Financial
Corporation or NCFC, a public company. The master servicer is a consumer finance
and mortgage banking company that originates, sells and services first and
second mortgage loans and other consumer loans. The master servicer emphasizes
the origination of mortgage loans that are commonly referred to as
non-conforming "B&C" loans. The master servicer commenced lending operations on
February 26, 1996. It is headquartered in Irvine, California.
For the year ended December 31, 1999, the master servicer originated and
purchased approximately $4.08 billion in mortgage loans. For the year ended
December 31, 1999, the master servicer sold approximately $1.03 billion of
mortgage loans, mostly on a servicing- released basis, in whole loan sales and
approximately $3.02 billion of mortgage loans through securitization.
As of December 31, 1999, the master servicer had retail and wholesale
branch offices in 34 states, and was originating mortgage loans through five
regional operating centers, 41 wholesale sales offices and 83 retail sales
offices. As of December 31, 1999, the master servicer had approximately 1,770
employees.
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<PAGE>
LOAN LOSS AND DELINQUENCY
THE MASTER SERVICER COMMENCED LENDING OPERATIONS IN FEBRUARY 1996,
COMMENCED ITS DEFAULT RELATED SERVICING OPERATIONS IN SEPTEMBER 1997 AND AS OF
JULY 1998 IS DIRECTLY HANDLING SERVICING DUTIES THAT IT USED TO OUTSOURCE,
INCLUDING LOAN SETUP, ESCROW ADMINISTRATION, MONTHLY BILLINGS, CASHIERING AND
LOCKBOX OPERATION AND SWEEPS, DEMANDS AND PAYOFF REQUESTS, YEAR-END TAX
REPORTING, ROUTINE CUSTOMER CALLS AND CORRESPONDENCE AND MORTGAGE POOL DATA
REPORTING. ACCORDINGLY, THE MASTER SERVICER HAS NO REPRESENTATIVE HISTORICAL
DELINQUENCY, BANKRUPTCY, FORECLOSURE OR DEFAULT EXPERIENCE THAT MAY BE REFERRED
TO FOR PURPOSES OF ESTIMATING FUTURE DELINQUENCY AND LOSS EXPERIENCE OF THE
MORTGAGE LOANS.
However, the following tables sets forth information regarding the loan
loss and delinquency experience of mortgage loans for which the master servicer
is servicer or master servicer. The mortgage loans for which this information is
provided include those originated or acquired under the master servicer's
regular lending program and either owned by the master servicer or previously
sold to trusts in transactions in which the master servicer was appointed as
servicer or master servicer.
Because the master servicer commenced loan origination only in February
1996, all of the mortgage loans included in the statistics contained in this
section are seasoned less than 48 months. Moreover, because mortgage loans are
continually being originated and added to the pool for which these statistics
are compiled, the average seasoning of the mortgage loans included in the
statistics is considerably shorter. Because newly originated mortgage loans will
not be added to the mortgage pool after the closing date, the mortgage pool will
consist of a static group of mortgage loans, and accordingly the actual loss and
delinquency percentages with respect to the mortgage pool are likely to be
substantially higher than those indicated in the tables contained in this
section.
A number of the mortgage loans in the statistics contained in the tables in
this section are serviced by a subservicer for the master servicer. Accordingly,
the performance statistics reflect the servicing practices of that subservicer,
as well as the quality and type of mortgage loans. These servicing practices are
not necessarily representative of the practices employed by the master servicer
in its servicing and administrative duties.
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<PAGE>
<TABLE>
<CAPTION>
DELINQUENCY AND FORECLOSURE EXPERIENCE
OF THE ORIGINATOR'S SERVICING PORTFOLIO
AS OF DECEMBER 31, 1998 DECEMBER 31, 1999
Percentage Percentage
Dollar of Total Dollar of Total
Amount Servicing Amount Servicing
------ Portfolio ------ Portfolio
--------- ---------
<S> <C> <C> <C> <C>
Delinquency(1)
30-59 Days $ 66,305,256 1.80% $ 91,134,032 1.52%
60-89 Days $ 13,690,073 0.37% $ 28,391,092 0.47%
90 Days or $ 20,657,896 0.56% 1.25%
more
$ 75,083,913(3)
Loans in $ 84,547,901 2.30% $ 181,811,560 3.03%
Foreclosure(2)
REO $ 13,011,568 0.35% $ 50,631,760 0.84%
Properties
Total $ 3,676,504,202 $ 6,002,723,518
Servicing
Portfolio
</TABLE>
- ------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) The percentage of loans in foreclosure and REO properties is based on the
dollar amount of loans in foreclosure and REO properties as a percentage of
the total dollar amount of the mortgage loans in the servicing portfolio as
of the date indicated.
(3) With respect to the mortgage loans that are 90 days or more delinquent but
not in foreclosure as of December 31, 1999, 78.90% of the dollar amount
represents loans the related borrowers of which have filed for bankruptcy,
2.88% of the dollar amount represents loans pending foreclosure and 3.65%
of the dollar amount represents loans where the master servicer has
postponed commencement of foreclosure proceedings as it pursues loss
mitigation efforts, in each case as discussed under "Realization on
Defaulted Mortgage Loans" below.
With respect to the table above entitled "Delinquency and Foreclosure
Experience of the Master Servicer's Servicing Portfolio," there can be no
assurance that the delinquency experience of the mortgage loans in the mortgage
pool will correspond to the loss experience of the master servicer's mortgage
portfolio set forth in that table. The statistics shown represent the
delinquency experience for the master servicer's total servicing portfolio only
for the time periods presented, whereas the aggregate delinquency experience on
the mortgage loans in the mortgage pool will depend on the results obtained over
the life of the trust. In particular, investors should note that newly
originated mortgage loans will not be added to the mortgage pool and the
mortgage pool will therefore consist of a static pool of mortgage loans, whereas
new mortgage loans are continually being originated and added to the pool for
which the statistics above are compiled. The master servicer's portfolio
includes mortgage loans with payment and
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other characteristics which are not representative of the payment and other
characteristics of the mortgage loans included in the mortgage pool. 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 the master servicer. In addition,
adverse economic conditions, which may or may not affect real property values,
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the mortgage loans in the mortgage pool and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to those
mortgage loans.
The delinquency experience percentages set forth above in the table above
entitled "Delinquency and Foreclosure Experience of the Master Servicer's
Servicing Portfolio" are calculated on the basis of the total mortgage loans
serviced as of the end of the periods indicated. However, because the total
outstanding principal balance of residential loans serviced by the master
servicer has increased substantially, the total outstanding principal balance of
originated loans serviced as of the end of any indicated period includes many
loans that will not have been outstanding long enough to give rise to some or
all of the indicated periods of delinquency. In the absence of substantial and
continual additions of newly originated loans to the total amount of loans
serviced, the percentages indicated above would be higher and could be
substantially higher. The actual delinquency percentages with respect to the
mortgage loans in the mortgage pool may be expected to be substantially higher
than the delinquency percentages indicated above because the composition of the
mortgage loans in the mortgage pool will not change.
REALIZATION ON DEFAULTED MORTGAGE LOANS
Typically, on the 35th day of delinquency of a mortgage loan, the master
servicer sends a letter to the related mortgagor of its intent to foreclose if
the borrower does not make all past due payments. If that loan becomes 65 days
delinquent the master servicer will generally commence foreclosure proceedings
as soon as legally permissible in the jurisdiction in which the mortgaged
property is located unless precluded from doing so by a bankruptcy filing on the
part of the borrower. In some instances, however, state laws extend or suspend
the period before foreclosure may commence. In other instances, the master
servicer holds off on commencing foreclosure as it pursues loss mitigation
efforts or special collection arrangements, or until the legal issues, other
than bankruptcy, or title issues relating to the mortgage loan are resolved.
Once a mortgage loan is in foreclosure it will either:
o become REO property and liquidated,
o be cured or paid off in full, or
o be liquidated in foreclosure by short payoff from the borrower or short
sale to a third party without taking title to the related mortgaged
property.
The master servicer does not have a write-off policy. All loans are kept on
the servicing system until the final disposition of the loan or the related
mortgaged property. The following table sets forth information with respect to
the 154 mortgage loans with an aggregate outstanding principal balance prior to
resolution of $9,468,452 that were resolved in any one of these ways
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during the year ended December 31, 1998 and with respect to the 1,670 mortgage
loans with an aggregate outstanding principal balance prior to resolution of
$134,946,650 that were resolved in one of these ways during the year ended
December 31, 1999.
<TABLE>
<CAPTION>
REALIZATION EXPERIENCE OF LOANS
IN FORECLOSURE AND REO PROPERTIES
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1999
Percentage Percentage
of Loans Average Average of Loans Average Average
Resolved Days(1) Loss(2) Resolved Days(1) Loss(2)
--------------- ------------- ----------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Cure/Payoff 11.89% 69 N/A 46.09% 119.8 N/A
Liquidation in
Foreclosure 22.81% 122 (22.27)% 16.63% 129.1 (13.96)%
REO Sales 65.30% 88 (34.80)% 37.28% 106.8 (38.31)%
</TABLE>
- ------------------
(1) Represents the average number of days from foreclosure to resolution.
(2) Expressed as a percentage of principal balance.
With respect to the table above entitled "Realization Experience of
Loans in Foreclosure and REO Properties," there can be no assurance that the
manner of resolution, the amount of time it takes to resolution or the average
losses with respect to the mortgage loans in the mortgage pool will conform to
the master servicer's experience provided in the table. The pooling and
servicing agreement provides that the master servicer is to "maximize the timely
and complete recovery of principal and interest" with respect to delinquent and
defaulted mortgage loans and the master servicer can not predict what resolution
methods will enable it to "maximize the timely and complete recovery of
principal and interest" with respect to realizations on defaulted and delinquent
mortgage loans in the mortgage pool.
THE TRUSTEE
Firstar Bank, N.A., a national banking association, will act as trustee
for the certificates under the pooling and servicing agreement. The trustee's
offices for notices under the pooling and servicing agreement are located at
1555 North River Drive, Suite 301, Milwaukee, Wisconsin 53212, and its telephone
number is (414) 905-5000. In the event the trust administrator advises the
trustee that it is unable to continue to perform its obligations under the terms
of the pooling and servicing agreement prior to the appointment of a successor,
the trustee is obligated to perform these obligations until a new trust
administrator is appointed.
The principal compensation to be paid to the trustee in respect of its
obligations under the pooling and servicing agreement will consist of a
specified portion of the "administration fee." The "administration fee" will
accrue at the "administration fee rate," which is 0.0070% per annum, on the
aggregate loan balance of the mortgage loans. The pooling and servicing
agreement will provide that the trustee and any director, officer, employee or
agent of the trustee will be indemnified by the trust fund and will be held
harmless against any loss, liability or
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expense incurred by the trustee in connection with any pending or threatened
claim or legal action arising out of or in connection with the acceptance or
administration of its obligations and duties under the pooling and servicing
agreement, other than any loss, liability or expense:
o resulting from any breach of the master servicer's or the trust
administrator's obligations in connection with the pooling and servicing
agreement;
o that constitutes a specific liability of the trustee under the pooling and
servicing agreement; or
o incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the trustee's duties under the pooling and servicing
agreement or as a result of a breach, or by reason of reckless disregard,
of the trustee's obligations and duties under the pooling and servicing
agreement.
The indemnification provided to the trustee in the pooling and
servicing agreement shall not include expenses, disbursements and advances
incurred or made by the trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the trustee's
performance in accordance with the provisions of the pooling and servicing
agreement.
THE TRUST ADMINISTRATOR
The trust administrator, a national banking association, will act as
trust administrator for the certificates under the pooling and servicing
agreement. The trust administrator's offices for notices under the pooling and
servicing agreement are located at 180 East Fifth Street, St. Paul, Minnesota
55101, and its telephone number is (612) 973-5800. The trust administrator will
perform administrative functions on behalf of the trustee and will act as
initial paying agent, certificate registrar and custodian.
The principal compensation to be paid to the trust administrator in
respect of its obligations under the pooling and servicing agreement will
consist of a specified portion of the administrative fee. The pooling and
servicing agreement will provide that the trust administrator and any director,
officer, employee or agent of the trust administrator will be indemnified by the
trust fund and will be held harmless against any loss, liability or expense
incurred by the trust administrator in connection with any pending or threatened
claim or legal action arising out of or in connection with the acceptance or
administration of its obligations and duties under the pooling and servicing
agreement, other than any loss, liability or expense:
o resulting from any breach of the master servicer's or the trustee's
obligations in connection with the pooling and servicing agreement;
o that constitutes a specific liability of the trust administrator under the
pooling and servicing agreement or
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o incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the trust administrator's duties under the pooling and
servicing agreement or as a result of a breach, or by reason of reckless
disregard, of the trust administrator's obligations and duties under the
pooling and servicing agreement.
The indemnification provided to the trust administrator in the pooling
and servicing agreement shall not include expenses, disbursements and advances
incurred or made by the trust administrator, including the compensation and
expenses and disbursements of its agents and counsel, in the ordinary course of
the trust administrator's performance in accordance with the provisions of the
pooling and servicing agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the master servicer in respect
of its servicing activities for the certificates will consist of the "servicing
fee." The servicing fee will accrue at the "servicing fee rate," which is 0.50%
per annum, on the aggregate loan balances of the mortgage loans. As additional
servicing compensation, the master servicer will be entitled to retain:
o all assumption fees, late payment charges and other miscellaneous servicing
fees, except for prepayment premiums which, to the extent collected from
mortgagors, will be distributed to the holders of the Class P Certificates,
and
o any interest or other income earned on funds held in the collection
account, the certificate account and any escrow accounts.
The master servicer is obligated to pay certain insurance premiums and
certain ongoing expenses associated with the mortgage pool incurred by the
master servicer in connection with its responsibilities under the pooling and
servicing agreement and is entitled to reimbursement for these expenses as
provided in the pooling and servicing agreement. See "Description of the
Securities--Retained Interest; Servicing or Administration Compensation and
Payment of Expenses" in the prospectus for information regarding expenses
payable by the master servicer and "Federal Income Tax Consequences" herein
regarding certain taxes payable by the master servicer.
EVENTS OF DEFAULT
In addition to those events of default described under "Description of
the Securities--Events of Default under the Governing Agreement and Rights Upon
Events of Default" in the prospectus, upon the occurrence of loss triggers with
respect to the mortgage loans, the master servicer may be removed as master
servicer of the mortgage loans in accordance with the terms of the pooling and
servicing agreement.
Any successor to the master servicer appointed under the pooling and
servicing agreement must be a housing loan servicing institution, acceptable to
each rating agency as defined in the prospectus, with a net worth at the time of
the appointment of at least $15,000,000.
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See "Description of the Securities--Events of Default under the Governing
Agreements and Rights Upon Event of Default" in the prospectus.
VOTING RIGHTS
At all times, 97% of all voting rights will be allocated among the
holders of the offered certificates and the Class CE Certificates in proportion
to the then outstanding Certificate Principal Balances of their respective
certificates, 1% of all voting rights will be allocated to the holders of the
Class IO Certificates in proportion to the then outstanding Notional Amount of
their certificates, 1% of all voting rights will be allocated to the holders of
the Class P Certificates in proportion to the then outstanding Certificate
Principal Balances of their respective certificates and 1/5 of 1% of all voting
rights will be allocated among the holders of each class of the Residual
Certificates in proportion to the percentage interests in those classes
evidenced by their respective certificates.
TERMINATION
The circumstances under which the obligations created by the pooling
and servicing agreement will terminate in respect of the certificates are
described in "Description of the Securities--Termination of the Trust Fund and
Disposition of the Trust Fund Assets" in the prospectus. The master servicer
will have the right to purchase all remaining mortgage loans and any properties
acquired in respect of the mortgage loans and thereby effect early retirement of
the certificates on any distribution date following the due period during which
the aggregate principal balance of the mortgage loans and properties acquired in
respect of the mortgage loans remaining in the trust fund at the time of
purchase is reduced to less than 10% of the aggregate principal balance of the
mortgage loans as of the cut-off date. In the event the master servicer
exercises the option, the purchase price payable in connection with the option
will be equal to the greater of par or the fair market value of the mortgage
loans and properties, plus accrued interest for each mortgage loan at the
related mortgage rate to but not including the first day of the month in which
the repurchase price is distributed, together with any amounts due to the master
servicer for unpaid servicing fees and any unreimbursed advances. In the event
the master servicer exercises this option, the portion of the purchase price
allocable to the offered certificates will be, to the extent of available funds:
o 100% of the then outstanding Certificate Principal Balance of the
offered certificates, plus
o one month's interest on the then outstanding Certificate
Principal Balance of the offered certificates at the then
applicable pass-through rate for the class, plus
o any previously accrued but unpaid interest thereon to which the
holders of the offered certificates are entitled.
The holders of the Residual Certificates shall pledge any amount
received in a termination in excess of par to the holders of the Class CE
Certificates. In no event will the trust created by the pooling and servicing
agreement continue beyond the expiration of 21 years from
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the death of the survivor of the persons named in the pooling and servicing
agreement. See "Description of the Securities--Termination of the Trust Fund and
Disposition of the Trust Fund Assets" in the prospectus.
YEAR 2000 SYSTEMS PERFORMANCE
The master servicer and the trust administrator have undertaken various
procedures to ensure that their computer systems and software are year 2000
compliant, and the master servicer and the trust administrator are required by
the pooling and servicing agreement to be year 2000 compliant. As of the date of
this prospectus supplement, the master servicer and the trust administrator have
not reported any material year 2000 system or software failures. If the
foregoing were to occur in any time-sensitive software used by the master
servicer or the trust administrator or their suppliers or agents, then major
miscalculations or disruptions in the usability of such software could result.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Thacher Proffitt & Wood, counsel to the depositor,
assuming compliance with the provisions of the pooling and servicing agreement,
for federal income tax purposes, each of REMIC I, REMIC II, REMIC III, REMIC IV
and REMIC V established under the pooling and servicing agreement will qualify
as a REMIC under the Code.
For federal income tax purposes:
o the Class R-I Certificates will represent the sole class of "residual
interests" in REMIC I;
o separate non-certificated regular interests in REMIC I will be issued and
will represent the "regular interests" in REMIC I;
o the Class R-II Certificates will represent the sole class of "residual
interests" in REMIC II;
o separate non-certificated regular interests in REMIC II will be issued and
will represent the "regular interests" in REMIC II;
o the Class R-III Certificates will represent the sole class of "residual
interests" in REMIC III;
o separate non-certificated regular interests in REMIC III will be issued and
will represent the "regular interests" in REMIC III;
o the Class R-IV Certificates will represent the sole class of "residual
interests" in REMIC IV;
o separate non-certificated regular interests in REMIC IV will be issued and
will represent the "regular interests" in REMIC IV;
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o the Class R-V Certificates will represent the sole "residual interests" in
REMIC V; and
o the offered certificates, the Class IO Certificates, the Class P
Certificates and the Class CE Certificates will represent the "regular
interests" in REMIC V and will be treated as debt instruments of REMIC V.
See "Federal Income Tax Consequences--REMICs" in the prospectus.
For federal income tax purposes, the offered certificates will not be
treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that, subsequent to the date of any
determination the mortgage loans will prepay at a rate equal to 28% of CPR. No
representation is made that the mortgage loans will prepay at that rate or at
any other rate. See "Federal Income Tax Consequences--General" and
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount" in the prospectus.
The Internal Revenue Service has issued original issue discount
regulations under sections 1271 to 1275 of the Internal Revenue Code that
address the treatment of debt instruments issued with original issue discount.
Purchasers of the offered certificates should be aware that Section
1272(a)(6) of the Code and the OID regulations do not adequately address certain
issues relevant to, or applicable to, prepayable securities bearing a variable
rate of interest such as the offered certificates. In the absence of other
authority, the trust administrator intends to be guided by certain principles of
the OID regulations applicable to variable rate debt instruments in determining
whether such certificates should be treated as issued with original issue
discount and in adapting the provisions of Section 1272(a)(6) of the Code to
these certificates for the purpose of preparing reports furnished to
certificateholders and the IRS. Because of the uncertainties concerning the
application of Section 1272(a)(6) of the Code to these certificates and because
the rules relating to debt instruments having a variable rate of interest are
limited in their application in ways that could preclude their application to
these certificates even in the absence of Section 1272(a)(6) of the Code, the
IRS could assert that the offered certificates should be governed by some other
method not yet set forth in regulations or should be treated as having been
issued with original issue discount. Prospective purchasers of the offered
certificates are advised to consult their tax advisors concerning the tax
treatment of these certificates.
If the method for computing original issue discount described in the
prospectus results in a negative amount for any period with respect to a
certificateholder, the amount of original issue discount allocable to that
period would be zero and the certificateholder will be permitted to offset that
negative amount only against future original issue discount, if any,
attributable to those certificates.
In some circumstances the OID regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
certificate may be able to select a method for
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recognizing original issue discount that differs from that used by the trust
administrator in preparing reports to the certificateholders and the IRS.
Some of the classes of offered certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
one of those classes of certificates will be treated as holding a certificate
with amortizable bond premium will depend on the certificateholder's purchase
price and the distributions remaining to be made on the certificate at the time
of its acquisition by the certificateholder. Holders of those classes of
certificates should consult their tax advisors regarding the possibility of
making an election to amortize this premium. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the prospectus.
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code and "real estate assets" under
Section 856(c)(4)(A) of the Internal Revenue Code generally in the same
proportion that the assets of the trust would be so treated. In addition,
interest on the offered certificates will be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the
Internal Revenue Code to the extent that the offered certificates are treated as
"real estate assets" under Section 856(c)(4)(A) of the Internal Revenue Code.
Moreover, the offered certificates will be "qualified mortgages" within the
meaning of Section 860G(a)(3) of the Internal Revenue Code if transferred to
another REMIC on its startup day in exchange for a regular or residual interest
therein. However, prospective investors in offered certificates that will be
treated as assets described in Section 860G(a)(3) of the Internal Revenue Code
should note that, notwithstanding that treatment, any repurchase of a
certificate pursuant to the right of the master servicer or the depositor to
repurchase the offered certificates may adversely affect any REMIC that holds
the offered certificates if the repurchase is made under circumstances giving
rise to a Prohibited Transaction Tax. See "Description of the
Certificates--Optional Termination" in this prospectus supplement and "Federal
Income Tax Consequences--REMICs-- Characterization of Investments in REMIC
Certificates" in the prospectus.
The holders of the offered certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting.
For further information regarding federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated March 22, 2000, the depositor has agreed to sell, and Salomon
Smith Barney Inc., the underwriter, has agreed to purchase the offered
certificates. The underwriter is obligated to purchase all offered certificates
if it purchases any.
Distribution of the offered certificates will be made from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the depositor from the sale of the offered
certificates, before deducting expenses payable by the
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depositor, will be 99.625% of the aggregate initial Certificate Principal
Balance of the offered certificates. In connection with the purchase and sale of
the offered certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting discounts.
The offered certificates are offered subject to receipt and acceptance
by the underwriter, to prior sale and to the underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the offered certificates will be made
through the facilities of DTC, Clearstream and the Euroclear System on or about
the closing date. The offered certificates will be offered in Europe and the
United States of America.
The underwriting agreement provides that the depositor will indemnify
the underwriter against those civil liabilities set forth in the underwriting
agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the underwriter may be required to make in
respect of these liabilities.
SECONDARY MARKET
There is currently no secondary market for the offered certificates and
there can be no assurance that a secondary market for the offered certificates
will develop or, if it does develop, that it will continue. The underwriter
intends to establish a market in the offered certificates but it is not
obligated to do so. There can be no assurance that any additional information
regarding the offered certificates will be available through any other source.
In addition, the depositor is not aware of any source through which price
information about the offered certificates will be available on an ongoing
basis. The limited nature of the information regarding the offered certificates
may adversely affect the liquidity of the offered certificates, even if a
secondary market for the offered certificates becomes available. The primary
source of information available to investors concerning the offered certificates
will be the monthly statements discussed in the prospectus under "Description of
the Securities--Form of Reports to Securityholders," which will include
information as to the outstanding principal balance of the offered certificates
and the status of the applicable form of credit enhancement.
LEGAL OPINIONS
Legal matters relating to the offered certificates will be passed upon
for the depositor by Thacher Proffitt & Wood, New York, New York and for the
underwriter by Stroock & Stroock & Lavan LLP, New York, New York.
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RATINGS
It is a condition to the issuance of the certificates that:
o the Class A Certificates be rated "Aaa" by Moody's Investors Service, Inc.
or Moody's, "AAA" by Duff & Phelps Credit Rating Co., or DCR and "AAA" by
Fitch IBCA, Inc., or Fitch;
o the Class M-1 Certificates be rated as least "Aa2" by Moody's, "AA" by DCR
and "AA" by Fitch;
o the Class M-2 Certificates be rated at least "A2" by Moody's, "A" by DCR
and "A" by Fitch; and
o the Class M-3 Certificates be rated at least "Baa2" by Moody's, "BBB" by
DCR and "BBB" by Fitch.
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
the certificateholders are entitled. The rating process addresses structural and
legal aspects associated with the certificates, including the nature of the
underlying mortgage loans. The ratings assigned to mortgage pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments will differ from that originally anticipated. The ratings do not
address the possibility that certificateholders might suffer a lower than
anticipated yield due to non-credit events.
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. In the event that the ratings
initially assigned to the offered 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 offered certificates.
The depositor has not requested that any rating agency rate the offered
certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the offered certificates, or, if it
does, what rating would be assigned by any other rating agency. A rating on the
offered certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the offered certificates as stated in this section.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA for so long as they are
rated not lower than the second highest rating category by a rating agency, as
defined in the prospectus, and, therefore, will be legal investments for those
entities to the extent provided in SMMEA. SMMEA, however, provides for state
limitation on the authority of entities to invest in "mortgage related
securities"
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provided that the restrictive legislation was enacted prior to October 3, 1991.
There are ten states that have enacted legislation which overrides the
preemption provisions of SMMEA. The Class M-2 Certificates and the Class M-3
Certificates will not constitute "mortgage related securities" for purposes of
SMMEA.
The depositor makes no representations as to the proper
characterization of any class of offered certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of offered certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of offered
certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of offered
certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
See "Legal Investment" in the prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any ERISA plan, IRA, Keogh plan or government plan,
collectively referred to here as "benefit plans," or any insurance company,
whether through its general or separate accounts, or any other person investing
benefit plan assets of any benefit plan, should carefully review with its legal
advisors whether the purchase or holding of offered certificates could give rise
to a transaction prohibited or not otherwise permissible under ERISA or Section
4975 of the Code. The purchase or holding of the offered certificates by or on
behalf of, or with benefit plan assets of, a benefit plan may qualify for
exemptive relief under the Underwriters' Exemption, as described under
"Considerations for Benefit Plan Investors--Possible Exemptive Relief" in the
prospectus. The Underwriters' Exemption relevant to the offered certificates was
granted by the Department of Labor on April 18, 1991 as PTE 91-23 at 56 F.R.
15,936. The purchase of the Class A Certificates by, on behalf of or with the
plan assets of any benefit plan may qualify for exemptive relief under the
Underwriters' Exemption. However, the Underwriters' Exemption contains a number
of conditions which must be met for the exemption to apply, including the
requirement that the investing benefit plan must be an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act.
Because the characteristics of the Class M-1 Certificates, the Class
M-2 Certificates and the Class M-3 Certificates will not meet the requirements
of PTCE 83-1 as described in the prospectus or the Underwriters' Exemption, the
purchase, sale or holding of these certificates by, on behalf of or with plan
assets of any benefit plan may result in prohibited transactions or the
imposition of excise taxes or civil penalties. Therefore, the pooling and
servicing agreement provides that transfers of these certificates to a benefit
plan, a trustee or other person acting on behalf of any benefit plan or to any
person using plan assets of a benefit plan to effect such acquisition will not
be registered by the trust administrator unless the purchaser thereof provides
the depositor, the trustee, the trust administrator and the master servicer with
either (i) an opinion of counsel satisfactory to the depositor, the trustee, the
trust administrator and the master
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servicer, which opinion will not be at the expense of the depositor, the master
servicer, the trust administrator, the trustee or the trust fund, to the effect
that the purchase of these certificates is permissible under applicable law,
will not constitute or result in any non-exempt prohibited transaction under
ERISA or Section 4975 of the Code and will not subject the depositor, the master
servicer, the trust administrator, the trustee or the trust fund to any
obligation in addition to those undertaken in the pooling and servicing
agreement or (ii) a certification of facts, which in the case of the Class M-1
Certificates, the Class M-2 Certificates and the Class M-3 Certificates which
are in book-entry form, the purchaser will be deemed to have represented such
certification of facts, substantially to the effect that the purchase of these
certificates by or on behalf of such benefit plan is permissible under
applicable law, will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Code, will not subject the
depositor, the master servicer, the trust administrator or the trustee to any
obligation in addition to those undertaken in the pooling and servicing
agreement and the following conditions are met:
o the source of funds used to purchase these certificates is an
"insurance company general account" as such term is defined in
PTCE 95-60,
o the conditions set forth in PTCE 95-60 have been satisfied and
o there is no benefit plan with respect to which the amount of such
general account's reserves and liabilities for contracts held by
or on behalf of such benefit plan and all other benefit plans
maintained by the same employer, or any "affiliate" thereof, as
defined in PTCE 95-60, or by the same employee organization
exceeds 10% of the total of all reserves and liabilities of such
general account, as determined under PTCE 95-60, as of the date
of the acquisition of the certificates.
The Class M-1 Certificates, the Class M-2 Certificates and the Class
M-3 Certificates will contain a legend describing these restrictions on
transfer.
If any Class M-1 Certificate, Class M-2 Certificate or Class M-3
Certificate or any interest therein is acquired or held in violation of the
provisions of the preceding paragraph, the next preceding permitted beneficial
owner will be treated as the beneficial owner of that certificate retroactive to
the date of transfer to the purported beneficial owner. Any purported beneficial
owner whose acquisition or holding of any such certificate or interest therein
was effected in violation of the provisions of the preceding paragraph shall
indemnify and hold harmless the depositor, the master servicer, the trust
administrator, the trustee and the trust fund from and against any and all
liabilities, claims, costs or expenses incurred by those parties as a result of
that acquisition or holding.
Before purchasing a Class A Certificate, a fiduciary of a benefit plan
should itself confirm that the Class A Certificates constitute "certificates"
for purposes of the Underwriters' Exemption and that the specific and general
conditions of the Underwriters' Exemption and the other requirements set forth
in the Underwriters' Exemption would be satisfied. In addition, before
purchasing a Class M-1 Certificate, a Class M-2 Certificate or a Class M-3
Certificate, a
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fiduciary of a benefit plan should itself confirm that the conditions to such
purchase described above would be satisfied. Any benefit plan fiduciary that
proposes to cause a benefit plan to purchase a certificate should consult with
its counsel with respect to the potential applicability to such investment of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to the proposed investment. For further information regarding the ERISA
considerations of investing in the Certificates, see "Considerations for Benefit
Plan Investors" in the prospectus.
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ANNEX I
GLOBAL CLEARANCE AND SETTLEMENT AND DOCUMENTATION PROCEDURES
Except in limited circumstances described in this prospectus supplement
under "Description of the Certificates--Book-Entry Certificates", the offered
certificates will be available only in book-entry form. Investors in the global
securities may hold the global securities through any of DTC, Clearstream or
Euroclear. The global securities will be tradeable 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 Clearstream and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Clearstream and Euroclear and in accordance
with conventional eurobond practice, that is 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 Clearstream or Euroclear and DTC
participants holding certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear, in that
capacity, and as DTC participants.
Non-U.S. holders of Global Securities will be subject to U.S.
withholding taxes unless those holders meet specific 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, Clearstream and
Euroclear will hold positions on behalf of their participants through their
relevant depositary which in turn will hold those 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 Clearstream
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.
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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 mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream participants or Euroclear participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Clearstream participant or a Euroclear participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream participant or Euroclear participant at least one business day prior
to settlement. Clearstream 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 the 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 Clearstream 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--the trade
fails--the Clearstream or Euroclear cash debt will be valued instead as of the
actual settlement date.
Clearstream 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 Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their account one day later. As an
alternative, if Clearstream or Euroclear has extended a line of credit to them,
Clearstream 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, Clearstream 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
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investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of overdraft charges, although the
result will depend on each Clearstream 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
Clearstream 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 CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream 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 Clearstream or Euroclear through a Clearstream participant or
Euroclear participant at least one business day prior to settlement. In these
cases Clearstream 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 the 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
Clearstream participant or Euroclear participant the following day, and receipt
of the cash proceeds in the Clearstream 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 Clearstream 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--the
trade fails--receipt of the cash proceeds in the Clearstream participant's or
Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC participants for delivery to Clearstream
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:
o borrowing through Clearstream or Euroclear for one day, until the
purchase side of the trade is reflected in their Clearstream or
Euroclear accounts, in accordance with the clearing system's customary
procedures
o 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 Clearstream or
Euroclear account in order to settle the sale side of the trade; or
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o 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 Clearstream
participant or Euroclear participant.
MATERIAL U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream 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, unless
o 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
o 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 OR FORM W-8BEN). Beneficial
owners of Global Securities that are non-U.S. Persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status) or Form W-8BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding). If the information shown on Form W-8
or Form W-8BEN changes, a new Form W-8 or Form W-8BEN must be filed within 30
days of such change. After December 31, 2000, only Form W-8BEN will be
acceptable.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224 OR FORM W- 8ECI). A non-U.S. Person, 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) or Form W-8ECI (Certificate of Foreign
Person's Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct of a Trade or Business in the United States). After December
31, 2000, only Form W-8ECI will be acceptable.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001 OR FORM W-8BEN). Non-U.S. Persons that are Certificate
Owners 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 (Ownership, Exemption or Reduced Rate Certificate) or Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form 1001 or Form W-8BEN may be filed by the Certificate Owners or
his agent. After December 31, 2000, only Form W-8BEN will be acceptable.
I-4
<PAGE>
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 Certificate Owner 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 clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8, Form 1001 and Form 4224 are effective until
December 31, 2000. Form W-8BEN and Form W-8ECI are effective until the third
succeeding calendar year from the date such form is signed.
The term "U.S. Person" means:
o a citizen or resident of the United States,
o a corporation, partnership or other entity treated as a
corporation or partnership for United States federal income tax
purposes organized in or under the laws of the United States or
any state thereof or the District of Columbia (unless, in the
case of a partnership, Treasury regulations provide otherwise) or
o an estate the income of which is includible in gross income for
United States tax purposes, regardless of its source, or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have authority to control all
substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury 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 will also be 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.
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MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
NEW CENTURY MORTGAGE SECURITIES, INC.
Depositor
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS
PROSPECTUS AND IN THE PROSPECTUS SUPPLEMENT.
THE PROSPECTUS TOGETHER WITH THE ACCOMPANYING PROSPECTUS SUPPLEMENT WILL
CONSTITUTE THE FULL PROSPECTUS.
THE SECURITIES:
New Century Mortgage Securities, Inc., as depositor, will sell the securities,
which may be in the form of mortgage pass-through certificates or
mortgage-backed notes. Each issue of securities will have its own series
designation and will evidence either:
o the ownership of trust fund assets, or
o debt obligations secured by trust fund assets.
THE TRUST FUND AND ITS ASSETS
The assets of a trust fund will primarily include any combination of various
types of one- to four-family residential first and junior lien mortgage loans,
home equity lines of credit, cooperative apartment loans or manufactured housing
conditional sales contracts and installment loan agreements.
CREDIT ENHANCEMENT
The assets of the trust fund for a series of securities may also include pool
insurance policies, letters of credit, reserve funds or currency or interest
rate exchange agreements or any combination of credit support. Credit
enhancement may also be provided by means of subordination of one or more
classes of securities, cross collateralization or by overcollateralization.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the securities may be made through one or more different methods,
including through underwriters as described in "Methods of Distribution" in this
prospectus and in the related prospectus supplement.
The date of this Prospectus is September 10, 1999.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
Risk Factors......................................................................................................4
Description of the Trust Funds...................................................................................12
Description of the Mortgage Loans to be Included in a Trust Fund............................................12
Description of the Pre-Funding Account for the Purchase of Additional Mortgage Loans........................18
The Depositor....................................................................................................19
Use of Proceeds..................................................................................................19
Yield Considerations.............................................................................................19
Maturity And Prepayment Considerations...........................................................................20
The Depositor's Mortgage Loan Purchase Program...................................................................22
Underwriting Standards......................................................................................22
Qualifications of Originators and Mortgage Loan Sellers.....................................................24
Representations by or on behalf of Mortgage Loan Sellers; Remedies for Breach of
Representation..........................................................................................24
Description of The Securities....................................................................................26
Assignment of Trust Fund Assets; Review of Files by Trustee.................................................28
Establishment of Certificate Account; Deposits to Certificate Account In Respect of Trust
Fund Assets.............................................................................................31
Distributions on the Securities.............................................................................34
Advances by Master Servicer in Respect of Delinquencies on the Trust Fund Assets............................37
Form of Reports to Securityholders..........................................................................38
Collection and Other Servicing Procedures Employed by the Master Servicer...................................39
Description of Sub-Servicing................................................................................41
Procedures for Realization Upon Defaulted Mortgage Loans....................................................42
Retained Interest; Servicing or Administration Compensation and Payment of Expenses.........................43
Annual Evidence as to the Compliance of the Master Servicer.................................................44
Matters Regarding the Master Servicer and the Depositor.....................................................45
Events of Default under the Governing Agreement and Rights Upon Events of Default...........................46
Amendment of the Governing Agreements.......................................................................50
Termination of the Trust Fund and Disposition of Trust Fund Assets..........................................51
Optional Purchase by the Master Servicer of Defaulted Mortgage Loans........................................52
Duties of the Trustee.......................................................................................52
Description of the Trustee..................................................................................53
Description of Credit Support....................................................................................53
Subordination...............................................................................................53
Letter of Credit............................................................................................55
Mortgage Pool Insurance Policy..............................................................................56
Special Hazard Insurance Policy.............................................................................58
Bankruptcy Bond.............................................................................................60
Financial Guarantee Insurance...............................................................................61
Reserve Fund................................................................................................61
Overcollateralization.......................................................................................61
Cross-Support Features......................................................................................62
Cash Flow Agreements........................................................................................62
Description of Primary Insurance Policies........................................................................62
Primary Mortgage Insurance Policies.........................................................................62
Primary Hazard Insurance Policies...........................................................................63
FHA Insurance...............................................................................................64
VA Guarantees...............................................................................................65
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Legal Aspects of Mortgage Loans..................................................................................65
Single-Family Loans.........................................................................................66
Cooperative Loans...........................................................................................67
Manufactured Housing Contracts..............................................................................68
Foreclosure on Mortgages....................................................................................70
Foreclosure on Mortgaged Properties Located in the Commonwealth of Puerto Rico..............................72
Foreclosure on Cooperative Shares...........................................................................72
Repossession with respect to Manufactured Housing Contracts.................................................74
Rights of Redemption with respect to Single-Family Properties...............................................75
Notice of Sale; Redemption Rights with respect to Manufactured Homes........................................75
Anti-Deficiency Legislation and Other Limitations on Lenders................................................75
Junior Mortgages............................................................................................77
Home Equity Line of Credit Loans............................................................................78
Consumer Protection Laws with respect to Manufactured Housing Contracts.....................................78
Other Limitations...........................................................................................80
Enforceability of Provisions................................................................................80
Subordinate Financing.......................................................................................81
Applicability of Usury Laws.................................................................................81
Alternative Mortgage Instruments............................................................................82
Formaldehyde Litigation with respect to Manufactured Housing Contracts......................................83
Soldiers' and Sailors' Civil Relief Act of 1940.............................................................84
Environmental Legislation...................................................................................84
Forfeitures in Drug and RICO Proceedings....................................................................85
Negative Amortization Loans.................................................................................86
Federal Income Tax Consequences..................................................................................86
General.....................................................................................................86
REMICs......................................................................................................87
Notes......................................................................................................106
Grantor Trust Funds........................................................................................107
Partnership Trust Funds....................................................................................118
State And Other Tax Consequences................................................................................124
Considerations For Benefit Plan Investors.......................................................................124
Investors Affected.........................................................................................124
Fiduciary Standards for ERISA Plans and Related Investment Vehicles........................................124
Prohibited Transaction Issues for ERISA Plans, Keogh Plans, IRAs and Related
Investment Vehicles....................................................................................125
Possible Exemptive Relief..................................................................................126
Consultation with Counsel..................................................................................131
Government Plans...........................................................................................131
Required Deemed Representations of Investors...............................................................131
Legal Investment................................................................................................132
Methods of Distribution.........................................................................................133
Legal Matters...................................................................................................134
Financial Information...........................................................................................135
Rating..........................................................................................................135
Available Information...........................................................................................135
Incorporation of Certain Information by Reference...............................................................136
</TABLE>
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RISK FACTORS
The offered securities are not suitable investments for all investors. In
particular, you should not purchase the offered securities unless you understand
and are able to bear the prepayment, credit, liquidity and market risks
associated with the securities.
You should carefully consider the following factors in connection with the
purchase of the securities offered hereby as well as any additional risk factors
that are set forth in the prospectus supplement related to your security:
THE SECURITIES WILL HAVE LIMITED LIQUIDITY SO INVESTORS MAY BE UNABLE TO SELL
THEIR SECURITIES OR MAY BE FORCED TO SELL THEM AT A DISCOUNT FROM THEIR INITIAL
OFFERING PRICE
There can be no assurance that a resale market for the securities of any
series will develop following the issuance and sale of any series of securities.
Even if a resale market does develop, it may not provide securityholders with
liquidity of investment or continue for the life of the securities of any
series. The prospectus supplement for any series of securities may indicate that
an underwriter specified in the prospectus supplement intends to establish a
secondary market in the securities, however no underwriter will be obligated to
do so. As a result, any resale prices that may be available for any offered
security in any market that may develop may be at a discount from the initial
offering price. The securities offered hereby will not be listed on any
securities exchange.
CREDIT SUPPORT MAY BE LIMITED; THE FAILURE OF CREDIT SUPPORT TO COVER LOSSES ON
THE TRUST FUND ASSETS WILL RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
Credit support is intended to reduce the effect of delinquent payments or
losses on the underlying trust fund assets on those classes of securities that
have the benefit of the credit support. With respect to each series of
securities, credit support will be provided in one or more of the forms referred
to in this prospectus and the related prospectus supplement. Regardless of the
form of credit support provided, the amount of coverage will usually be limited
in amount and in most cases will be subject to periodic reduction in accordance
with a schedule or formula. Furthermore, credit support may provide only very
limited coverage as to particular types of losses or risks, and may provide no
coverage as to other types of losses or risks. If losses on the trust fund
assets exceed the amount of coverage provided by any credit support or the
losses are of a type not covered by any credit support, these losses will be
borne by the holders of the related securities or specific classes of the
related securities. SEE "DESCRIPTION OF CREDIT SUPPORT".
THE TYPES OF MORTGAGE LOANS INCLUDED IN THE TRUST FUND RELATED TO YOUR
SECURITIES MAY BE ESPECIALLY PRONE TO DEFAULTS WHICH MAY EXPOSE YOUR SECURITIES
TO GREATER LOSSES
The securities will be directly or indirectly backed by mortgage loans,
manufactured housing conditional sales contracts and installment loan
agreements. The types of mortgage loans included in the trust fund may have a
greater likelihood of delinquency and foreclosure, and a greater likelihood of
loss in the event of delinquency and foreclosure. You should be aware that if
the mortgaged properties fail to provide adequate security for the mortgage
loans included in a trust
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<PAGE>
fund, any resulting losses, to the extent not covered by credit support, will be
allocated to the related securities in the manner described in the related
prospectus supplement and consequently would adversely affect the yield to
maturity on those securities. The depositor cannot assure you that the values of
the mortgaged properties have remained or will remain at the appraised values on
the dates of origination of the related mortgage loans. The prospectus
supplement for each series of securities will describe the mortgage loans which
are to be included in the trust fund related to your security and risks
associated with those mortgage loans which you should carefully consider in
connection with the purchase of your security.
NONPERFECTION OF SECURITY INTERESTS IN MANUFACTURED HOMES MAY RESULT IN LOSSES
ON THE RELATED MANUFACTURED HOUSING CONTRACTS AND THE SECURITIES BACKED BY THE
MANUFACTURED HOUSING CONTRACTS
Any conditional sales contracts and installment loan agreements with
respect to manufactured homes included in a trust fund will be secured by a
security interest in a manufactured home. Perfection of security interests in
manufactured homes and enforcement of rights to realize upon the value of the
manufactured homes as collateral for the manufactured housing contracts are
subject to a number of federal and state laws, including the Uniform Commercial
Code as adopted in each state and each state's certificate of title statutes.
The steps necessary to perfect the security interest in a manufactured home will
vary from state to state. If the master servicer fails, due to clerical errors
or otherwise, to take the appropriate steps to perfect the security interest,
the trustee may not have a first priority security interest in the manufactured
home securing a manufactured housing contract. Additionally, courts in many
states have held that manufactured homes may become subject to real estate title
and recording laws. As a result, a security interest in a manufactured home
could be rendered subordinate to the interests of other parties claiming an
interest in the home under applicable state real estate law. The failure to
properly perfect a valid, first priority security interest in a manufactured
home securing a manufactured housing contract could lead to losses that, to the
extent not covered by credit support, may adversely affect the yield to maturity
of the related securities.
FORECLOSURE OF MORTGAGE LOANS MAY RESULT IN LIMITATIONS OR DELAYS IN RECOVERY
AND LOSSES ALLOCATED TO THE RELATED SECURITIES
Even assuming that the mortgaged properties provide adequate security for
the mortgage loans, substantial delays can be encountered in connection with the
liquidation of defaulted mortgage loans and corresponding delays in the receipt
of related proceeds by the securityholders could occur. An action to foreclose
on a mortgaged property securing a mortgage loan is regulated by state statutes,
rules and judicial decisions and is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. In several states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a mortgaged
property. In the event of a default by a mortgagor, these restrictions may
impede the ability of the master servicer to foreclose on or sell the mortgaged
property or to obtain liquidation proceeds sufficient to repay all amounts due
on the related mortgage loan. The master servicer will be entitled to deduct
from liquidation proceeds all expenses reasonably incurred in attempting to
recover amounts due on the related liquidated mortgage loan and not yet repaid,
including payments
5
<PAGE>
to prior lienholders, accrued servicing fees, legal fees and costs of legal
action, real estate taxes, and maintenance and preservation expenses. If any
mortgaged properties fail to provide adequate security for the mortgage loans in
the trust fund related to your security and insufficient funds are available
from any applicable credit support, you could experience a loss on your
investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
MORTGAGED PROPERTIES ARE SUBJECT TO ENVIRONMENTAL RISKS AND THE COST OF
ENVIRONMENTAL CLEAN-UP MAY INCREASE LOSSES ON THE RELATED MORTGAGE LOANS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
the property. These laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of the hazardous or toxic
substances. A lender also risks liability on foreclosure of the mortgage on the
property. In addition, the presence of hazardous or toxic substances, or the
failure to properly remediate the property, may adversely affect the owner's or
operator's ability to sell the property. Although the incidence of environmental
contamination of residential properties is less common than that for commercial
properties, mortgage loans contained in a trust fund may be secured by mortgaged
properties in violation of environmental laws, ordinances or regulations. The
master servicer is generally prohibited from foreclosing on a mortgaged property
unless it has taken adequate steps to ensure environmental compliance with
respect to the mortgaged property. However, to the extent the master servicer
errs and forecloses on mortgaged property that is subject to environmental law
violations, and to the extent a mortgage loan seller does not provide adequate
representations and warranties against environmental law violations, or is
unable to honor its obligations, including the obligation to repurchase a
mortgage loan upon the breach of a representation or warranty, a trust fund
could experience losses which, to the extent not covered by credit support,
could adversely affect the yield to maturity on the related securities.
THE RATINGS OF YOUR SECURITIES MAY BE LOWERED OR WITHDRAWN WHICH MAY ADVERSELY
AFFECT THE LIQUIDITY OR MARKET VALUE OF YOUR SECURITY
It is a condition to the issuance of the securities that each series of
securities be rated in one of the four highest rating categories by a nationally
recognized statistical rating agency. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time. No person is obligated to maintain the rating on any security, and
accordingly, there can be no assurance to you that the ratings assigned to any
security on the date on which the security is originally issued will not be
lowered or withdrawn by a rating agency at any time thereafter. The rating(s) of
any series of securities by any applicable rating agency may be
6
<PAGE>
lowered following the initial issuance of the securities as a result of the
downgrading of the obligations of any applicable credit support provider, or as
a result of losses on the related mortgage loans in excess of the levels
contemplated by the rating agency at the time of its initial rating analysis.
Neither the depositor, the master servicer nor any of their respective
affiliates will have any obligation to replace or supplement any credit support,
or to take any other action to maintain any rating(s) of any series of
securities. If any rating is revised or withdrawn, the liquidity or the market
value of your security may be adversely affected.
FAILURE OF THE MORTGAGE LOAN SELLER TO REPURCHASE OR REPLACE A MORTGAGE LOAN MAY
RESULT IN LOSSES ALLOCATED TO THE RELATED SECURITIES
Each mortgage loan seller will have made representations and warranties in
respect of the mortgage loans sold by the mortgage loan seller and evidenced by
a series of securities. In the event of a breach of a mortgage loan seller's
representation or warranty that materially adversely affects the interests of
the securityholders in a mortgage loan, the related mortgage loan seller will be
obligated to cure the breach or repurchase or, if permitted, replace the
mortgage loan as described under "Mortgage Loan Program-Representations as to
Mortgage Loans to be made by or on Behalf of Mortgage Loan Sellers; Remedies for
Breach of Representation". However, there can be no assurance that a mortgage
loan seller will honor its obligation to cure, repurchase or, if permitted,
replace any mortgage loan as to which a breach of a representation or warranty
arises. A mortgage loan seller's failure or refusal to honor its repurchase
obligation could lead to losses that, to the extent not covered by credit
support, may adversely affect the yield to maturity of the related securities.
In instances where a mortgage loan seller is unable, or disputes its
obligation, to purchase affected mortgage loans, the master servicer may
negotiate and enter into one or more settlement agreements with the mortgage
loan seller that could provide for the purchase of only a portion of the
affected mortgage loans. Any settlement could lead to losses on the mortgage
loans which would be borne by the related securities. Neither the depositor nor
the master servicer will be obligated to purchase a mortgage loan if a mortgage
loan seller defaults on its obligation to do so, and no assurance can be given
that the mortgage loan sellers will carry out their purchase obligations. A
default by a mortgage loan seller is not a default by the depositor or by the
master servicer. Any mortgage loan not so purchased or substituted for shall
remain in the related trust fund and any related losses shall be allocated to
the related credit support, to the extent available, and otherwise to one or
more classes of the related series of securities.
All of the representations and warranties of a mortgage loan seller in
respect of a mortgage loan will have been made as of the date on which the
mortgage loan was purchased from the mortgage loan seller by or on behalf of the
depositor which will be a date prior to the date of initial issuance of the
related series of securities. A substantial period of time may have elapsed
between the date as of which the representations and warranties were made and
the later date of initial issuance of the related series of securities.
Accordingly, the mortgage loan seller's purchase obligation, or, if specified in
the related prospectus supplement, limited replacement option, will not arise
if, during the period after the date of sale by the mortgage loan seller, an
event occurs that would have given rise to a repurchase obligation had the event
occurred prior to sale of the affected mortgage loan.
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The occurrence of events during this period that are not covered by a mortgage
loan seller's purchase obligation could lead to losses that, to the extent not
covered by credit support, may adversely affect
the yield to maturity of the related securities.
THE YIELD TO MATURITY ON YOUR SECURITIES WILL DEPEND ON A VARIETY OF FACTORS
INCLUDING PREPAYMENTS
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying assets in the trust
fund or;
o how payments of principal are allocated among the classes of
securities of that series as specified in the related prospectus
supplement;
o if any party has an option to terminate the related trust fund
early, the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the
related trust fund; and
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by the
depositor, master servicer or mortgage loan seller.
Prepayments on mortgage loans are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. The rate of prepayment of the mortgage loans
included in or underlying the assets in each trust fund may affect the yield to
maturity of the securities. In general, if you purchase a class of offered
securities at a price higher than its outstanding principal balance and
principal distributions on your class occur faster than you anticipate at the
time of purchase, the yield will be lower than you anticipate. Conversely, if
you purchase a class of offered securities at a price lower than its outstanding
principal balance and principal distributions on that class occur more slowly
than you anticipate at the time of purchase, the yield will be lower than you
anticipate.
To the extent amounts in any pre-funding account have not been used to
purchase additional mortgage loans, holders of the related securities may
receive an additional prepayment.
The yield to maturity on the types of classes of securities, including
securities that are entitled to principal distributions only or interest
distributions only, securities as to which accrued interest or a portion thereof
will not be distributed but rather added to the principal balance of the
security, and securities with an interest rate which fluctuates inversely with
an index, may be relatively more sensitive to the rate of prepayment on the
related mortgage loans than other classes of securities and, if applicable, to
the occurrence of an early retirement of the securities. The prospectus
supplement for a series will set forth the related classes of securities that
may be more sensitive to prepayment rates.
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<PAGE>
SEE "YIELD CONSIDERATIONS" AND "MATURITY AND PREPAYMENT CONSIDERATIONS" IN
THIS PROSPECTUS.
THE EXERCISE OF AN OPTIONAL TERMINATION RIGHT WILL AFFECT THE YIELD TO MATURITY
ON THE RELATED SECURITIES
If so specified in the related prospectus supplement, certain parties will
have the option to purchase, in whole but not in part, the securities specified
in the related prospectus supplement in the manner set forth in the related
prospectus supplement. Upon the purchase of the securities or at any time
thereafter, at the option of the party entitled to termination, the assets of
the trust fund may be sold, thereby effecting a retirement of the securities and
the termination of the trust fund, or the securities so purchased may be held or
resold.
The prospectus supplement for each series of securities will set forth the
party that may, at its option, purchase the assets of the related trust fund if
the aggregate principal balance of the mortgage loans and other trust fund
assets in the trust fund for that series is less than the percentage specified
in the related prospectus supplement of the aggregate principal balance of the
outstanding mortgage loans and other trust fund assets at the cut-off date for
that series. The percentage will be between 25% and 0%. The exercise of the
termination right will effect the early retirement of the securities of that
series. The prospectus supplement for each series of securities will set forth
the price to be paid by the terminating party and the amounts that the holders
of the securities will be entitled to receive upon early retirement.
In addition to the repurchase of the assets in the related trust fund as
described in the paragraph above, the related prospectus supplement may permit
that, a holder of a non-offered class of securities will have the right, solely
at its discretion, to terminate the related trust fund on any distribution date
after the 12th distribution date following the date of initial issuance of the
related series of securities and until the date as the option to terminate as
described in the paragraph above becomes exercisable and thereby effect early
retirement of the securities of the series. Any call of this type will be of the
entire trust fund at one time; multiple calls with respect to any series of
securities will not be permitted. In this case, the call class must remit to the
trustee for distribution to the holders of the related securities offered hereby
a price equal to 100% of the principal balance of their securities offered
hereby as of the day of the purchase plus accrued interest thereon at the
applicable interest rate during the related period on which interest accrues on
their securities. If funds equal to the call price are not deposited with the
related trustee, the securities will remain outstanding. There will not be any
additional remedies available to securityholders. In addition, in the case of a
trust fund for which a REMIC election or elections have been made, the
termination will constitute a "qualified liquidation" under Section 860F of the
Internal Revenue Code. In connection with a call by the call class, the final
payment to the securityholders will be made upon surrender of the related
securities to the trustee. Once the securities have been surrendered and paid in
full, there will not be any continuing liability from the securityholders or
from the trust fund to securityholders.
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A trust fund may also be terminated and the certificates retired upon the
master servicer's determination, if applicable and based upon an opinion of
counsel, that the REMIC status of the trust fund has been lost or that a
substantial risk exists that the REMIC status will be lost for the then current
taxable year.
The termination of a trust fund and the early retirement of securities by
any party would decrease the average life of the securities and may adversely
affect the yield to holders of some or all classes
of the related securities.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS AND THE SECURITIES BACKED BY THOSE MORTGAGE LOANS
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 mortgage loans;
o require specific disclosures to borrowers;
o require licensing of originators; and
o regulate generally the origination, servicing and collection process
for the mortgage loans.
Depending on the specific facts and circumstances involved, violations may
limit the ability of a trust fund to collect all or a part of the principal of
or interest on the mortgage loans, may entitle the borrower to a refund of
amounts previously paid and could result in liability for damages and
administrative enforcement against the originator or an assignee of the
originator, like a trust fund, or the initial servicer or a subsequent servicer,
as the case may be. In particular, it is possible that mortgage loans included
in a trust fund will be subject to the Home Ownership and Equity Protection Act
of 1994. The Homeownership Act adds additional provisions to Regulation Z, the
implementing regulation of the Federal Truth-In-Lending Act. These provisions
impose additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with high interest rates or high up-front fees
and charges. In general, mortgage loans within the purview of the Homeownership
Act have annual percentage rates over 10 percentage points greater than the
yield on Treasury securities of comparable maturity and/or fees and points which
exceed the greater of 8% of the total loan amount or $441. The $441 amount is
adjusted annually based on changes in the Consumer Price Index for the prior
year. The provisions of the Homeownership Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor, like a trust fund, would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including the right to rescind the mortgage loan. Recently, class
action lawsuits under the Homeownership Act have been brought naming as a
defendant securitization trusts like the trust funds described in this
prospectus with respect to the mortgage loans.
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In addition, amendments to the federal bankruptcy laws have been proposed
that could result in (1) the treatment of a claim secured by a junior lien in a
borrower's principal residence as protected only to the extent that the claim
was secured when the security interest was made and (2) the disallowance of
claims based on secured debt if the creditor failed to comply with specific
provisions of the Truth in Lending Act (15 U.S.C. ss.1639). These amendments
could apply retroactively to secured debt incurred by the debtor prior to the
date of effectiveness of the amendments.
The depositor will represent that all applicable federal and state laws
were complied with in connection with the origination of the mortgage loans. If
there is a material and adverse breach of a representation, the depositor will
be obligated to repurchase any affected mortgage loan or to substitute a new
mortgage loan into the related trust fund. SEE "LEGAL ASPECTS OF MORTGAGE
LOANS".
MODIFICATION OF A MORTGAGE LOAN BY THE MASTER SERVICER MAY REDUCE THE YIELD ON
THE RELATED SECURITIES
In instances in which a mortgage loan is in default, or if default is
reasonably foreseeable, the master servicer, if it determines it is in the best
interests of the related securityholders, may permit modifications of the
mortgage loan rather than proceeding with foreclosure. Modification may have the
effect of reducing the interest rate on the mortgage loan, forgiving the payment
of principal or interest rate or extending the final maturity date of the
mortgage loan. Any modified mortgage loan retained in the related trust fund may
result in reduced collections from that mortgage loan and, to the extent not
covered by the related credit support, reduced distributions on one or more
classes of the related securities. Any mortgage loan modified to extend the
final maturity of the mortgage loan may result in extending the final maturity
of one or more classes of the related securities. SEE "COLLECTION AND OTHER
SERVICING PROCEDURES EMPLOYED BY THE MASTER SERVICER".
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Several capitalized terms are used in this prospectus to assist you in
understanding the terms of the securities. All of the capitalized terms used in
this prospectus are defined in the glossary beginning on page 140 in this
prospectus.
DESCRIPTION OF THE TRUST FUNDS
The trust fund for each series will be held by the trustee for the benefit
of the related securityholders. Each trust fund will consist of:
o a segregated pool of various types of one- to four-family residential
first and junior lien mortgage loans, cooperative apartment loans or
manufactured housing conditional sales contracts and installment loan
agreements as from time to time are subject to the related agreement
governing the trust fund;
o amounts on deposit in the certificate account, pre-funding account, if
applicable, or any other account maintained for the benefit of the
securityholders;
o property acquired on behalf of securityholders by foreclosure, deed in
lieu of foreclosure or repossession and any revenues received on the
property;
o the rights of the depositor under any hazard insurance policies, FHA
insurance policies, VA guarantees and primary mortgage insurance
policies to be included in the trust fund, each as described under
"Description of Primary Insurance Policies";
o the rights of the depositor under the agreement or agreements under
which it acquired the mortgage loans to be included in the trust fund;
o the rights of the trustee in any cash advance reserve fund or surety
bond to be included in the trust fund, each as described under
"Advances by Master Servicer in Respect of Delinquencies on the Trust
Fund Assets"; and
o any letter of credit, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, financial guarantee insurance
policy, reserve fund, currency or interest rate exchange agreement or
guarantee, each as described under "Description of Credit Support".
To the extent specified in the related prospectus supplement, a portion of
the interest received on a mortgage loan may not be included in the trust for
that series. Instead, the retained interest will be retained by or payable to
the originator, servicer or seller of the loan, free and clear of the interest
of securityholders under the related agreement.
DESCRIPTION OF THE MORTGAGE LOANS TO BE INCLUDED IN A TRUST FUND
Each mortgage loan will be originated by a person other than the depositor.
Each mortgage loan will be selected by the depositor for inclusion in a trust
fund from among those purchased by the
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depositor, either directly or through its affiliates, from New Century Mortgage
Corporation, the indirect parent of the depositor, and its affiliates or from
banks, savings and loan associations, mortgage bankers, mortgage brokers,
investment banking firms, the Federal Deposit Insurance Corporation and other
mortgage loan originators or sellers not affiliated with the depositor. Each
seller of mortgage loans will be referred to in this prospectus and the related
prospectus supplement as a mortgage loan seller. The mortgage loans acquired by
the depositor will have been originated in accordance with the underlying
criteria described in this prospectus under "The Depositor's Mortgage Loan
Purchase Program-Underwriting Standards" and in the prospectus supplement. All
mortgage loans to be included in a trust fund will have been purchased by the
depositor on or before the date of initial issuance of the related securities.
The mortgage loans included in a trust fund may be secured by any of the
following:
o first or junior liens evidenced by promissory notes on one- to
four-family residential properties including detached and attached
dwellings, townhouses, rowhouses, individual condominium units,
individual units in planned-unit developments and individual units in
de minimis planned-unit developments. Loans secured by this type of
property may be conventional loans, FHA-insured loans or VA-guaranteed
loans as specified in the related prospectus supplement;
o mortgage loans evidenced by promissory notes secured by shares in a
private cooperative housing corporation that give the owner of the
shares the right to occupy a particular dwelling unit in the
cooperative;
o conditional sales contracts and installment loan agreements with
respect to new or used manufactured homes; or
o real property acquired upon foreclosure or comparable conversion of the
mortgage loans included in a trust fund.
No more than 10% of the assets of a trust fund, by original principal
balance of the pool, will consist of conditional sales contracts or installment
loan agreements secured by manufactured homes. The manufactured homes securing
the manufactured housing contracts will consist of manufactured homes within the
meaning of 42 United States Code, Section 5402(6), which defines a manufactured
home as "a structure, transportable in one or more sections, which in the
traveling mode, is eight body feet or more in width or forty body feet or more
in length, or, when erected on site, is three hundred twenty or more square
feet, and which is built on a permanent chassis and designed to be used as a
dwelling with or without a permanent foundation when connected to the required
utilities, and includes the plumbing, heating, air conditioning, and electrical
systems contained therein; except that such term shall include any structure
which meets all the requirements of this paragraph except the size requirements
and with respect to which the manufacturer voluntarily files a certification
required by the Secretary of Housing and Urban Development and complies with the
standards established under this chapter."
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The mortgaged properties may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States. The mortgaged properties may include leasehold interests in residential
properties, the title to which is held by third party lessors. The term of any
leasehold will exceed the term of the mortgage note by at least five years.
The mortgage loans to be included in a trust fund will be any one of the
following types of mortgage loans:
o Fully amortizing mortgage loans with a fixed rate of interest and level
monthly payments to maturity;
o Fully amortizing mortgage loans with an interest rate that adjusts
periodically, with corresponding adjustments in the amount of monthly
payments, to equal the sum, which may be rounded, of a fixed percentage
amount and an index;
o ARM Loans that provide for an election, at the borrower's option, to
convert the adjustable interest rate to a fixed interest rate, which
will be described in the related prospectus supplement;
o ARM Loans that provide for negative amortization or accelerated
amortization resulting from delays in or limitations on the payment
adjustments necessary to amortize fully the outstanding principal
balance of the loan at its then applicable interest rate over its
remaining term;
o Fully amortizing mortgage loans with a fixed interest rate and level
monthly payments, or payments of interest only, during the early years
of the term, followed by periodically increasing monthly payments of
principal and interest for the duration of the term or for a specified
number of years, which will be described in the related prospectus
supplement;
o Fixed interest rate mortgage loans providing for level payment of
principal and interest on the basis of an assumed amortization schedule
and a balloon payment at the end of a specified term;
o Mortgage loans that provide for a line of credit under which amounts
may be advanced to the borrower from time to time; and
o Another type of mortgage loan described in the related prospectus
supplement.
All of the mortgage loans to be included in a trust fund will have:
o individual principal balances at origination of not less than $10,000
or more than $5,000,000,
o original terms to maturity of not more than 40 years, and
o a loan-to-value ratio at origination not in excess of 150%.
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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, or, in the case of a home equity line of credit loan, the
maximum principal amount which may be advanced over the term of the loan, plus,
in the case of a mortgage loan secured by a junior lien, the outstanding
principal balance of the related senior liens, to the value of the related
mortgaged property. The value of a single-family property or cooperative unit,
other than with respect to loans made to refinance existing loans, is the lesser
of (a) the appraised value determined in an appraisal obtained by the originator
at origination of the loan or, if the mortgaged property has been appraised
subsequent to origination, the value determined in the subsequent appraisal and
(b) the sales price for the property.
The value of the mortgaged property securing a mortgage loan made to refinance
an existing loan is the appraised value of the mortgaged property determined in
an appraisal obtained at the time of origination of the refinance loan or in an
appraisal, if any, obtained at the time of refinancing. For purposes of
calculating the loan-to-value ratio of a manufactured housing contract relating
to a new manufactured home, the value is no greater than the sum of a fixed
percentage of the list price of the unit actually billed by the manufacturer to
the dealer, exclusive of freight to the dealer site, including accessories
identified in the invoice, plus the actual cost of any accessories purchased
from the dealer, a delivery and set-up allowance, depending on the size of the
unit, and the cost of state and local taxes, filing fees and up to three years
prepaid hazard insurance premiums. With respect to a used manufactured home, the
value is generally the least of the sale price, the appraised value, and the
National Automobile Dealer's Association book value plus prepaid taxes and
hazard insurance premiums. The appraised value of a manufactured home is based
upon the age and condition of the manufactured housing unit and the quality and
condition of the mobile home park in which it is situated, if applicable.
Manufactured homes are less likely than other types of housing to experience
appreciation in value and are more likely to experience depreciation in value.
The underwriting standards of the mortgage loan originator or mortgage loan
seller may require a review of the appraisal used to determine the loan-to-value
of a mortgage loan. Where the review appraisal results in a valuation of the
mortgaged property that is less than a specified percentage of the original
appraisal, the loan-to-value ratio of the related mortgage loan will be based on
the review appraisal. The prospectus supplement of each series will describe the
percentage variance used by the related mortgage loan originator or mortgage
loan seller in determining whether the review appraisal will apply.
Each mortgage loan having a loan-to-value ratio at origination in excess of
80%, may be required to be covered by a primary mortgage guaranty insurance
policy insuring against default on the mortgage loan as to at least the
principal amount thereof exceeding 75% of the value of the mortgaged property at
origination of the mortgage loan. This type of insurance will remain in force at
least until the mortgage loan amortizes to a level that would produce a
loan-to-value ratio lower than 80%. SEE "DESCRIPTION OF PRIMARY INSURANCE
POLICIES--PRIMARY MORTGAGE INSURANCe POLICIES".
A mortgaged property may have been subject to secondary financing at
origination of the mortgage loan, but, unless otherwise specified in the related
prospectus supplement, the total amount of primary and secondary financing at
the time of origination of the mortgage loan did not produce a combined
loan-to-value ratio in excess of 150%. The trust fund may contain mortgage loans
secured by junior liens, and the related senior lien may not be included in the
trust fund. The primary risk to holders of mortgage loans secured by junior
liens is the possibility that adequate
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funds will not be received in connection with a foreclosure of the related
senior liens to satisfy fully both the senior liens and the junior mortgage
loan. SEE "LEGAL ASPECTS OF THE MORTGAGE LOANS-FORECLOSURE ON MORTGAGES".
As of the cut-off date specified in the related prospectus supplement, the
aggregate principal balance of mortgage loans secured by condominium units will
not exceed 30% of the aggregate principal balance of the mortgage loans in the
related mortgage pool. A mortgage loan secured by a condominium unit will not be
included in a mortgage pool unless, at the time of sale of the mortgage loan by
the mortgage loan seller, representations and warranties as to the condominium
project are made by the mortgage loan seller or an affiliate of the mortgage
loan seller or by another person acceptable to the depositor having knowledge
regarding the subject matter of those representations and warranties. The
mortgage loan seller, or another party on its behalf, will have made the
following representations and warranties:
o If a condominium project is subject to developer control or to
incomplete phasing or add-ons, at least 50% of the units have been sold
to bona fide purchasers to be occupied as primary residences or
vacation or second homes.
o If a condominium project has been controlled by the unit owners, other
than the developer, and is not subject to incomplete phasing or
add-ons, at least 50% of the units been are occupied as primary
residences or vacation or second homes.
SEE "THE DEPOSITOR'S MORTGAGE LOAN PURCHASE PROGRAM--REPRESENTATIONS BY OR
ON BEHALF Of MORTGAGE LOAN SELLERS; REMEDIES FOR BREACH OF REPRESENTATION" IN
THIS PROSPECTUS FOR A DESCRIPTION OF OTHER REPRESENTATIONS MADE BY OR ON BEHALF
OF MORTGAGE LOAN SELLERS AT THE TIME MORTGAGE LOANS ARE SOLD.
The trust fund may include mortgage loans subject to temporary buydown
plans which provide that the monthly payments made by the borrower in the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan, the resulting difference to be made up from (a) an amount
contributed by the borrower, the seller of the mortgaged property, or another
source and placed in a custodial account and (b) unless otherwise specified in
the prospectus supplement, investment earnings on the buydown funds. The
borrower under a buydown mortgage loan is usually qualified at the lower monthly
payment taking into account the funds on deposit in the custodial account.
Accordingly, the repayment of a buydown mortgage loan is dependent on the
ability of the borrower to make larger level monthly payments after the funds in
the custodial account have been depleted. SEE "THE DEPOSITOR'S MORTGAGE LOAN
PURCHASE PROGRAM--UNDERWRITING STANDARDS" FOR A DISCUSSION OF LOSS AND
DELINQUENCY CONSIDERATIONS RELATING TO BUYDOWN MORTGAGE LOANS.
The trust fund may include mortgage loans that provide for a line of credit
under which amounts may be advanced to the borrower from time to time. Interest
on each home equity line of credit loan, excluding introductory rates offered
from time to time during promotional periods, is computed and payable monthly on
the average daily outstanding balance of the mortgage loan. Principal on a home
equity line of credit loan may be drawn down, up to a maximum amount as set
forth in the related prospectus supplement, or repaid under each mortgage loan
from time to time, but may be subject to a minimum periodic payment. Each home
equity line of credit loan included in a trust fund will be
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secured by a lien on a one-to-four family property or a manufactured home. A
trust fund will not include any amounts borrowed under a home equity line of
credit loan after the cut-off date specified
in the related prospectus supplement.
The trust fund may include mortgage loans that are delinquent as of the
date the related series of securities is issued. In that case, the related
prospectus supplement will set forth, as to each mortgage loan, available
information as to the period of delinquency and any other information relevant
for a prospective purchaser to make an investment decision. No mortgage loan in
a trust fund will be 90 or more days delinquent and no trust fund will include a
concentration of mortgage loans which are more than 30 and less than 90 days
delinquent of greater than 20%.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENT. Each prospectus
supplement will contain specific information with respect to the mortgage loans
contained in the related trust fund, as of the cut-off date specified in the
prospectus supplement, which will usually be close of business on the first day
of the month of formation of the related trust fund, to the extent specifically
known to the depositor as of the date of the prospectus supplement, including
the following:
o the aggregate outstanding principal balance, the largest, smallest and
average outstanding principal balance of the mortgage loans,
o the type of property securing the mortgage loans, e.g., one- to
four-family houses, shares in cooperatives and the related proprietary
leases or occupancy agreements, condominium units and other attached
units, new or used manufactured homes and vacation and second homes,
o the original terms to maturity of the mortgage loans,
o the earliest origination date and latest maturity date,
o the aggregate principal balance of mortgage loans having loan-to-value
ratios at origination exceeding 80%, or, with respect to mortgage loans
secured by a junior lien, the aggregate principal balance of mortgage
loans having combined loan-to-value ratios exceeding 80%,
o the interest rates or range of interest rates borne by the mortgage
loans,
o the geographical distribution of the mortgaged properties on a
state-by-state basis,
o the number and aggregate principal balance of buydown mortgage loans,
if any,
o the weighted average retained interest, if any,
o with respect to ARM Loans, the index, the adjustment dates, the
highest, lowest and weighted average margin, and the maximum interest
rate variation at the time of any adjustment and over the life of the
ARM Loan, and
o whether the mortgage loans provide for payments of interest only for
any period and the frequency and amount by which, and the term during
which, monthly payments adjust.
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If specific information respecting the trust fund assets is not known to
the depositor at the time securities are initially offered, more general
information of the nature described in the bullet points above will be provided
in the prospectus supplement, and specific information as to the trust fund
assets to be included in the trust fund on the date of issuance of the
securities will be set forth in a report which will be available to purchasers
of the related securities at or before the initial issuance of the securities
and will be filed, together with the related pooling and servicing agreement,
with respect to each series of certificates, or the related servicing agreement,
trust agreement and indenture, with respect to each series of notes, as part of
a report on Form 8-K with the Securities and Exchange Commission within fifteen
days after the initial issuance. If mortgage loans are added to or deleted from
the trust fund after the date of the related prospectus supplement, the addition
or deletion will be noted on the Current Report or Form 8-K. In no event,
however, will more than 5%, by principal balance at the cut-off date, of the
mortgage loans deviate from the characteristics of the mortgage loans set forth
in the related prospectus supplement. In addition, a report on Form 8-K will be
filed within 15 days after the end of any pre-funding period containing
information respecting the trust fund assets transferred to a trust fund after
the date of issuance of the related securities as described in the following
paragraph.
DESCRIPTION OF THE PRE-FUNDING ACCOUNT FOR THE PURCHASE OF ADDITIONAL MORTGAGE
LOANS
The agreement governing the trust fund may provide for the transfer by the
mortgage loan seller of additional mortgage loans to the related trust fund
after the date of initial issuance of the securities. In that case, the trust
fund will include a pre-funding account, into which all or a portion of the
proceeds of the sale of one or more classes of securities of the related series
will be deposited to be released as additional mortgage loans are transferred.
Additional mortgage loans will be required to conform to the requirements set
forth in the related agreement or other agreement providing for the transfer,
and will be underwritten to the same standards as the mortgage loans initially
included in the trust fund. A pre-funding account will be required to be
maintained as an eligible account under the related agreement, all amounts in
the pre-funding account will be required to be invested in U.S. government
securities or other investments that are rated in one of the top three rating
categories by a nationally recognized rating agency as specified in the
agreement and the amount held in the pre-funding account shall at no time exceed
40% of the aggregate outstanding principal balance of the securities. The
related agreement providing for the transfer of additional mortgage loans will
provide that all transfers must be made within 3 months after the date on which
the related securities were issued, and that amounts set aside to fund the
transfers, whether in a pre- funding account or otherwise, and not so applied
within the required period of time will be deemed to be principal prepayments
and applied in the manner set forth in the related prospectus supplement.
The depositor will be required to provide data regarding the additional
mortgage loans to the rating agencies and the security insurer, if any,
sufficiently in advance of the scheduled transfer to permit review by the rating
agencies and the security insurer. Transfer of the additional mortgage loans
will be further conditioned upon confirmation by the rating agencies that the
addition of mortgage loans to the trust fund will not result in the downgrading
of the securities or, in the case of a series guaranteed or supported by a
security insurer, will not adversely affect the capital requirements of the
security insurer. Finally, a legal opinion to the effect that the conditions to
the transfer of the additional mortgage loans have been satisfied will be
required.
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THE DEPOSITOR
New Century Mortgage Securities, Inc., the depositor, was incorporated in
the State of Delaware on March 25, 1999 as an indirect wholly-owned subsidiary
of New Century Mortgage Corporation. The depositor was organized for the purpose
of serving as a private secondary mortgage market conduit. The depositor
maintains its principal office at 18400 Von Karman, Suite 1000, Irvine,
California 92612. Its telephone number is 949-440-7030.
The depositor does not have, nor is it expected in the future to have, any
significant assets. The prospectus supplement for each series of securities will
disclose if the depositor is a party to any legal proceedings that could have a
material impact on the related trust fund and the interests of the potential
investors.
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 trust fund assets or will be used by
the depositor for general corporate purposes. The depositor expects that it will
make additional sales of securities similar to 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 trust fund assets acquired by the depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
The basis on which each monthly interest payment on a trust fund asset is
calculated will be either:
o as one-twelfth of the interest rate on that asset multiplied by the
unpaid principal balance of the trust fund asset, often referred to as
the 30/360 basis, or
o by multiplying the unpaid principal balance of the trust fund asset by
the number of days elapsed since the last day interest was paid on that
asset and dividing by 365, often referred to as the simple interest
method.
Interest to be distributed on each distribution date to the holders of the
various classes of securities, other than principal only classes of Strip
Securities, of each series may be similarly calculated or may be calculated by
multiplying the outstanding principal balance of the security by the actual
number of days elapsed in the accrual period and dividing 360, often referred to
as the actual/360 basis. In the case of Strip Securities with no or a nominal
principal balance, distributions of interest will be in an amount described in
the related prospectus supplement.
The effective yield to securityholders will be lower than the yield
otherwise produced by the applicable security interest rate, or, as to a Strip
Security, the distributions of Stripped Interest thereon, and purchase price,
because although interest that accrued on each trust fund asset during each
month is due and payable on the first day of the following month, the
distribution of interest on the securities will not be made until the
distribution date occurring in the month following the month
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of accrual of interest on the mortgage loans or later in the case of a series of
securities having distribution dates occurring at intervals less frequently than
monthly.
When a principal prepayment in full is made on a mortgage loan, the
borrower is charged interest only for the period from the due date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial prepayment is made on a mortgage loan, the mortgagor
is not charged interest on the amount of the prepayment for the month in which
the prepayment is made. Accordingly, the effect of principal prepayments in full
during any month will be to reduce the aggregate amount of interest collected
that is available for distribution to securityholders. The mortgage loans in a
trust fund may contain provisions limiting prepayments or requiring the payment
of a prepayment penalty upon prepayment in full or in part. If so specified in
the related prospectus supplement, a prepayment penalty collected may be applied
to offset the above-described shortfalls in interest collections on the related
distribution date. Full and partial principal prepayments collected during the
prepayment period set forth in a prospectus supplement will be available for
distribution to securityholders on the related distribution date. Neither the
trustee nor the depositor will be obligated to fund shortfalls in interest
collections resulting from prepayments. The prospectus supplement for a series
of securities may specify that the master servicer will be obligated to pay from
its own funds, without reimbursement, those interest shortfalls attributable to
full and partial prepayments by mortgagors but only up to an amount equal to its
servicing fee for the related due period. SEE "MATURITY AND PREPAYMENT
CONSIDERATIONS" AND "DESCRIPTION OF THE SECURITIES".
In addition, if so specified in the related prospectus supplement, a holder
of a non-offered class of securities will have the right, solely at its
discretion, to terminate the related trust fund on any distribution date after
the 12th distribution date following the date of initial issuance of the related
series of securities and until the date as the Clean-up Call becomes exercisable
and thereby effect early retirement of the securities of the series. Any call of
this type will be of the entire trust fund at one time; multiple calls with
respect to any series of securities will not be permitted. Early termination
would result in the concurrent retirement of all outstanding securities of the
related series and would decrease the average lives of the terminated
securities, perhaps significantly. The earlier after the date of the initial
issuance of the securities that the termination occurs, the greater would be the
effect.
The prospectus supplement for each series of securities may set forth
additional information regarding yield considerations.
MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the trust fund assets in a particular
trust fund will vary depending upon the type of mortgage loans underlying or
comprising the trust fund assets in a trust fund. Each prospectus supplement
will contain information with respect to the type and maturities of the trust
fund assets in the related trust fund. The mortgage loans in a trust fund may
contain provisions prohibiting prepayment for a specified period after the
origination date, prohibiting partial prepayments entirely or prohibiting
prepayment in full or in part without a prepayment penalty.
The prepayment experience on the mortgage loans underlying or comprising
the trust fund assets in a trust fund will affect the weighted average life of
the related series of securities. Weighted
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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 the security will be
repaid to the investor. The weighted average life of the securities of a series
will be influenced by the rate at which principal on the mortgage loans
underlying or comprising the trust fund assets included in the related trust
fund is paid, which payments 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 and hazard or condemnation
losses. The rate of prepayment with respect to fixed rate mortgage loans has
fluctuated significantly in recent years. In general, if interest rates fall
below the interest rates on the mortgage loans underlying or comprising the
trust fund assets, the rate of prepayment would be expected to increase. There
can be no assurance as to the rate of prepayment of the mortgage loans
underlying or comprising the trust fund assets in any trust fund. The depositor
is not aware of any publicly available statistics relating to the principal
prepayment experience of diverse portfolios of mortgage loans over an extended
period of time. All statistics known to the depositor that have been compiled
with respect to prepayment experience on mortgage loans indicates that while
some mortgage loans may remain outstanding until their stated maturities, a
substantial number will be paid prior to their respective stated maturities. The
depositor is not aware of any historical prepayment experience with respect to
mortgage loans secured by properties located in Puerto Rico or Guam and,
accordingly, prepayments on loans secured by properties in Puerto Rico or Guam
may not occur at the same rate or be affected by the same factors as other
mortgage loans.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, the terms
of the mortgage loans, as affected by the existence of lockout provisions,
due-on-sale and due-on-encumbrance clauses, prepayment fees and the frequency
and amount of any future draws on any home equity line of credit loans, the
quality of management of the mortgaged properties, possible changes in tax laws
and the availability of mortgage funds, may affect prepayment experience. Other
than FHA loans and VA loans, all mortgage loans in the trust fund will contain
due-on-sale provisions permitting the lender to accelerate the maturity of the
mortgage loan upon sale or other types of transfers by the borrower of the
underlying mortgaged property. Loans insured by the FHA and loans guaranteed by
the VA contain no due-on-sale clauses and may be assumed by the purchaser of the
mortgaged property. An ARM Loan may also be assumable under certain conditions,
despite the existence of a due-on-sale clause, if the proposed transferee of the
related mortgaged property establishes its ability to repay the mortgage loan
and, in the reasonable judgment of the master servicer or sub-servicer, the
security for the ARM Loan would not be impaired by the assumption. Thus, the
rate of prepayments on FHA loans, VA loans and ARM Loans may be lower than that
of conventional mortgage loans bearing comparable interest rates. The extent to
which ARM Loans, FHA loans and VA loans are assumed by purchasers of the
mortgaged properties rather than prepaid in connection with the sales of the
mortgaged properties will affect the weighted average life of the related
securities.
The master servicer generally will enforce, in accordance with the terms of
the related servicing agreement, any due-on-sale clause or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or encumbrance or the
proposed conveyance or encumbrance of the underlying mortgaged property and
reasonably believes that it is entitled to do so under applicable law; provided,
however, that the master servicer will not take any enforcement action that
would impair or threaten to impair any recovery under any related insurance
policy. SEE "DESCRIPTION OF THE SECURITIES--COLLECTION AND OTHER SERVICING
PROCEDURES EMPLOYED BY THE MASTER SERVICER" AND
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"LEGAL ASPECTS OF MORTGAGE LOANS--ENFORCEABILITY OF PROVISIONS" AND
"--PREPAYMENT CHARGES AND PREPAYMENTS" FOR A DESCRIPTION OF THE PROVISIONS OF
EACH AGREEMENT GOVERNING THE SERVICING OF THE MORTGAGE LOANS AND LEGAL
DEVELOPMENTS THAT MAY AFFECT THE PREPAYMENT EXPERIENCE ON THE MORTGAGE LOANS.
SEE "DESCRIPTION OF THE SECURITIES--TERMINATION OF THE TRUST FUND AND
DISPOSITION OF TRUST FUND ASSETS" FOR A DESCRIPTION OF THE POSSIBLE EARLY
TERMINATION OF ANY SERIES OF SECURITIES. SEE ALSO "THE DEPOSITOR'S MORTGAGE LOAN
PURCHASE PROGRAM--REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS;
REMEDIES FOR BREACH OF REPRESENTATION" AND "DESCRIPTION OF THE
SECURITIES--ASSIGNMENT OF TRUST FUND ASSETS" FOR A DESCRIPTION OF THE OBLIGATION
OF THE MORTGAGE LOAN SELLERS, THE MASTER SERVICER AND THE DEPOSITOR TO
REPURCHASE MORTGAGE LOANS.
In addition, if the applicable agreement for a series of securities
provides for a pre-funding account or other means of funding the transfer of
additional mortgage loans to the related trust fund and the trust fund is unable
to acquire the additional mortgage loans within any applicable time limit, the
amounts set aside for the purpose may be applied as principal payments on one or
more classes of securities of the series. SEE "DESCRIPTION OF THE TRUST FUNDS--
DESCRIPTION OF THE PRE-FUNDINg ACCOUNT FOR THE PURCHASE OF ADDITIONAL MORTGAGE
LOANS".
THE DEPOSITOR'S MORTGAGE LOAN PURCHASE PROGRAM
The mortgage loans to be included in a trust fund will be purchased by the
depositor, either directly or indirectly, from the mortgage loan sellers.
UNDERWRITING STANDARDS
All mortgage loans to be included in a trust fund will have been subject to
underwriting standards acceptable to the depositor and applied as described in
the following paragraph. Each mortgage loan seller, or another party on its
behalf, will represent and warrant that mortgage loans purchased by or on behalf
of the depositor from it have been originated by the related originators in
accordance with these underwriting guidelines.
The underwriting standards are applied by the originators to evaluate the
value of the mortgaged property and to evaluate the adequacy of the mortgaged
property as collateral for the mortgage loan. While the originator's primary
consideration in underwriting a mortgage loan is the value of the mortgaged
property, the originator also considers the borrower's credit history and
repayment ability as well as the type and use of the mortgaged property. As a
result of this underwriting criteria, changes in the values of mortgage
properties may have a greater effect on the delinquency, foreclosure and loss
experience on the mortgage loans in a trust fund than these changes would be
expected to have on mortgage loans that are originated in a more traditional
manner. No assurance can be given by the depositor that the values of the
related mortgaged properties have remained or will remain at the levels in
effect on the dates of origination of the related mortgage loans.
Initially, a prospective borrower is required to fill out a detailed
application with respect to the applicant's liabilities, income and credit
history and personal information, as well as an authorization to apply for a
credit report that summarizes the borrower's credit history with local merchants
and lenders and any record of bankruptcy. In addition, an employment
verification is obtained that reports the borrower's current salary and may
contain information regarding length of employment and whether it is expected
that the borrower will continue his or her employment in the future. If a
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prospective borrower is self-employed, the borrower is required to submit copies
of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has demand
or savings accounts.
In determining the adequacy of the property as collateral, an appraisal is
made of each property considered for financing, except in the case of new
manufactured homes whose appraised value is determined using the list price of
the unit and accessories as described above under "Description of the Trust
Funds". Each appraiser is selected in accordance with predetermined guidelines
established for appraisers. The appraiser is required to inspect the property
and verify that it is in good condition and that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income, if considered applicable by the appraiser, and, when
deemed appropriate, the cost of replacing the home. The value of the property
being financed, as indicated by the appraisal, must be high enough so that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance.
Once all applicable employment, credit and property information is
received, the originator reviews the applicant's source of income, calculates
the amount of income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the debt
service-to-income ratio to determine the applicant's ability to repay the loan,
reviews the type of property being financed and reviews the property. In
evaluating the credit quality of borrowers, the originator may utilize credit
bureau risk scores, a statistical ranking of likely future credit performance
developed by Fair, Isaac & Company and three national credit data repositories -
Equifax, TransUnion and Experian.
In the case of a mortgage loan secured by a leasehold interest in a
residential property, the title to which is held by a third party lessor, the
mortgage loan seller, or another party on its behalf, is required to warrant,
among other things, that the remaining term of the lease and any sublease be at
least five years longer than the remaining term of the mortgage loan.
The mortgaged properties may be located in states where a lender providing
credit on a residential property may not seek a deficiency judgment against the
mortgagor but rather must look solely to the property for repayment in the event
of foreclosure. The underwriting standards to be applied to the mortgage loans
in all states, including anti-deficiency states, require that the value of the
property being financed, as indicated by the appraisal, currently supports and
is anticipated to support in the future the outstanding principal balance of the
mortgage loan.
With respect to any loan insured by the FHA, the mortgage loan seller is
required to represent that the FHA loan complies with the applicable
underwriting policies of the FHA. SEE "DESCRIPTION OF PRIMARY INSURANCE
POLICIES--FHA INSURANCE".
With respect to any loan guaranteed by the VA, the mortgage loan seller is
required to represent that the VA loan complies with the applicable underwriting
policies of the VA. SEE "DESCRIPTION OF PRIMARY INSURANCE POLICIES-VA
GUARANTEE".
The recent foreclosure or repossession and delinquency experience with
respect to loans serviced by the master servicer or, if applicable, a
significant sub-servicer will be provided in the related prospectus supplement.
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The types of loans that may be included in the mortgage pools may be
recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, the mortgage loans may provide for
escalating or variable payments by the borrower. These types of mortgage loans
are underwritten on the basis of a judgment that borrowers will have the ability
to make larger monthly payments in subsequent years. The borrower's income,
however, may not be sufficient to make loan payments as monthly payments
increase.
QUALIFICATIONS OF ORIGINATORS AND MORTGAGE LOAN SELLERS
Each originator will be required to satisfy the qualifications set forth in
this paragraph. Each originator must be an institution experienced in
originating and servicing conventional mortgage loans in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those loans. Each originator must be a
HUD-approved mortgagee or an institution the deposit accounts in which are
insured by the Bank Insurance Fund or Savings Association Insurance Fund of the
FDIC. In addition, with respect to FHA loans or VA loans, each originator must
be approved to originate the mortgage loans by the FHA or VA, as applicable.
Each originator and mortgage loan seller must also satisfy criteria as to
financial stability evaluated on a case by case basis by the depositor.
REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REMEDIES FOR BREACH OF
REPRESENTATION
Each mortgage loan seller, or a party on its behalf, will have made
representations and warranties in respect of the mortgage loans sold by that
mortgage loan seller. The following material representations and warranties as
to the mortgage loans will be made by or on behalf of each
mortgage loan seller:
o that any required hazard insurance was effective at the origination of
each mortgage loan, and that each required policy remained in effect on
the date of purchase of the mortgage loan from the mortgage loan seller
by or on behalf of the depositor;
o that either (A) title insurance insuring, subject only to permissible
title insurance exceptions, the lien status of the Mortgage was
effective at the origination of each and the policy remained in effect
on the date of purchase of the mortgage loan from the mortgage loan
seller by or on behalf of the depositor or (B) if the mortgaged
property securing any mortgage loan is located in an area where title
insurance policies are generally not available, there is in the related
mortgage file an attorney's certificate of title indicating, subject to
permissible exceptions set forth therein, the first lien status of the
mortgage;
o that the mortgage loan seller had good title to each mortgage loan and
each mortgage loan was subject to no offsets, defenses, counterclaims
or rights of rescission except to the extent that any buydown agreement
described herein may forgive some indebtedness of a borrower;
o that each Mortgage constituted a valid lien on, or security interest
in, the mortgaged property, subject only to permissible title insurance
exceptions and senior liens, if any, and that the mortgaged property
was free from damage and was in good repair;
o that there were no delinquent tax or assessment liens against the
mortgaged property;
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o that each mortgage loan was not currently more than 90 days delinquent
as to required payments; and
o that each mortgage loan was made in compliance with, and is enforceable
under, all applicable local, state and federal laws and regulations in
all material respects.
If a person other than a mortgage loan seller makes any of the foregoing
representations and warranties on behalf of the mortgage loan seller, the
identity of the person will be specified in the related prospectus supplement.
Any person making representations and warranties on behalf of a mortgage loan
seller shall be an affiliate of the mortgage loan seller or a person acceptable
to the depositor having knowledge regarding the subject matter of those
representations and warranties.
All of the representations and warranties made by or on behalf of a
mortgage loan seller in respect of a mortgage loan will have been made as of the
date on which the mortgage loan seller sold the mortgage loan to or on behalf of
the depositor. A substantial period of time may have elapsed between the date
the representation or warranty was made to or on behalf of the depositor and the
date of initial issuance of the series of securities evidencing an interest in
the related mortgage loan.
In the event of a breach of any representation or warranty made by a mortgage
loan seller, the mortgage loan seller will be obligated to cure the breach or
repurchase or replace the affected mortgage loan as described in the second
following paragraph. Since the representations and warranties made by or on
behalf of a mortgage loan seller do not address events that may occur following
the sale of a mortgage loan by that mortgage loan seller, it will have a cure,
repurchase or substitution obligation in connection with a breach of a
representation and warranty only if the relevant event that causes the breach
occurs prior to the date of the sale to or on behalf of the depositor. A
mortgage loan seller would have no repurchase or substitution obligations if the
relevant event that causes the breach occurs after the date of the sale to or on
behalf of the depositor. However, the depositor will not include any mortgage
loan in the trust fund for any series of securities if anything has come to the
depositor's attention that would cause it to believe that the representations
and warranties made in respect of a mortgage loan will not be accurate and
complete in all material respects as of the date of initial issuance of the
related series of securities.
The only representations and warranties to be made for the benefit of
holders of securities in respect of any mortgage loan relating to the period
commencing on the date of sale of a mortgage loan by the mortgage loan seller to
or on behalf of the depositor will be the limited representations of the
depositor and of the master servicer described below under "Description of the
Securities-- Assignment of Trust Fund Assets; Review of Files by Trustee". If
the master servicer is also a mortgage loan seller with respect to a particular
series, the representations will be in addition to the representations and
warranties made by the master servicer in its capacity as a mortgage loan
seller.
The master servicer and the trustee, or the trustee, will promptly notify
the relevant mortgage loan seller of any breach of any representation or
warranty made by or on behalf of it in respect of a mortgage loan that
materially and adversely affects the value of that mortgage loan or the
interests in the mortgage loan of the securityholders. If the mortgage loan
seller cannot cure a breach within a specified time period up to 120 days from
the date on which the mortgage loan seller was notified of the breach, then the
mortgage loan seller will be obligated to repurchase the affected mortgage loan
from the trustee within a specified time period up to 180 days from the date on
which the mortgage
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loan seller was notified of the breach, at the purchase price therefor. A
mortgage loan seller, rather than repurchase a mortgage loan as to which a
breach has occurred, may have the option, within a specified period after
initial issuance of the related series of securities, to cause the removal of
the mortgage loan from the trust fund and substitute in its place one or more
other mortgage loans, in accordance with the standards described below under
"Description of the Securities--Assignment of the Mortgage Loans". The master
servicer will be required under the applicable servicing agreement to use its
best efforts to enforce the repurchase or substitution obligations of the
mortgage loan seller for the benefit of the trustee and the holders of the
securities, following the practices it would employ in its good faith business
judgment were it the owner of the mortgage loan. This repurchase or substitution
obligation will constitute the sole remedy available to holders of securities or
the trustee for a breach of representation by a mortgage loan seller. SEE
"DESCRIPTION OF THE SECURITIES".
Neither the depositor nor the master servicer will be obligated to purchase
or substitute for a mortgage loan if a mortgage loan seller defaults on its
obligation to do so, and no assurance can be given that mortgage loan sellers
will carry out their repurchase or substitution obligations with respect to
mortgage loans. To the extent that a breach of the representations and
warranties of a mortgage loan seller may also constitute a breach of a
representation made by the depositor, the depositor may have a repurchase or
substitution obligation as described below under "Description of the
Securities--Assignment of Trust Fund Assets; Review of Files by Trustee".
DESCRIPTION OF THE SECURITIES
The securities will be issued in series. Each series of certificates
evidencing interests in a trust fund consisting of mortgage loans will be issued
in accordance with a pooling and servicing agreement among the depositor, the
master servicer and the trustee named in the prospectus supplement. Each series
of notes evidencing indebtedness of a trust fund consisting of mortgage loans
will be issued in accordance with an indenture between the related issuer and
the trustee named in the prospectus supplement. The issuer of notes will be the
depositor or an owner trust established under an owner trust agreement between
the depositor and the owner trustee for the purpose of issuing a series of
notes. Where the issuer is an owner trust, the ownership of the trust fund will
be evidenced by equity certificates issued under the owner trust agreement. 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.
Various forms of pooling and servicing agreement, servicing agreement, owner
trust agreement, trust agreement and indenture have been filed as exhibits to
the registration statement of which this prospectus is a part. The following
summaries describe specific provisions which will appear in each agreement. The
prospectus supplement for a series of securities will describe additional
provisions of the agreement relating to a series. This prospectus together with
the prospectus supplement will describe the material terms of the agreement
governing the trust fund related to a series of securities. As used in this
prospectus supplement with respect to any series, the term certificate or the
term note refers to all of the certificates or notes of that series, whether or
not offered by this prospectus and by the related prospectus supplement, unless
the context otherwise requires.
The certificates of each series, including any class of certificates not
offered hereby, will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the trust fund created by the
related pooling and servicing agreement. The notes of each series,
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including any class of notes not offered hereby, will be issued in fully
registered form only and will represent indebtedness of the trust fund created
by the related indenture. If so provided in the prospectus supplement, any class
of securities of any series may be represented by a certificate or note
registered in the name of a nominee of The Depository Trust Company. The
interests of beneficial owners of securities registered in the name of DTC will
be represented by entries on the records of participating members of DTC.
Definitive certificates or notes will be available for securities registered in
the name of DTC only under the limited circumstances provided in the related
prospectus supplement. The securities will be transferable and exchangeable for
like securities of the same class and series in authorized denominations at the
corporate trust office of the trustee as specified in the related prospectus
supplement. The prospectus supplement for each series of securities will
describe any limitations on transferability. No service charge will be made for
any registration of exchange or transfer of securities, but the depositor or the
trustee or any agent of the trustee may require payment of a sum sufficient to
cover any tax or other governmental charge.
Each series of securities may consist of either:
o a single class of securities evidencing the entire beneficial ownership
of or indebtedness of the related trust fund;
o two or more classes of securities evidencing the entire beneficial
ownership of or indebtedness of the related trust fund, one or more
classes of which will be senior in right of payment to one or more of
the other classes;
o two or more classes of securities, one or more classes of which are
entitled to (a) principal distributions, with disproportionate, nominal
or no interest distributions or (b) interest distributions, with
disproportionate, nominal or no principal distributions;
o two or more classes of securities which differ as to timing, sequential
order, priority of payment, security interest rate or amount of
distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any class may be made
upon the occurrence of specified events, in accordance with a schedule
or formula, or on the basis of collections from designated portions of
the mortgage pool, which series may include one or more classes of
securities, as to which accrued interest or a portion thereof will not
be distributed but rather will be added to the principal balance of the
security on each distribution date in the manner described in the
related prospectus supplement; and
o other types of classes of securities, as described in the related
prospectus supplement.
With respect to any series of notes, the equity certificates, insofar as
they represent the beneficial ownership interest in the issuer, will be
subordinate to the related notes.
Each class of securities, other than interest only Strip Securities, will
have a stated principal amount and, unless otherwise provided in the related
prospectus supplement, will be entitled to payments of interest on the stated
principal amount based on a fixed, variable or adjustable interest rate. The
security interest rate of each security offered hereby will be stated in the
related prospectus supplement as the pass-through rate with respect to a
certificate and the note interest rate with
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respect to a note. SEE "-DISTRIBUTION OF INTEREST ON THE SECURITIES" AND
"-DISTRIBUTION OF PRINCIPAL OF THE SECURITIES" BELOW.
The specific percentage ownership interest of each class of securities and
the minimum denomination for each security will be set forth in the related
prospectus supplement.
As to each series of certificates with respect to which a REMIC election is
to be made, the master servicer or the trustee will be obligated to take all
actions required in order to comply with applicable laws and regulations, and
will be obligated to pay any Prohibited Transaction Taxes or Contribution Taxes
arising out of a breach of its obligations with respect to its compliance
without any right of reimbursement therefor from the trust fund or from any
securityholder. A Prohibited Transaction Tax or Contribution Tax resulting from
any other cause will be charged against the related trust fund, resulting in a
reduction in amounts otherwise distributable to securityholders. SEE "FEDERAL
INCOME TAX CONSEQUENCES."
ASSIGNMENT OF TRUST FUND ASSETS; REVIEW OF FILES BY TRUSTEE
At the time of issuance of any series of securities, the depositor will
cause the pool of mortgage loans to be included in the related trust fund to be
assigned to the trustee, together with all principal and interest received by or
on behalf of the depositor on or with respect to the mortgage loans after the
related 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 the assignment of mortgage loans, deliver the securities to
the depositor in exchange for the trust fund assets. Each mortgage loan will be
identified in a schedule appearing as an exhibit to the related servicing
agreement. The schedule of mortgage loans will include information as to the
outstanding principal balance of each mortgage loan after application of
payments due on the cut-off date, as well as information regarding the interest
rate on the mortgage loan, the interest rate net of the sum of the rates at
which the servicing fees and the retained interest, if any, are calculated, the
retained interest, if any, the current scheduled monthly payment of principal
and interest, the maturity of the mortgage note, the value of the mortgaged
property, the loan-to-value ratio at origination and other information with
respect to the mortgage loans.
In addition, the depositor will, with respect to each mortgage loan,
deliver or cause to be delivered to the trustee, or to the custodian hereinafter
referred to:
(1) With respect to each single-family loan, the mortgage note
endorsed, without recourse, to the order of the trustee or in blank, the
original Mortgage with evidence of recording indicated thereon and an
assignment of the Mortgage to the trustee or in blank, in recordable form.
If, however, a mortgage loan has not yet been returned from the public
recording office, the depositor will deliver or cause to be delivered a
copy of the Mortgage together with its certificate that the original of the
Mortgage was delivered to the recording office. The depositor will promptly
cause the assignment of each related mortgage loan 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, recording of the assignment is not required to protect the
trustee's interest in the mortgage loan against the claim of any subsequent
transferee or any successor to or creditor of the depositor, the master
servicer, the relevant mortgage loan seller or any other prior holder of
the mortgage loan.
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(2) With respect to each cooperative loan, the cooperative note, the
original security agreement, the proprietary lease or occupancy agreement,
the related stock certificate and related stock powers endorsed in blank,
and a copy of the original filed financing statement together with an
assignment thereof to the trustee in a form sufficient for filing. The
depositor will promptly cause the assignment and financing statement of
each related cooperative loan to be filed in the appropriate public office,
except in states where in the opinion of counsel acceptable to the trustee,
filing of the assignment and financing statement is not required to protect
the trustee's interest in the cooperative loan against the claim of any
subsequent transferee or any successor to or creditor of the depositor, the
master servicer, the relevant mortgage loan seller or any prior holder of
the cooperative loan.
(3) With respect to each manufactured housing contract, the original
manufactured housing contract endorsed, without recourse, to the order of
the trustee and copies of documents and instruments related to the
manufactured housing contract and the security interest in the manufactured
home securing the manufactured housing contract, together with a blanket
assignment to the trustee of all manufactured housing contracts in the
related trust fund and the documents and instruments. In order to give
notice of the right, title and interest of the securityholders to the
manufactured housing contracts, the depositor will cause to be executed and
delivered to the trustee a UCC-1 financing statement identifying the
trustee as the secured party and identifying all Contracts as collateral.
With respect to any mortgage loan secured by a mortgaged property located
in Puerto Rico, the Mortgages with respect to these mortgage loans either (a)
secure a specific obligation for the benefit of a specified person or (b) secure
an instrument transferable by endorsement. Endorsable Puerto Rico Mortgages do
not require an assignment to transfer the related lien. Rather, transfer of
endorsable mortgages follows an effective endorsement of the related mortgage
note and, therefore, delivery of the assignment referred to in paragraph (1)
above would be inapplicable. Puerto Rico Mortgages that secure a specific
obligation for the benefit of a specified person, however, require an assignment
to be recorded with respect to any transfer of the related lien and the
assignment for that purpose would be delivered to the trustee.
The trustee, or the custodian, will review the mortgage loan documents
within a specified period after receipt, and the trustee, or the custodian, will
hold the mortgage loan documents in trust for the benefit of the
securityholders. If any mortgage loan document is found to be missing or
defective in any material respect, the trustee, or the custodian, shall notify
the master servicer and the depositor, and the master servicer shall immediately
notify the relevant mortgage loan seller. If the mortgage loan seller cannot
cure the omission or defect within a specified number of days after receipt of
notice, the mortgage loan seller will be obligated to repurchase the related
mortgage loan from the trustee at the purchase price or substitute for the
mortgage loan. There can be no assurance that a mortgage loan seller will
fulfill this repurchase or substitution obligation. Although the master servicer
is obligated to use its best efforts to enforce the repurchase or substitution
obligation to the extent described above under "The Depositor's Mortgage Loan
Purchase Program-Representations by or on behalf of Mortgage Loan Sellers;
Remedies for Breach of Representation", neither the master servicer nor the
depositor will be obligated to repurchase or substitute for that mortgage loan
if the mortgage loan seller defaults on its obligation. The assignment of the
mortgage loans to the trustee will be without recourse to the depositor and this
repurchase or substitution obligation
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constitutes the sole remedy available to the securityholders or the trustee for
omission of, or a material defect in, a constituent document.
With respect to the mortgage loans in a trust fund, the depositor will make
representations and warranties as to the types and geographical concentration of
the mortgage loans and as to the accuracy in all material respects of
identifying information furnished to the trustee in respect of each mortgage
loan, e.g., original loan-to-value ratio, principal balance as of the cut-off
date, interest rate and maturity. In addition, the depositor will represent and
warrant that, as of the cut-off date for the related series of securities, no
mortgage loan was currently more than 90 days delinquent as to payment of
principal and interest and no mortgage loan was more than 90 days delinquent
more than once during the previous 12 months. Upon a breach of any
representation of the depositor that materially and adversely affects the value
of a mortgage loan or the interests of the securityholders in the mortgage loan,
the depositor will be obligated either to cure the breach in all material
respects, repurchase the mortgage loan at the purchase price or substitute for
that mortgage loan as described in the paragraph below.
If the depositor discovers or receives notice of any breach of its
representations or warranties with respect to a mortgage loan, the depositor may
be permitted under the agreement governing the trust fund to remove the mortgage
loan from the trust fund, rather than repurchase the mortgage loan, and
substitute in its place one or more mortgage loans, but only if (a) with respect
to a trust fund for which a REMIC election is to be made, the substitution is
effected within two years of the date of initial issuance of the certificates,
plus permissible extensions, or (b) with respect to a trust fund for which no
REMIC election is to be made, the substitution is effected within 180 days of
the date of initial issuance of the securities. Each substitute mortgage loan
will, on the date of substitution, comply with the following requirements:
(1) have an outstanding principal balance, after deduction of all
scheduled payments due in the month of substitution, not in excess
of, and not more than $10,000 less than, the outstanding principal
balance, after deduction of all unpaid scheduled payments due as
of the date of substitution, of the deleted mortgage loan,
(2) have an interest rate not less than, and not more than 1% greater
than, the interest rate of the deleted mortgage loan,
(3) have a remaining term to maturity not greater than, and not more
than one year less than, that of the deleted mortgage loan
(4) have a Lockout Date, if applicable, not earlier than the Lockout
Date on the deleted mortgage loan and
(5) comply with all of the representations and warranties set forth in
the pooling and servicing agreement or indenture as of the date of
substitution.
In connection with any substitution, an amount equal to the difference
between the purchase price of the deleted mortgage loan and the outstanding
principal balance of the substitute mortgage loan, after deduction of all
scheduled payments due in the month of substitution, together with one month's
interest at the applicable rate at which interest accrued on the deleted
mortgage loan, less
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the servicing fee rate and the retained interest, if any, on the difference,
will be deposited in the certificate account and distributed to securityholders
on the first distribution date following the prepayment period in which the
substitution occurred. In the event that one mortgage loan is substituted for
more than one deleted mortgage loan, or more than one mortgage loan is
substituted for one or more deleted mortgage loans, then the amount described in
(1) above will be determined on the basis of aggregate principal balances, the
rate described in (2) above with respect to deleted mortgage loans will be
determined on the basis of weighted average interest rates, and the terms
described in (3) above will be determined on the basis of weighted average
remaining terms to maturity and the Lockout Dates described in (4) above will be
determined on the basis of weighted average Lockout Dates.
With respect to any series as to which credit support is provided by means
of a mortgage pool insurance policy, in addition to making the representations
and warranties described above, the depositor or the related mortgage loan
seller, or another party on behalf of the related mortgage loan seller, as
specified in the related prospectus supplement, will represent and warrant to
the trustee that no action has been taken or failed to be taken, no event has
occurred and no state of facts exists or has existed on or prior to the date of
the initial issuance of the securities which has resulted or will result in the
exclusion from, denial of or defense to coverage under any applicable primary
mortgage insurance policy, FHA insurance policy, mortgage pool insurance policy,
special hazard insurance policy or bankruptcy bond, irrespective of the cause of
the failure of coverage but excluding any failure of an insurer to pay by reason
of the insurer's own breach of its insurance policy or its financial inability
to pay. This representation is referred to in this prospectus and the related
prospectus supplement as the insurability representation. Upon a breach of the
insurability representation which materially and adversely affects the interests
of the securityholders in a mortgage loan, the depositor or the mortgage loan
seller, as the case may be, will be obligated either to cure the breach in all
material respects or to purchase the affected mortgage loan at the purchase
price. The related prospectus supplement may provide that the performance of an
obligation to repurchase mortgage loans following a breach of an insurability
representation will be ensured in the manner specified in the prospectus
supplement. SEE "DESCRIPTION OF PRIMARY INSURANCE POLICIES" AND "DESCRIPTION OF
CREDIT SUPPORT" IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS SUPPLEMENT FOR
INFORMATION REGARDING THE EXTENT OF COVERAGE UNDER THE AFOREMENTIONED INSURANCE
POLICIES.
The obligation to repurchase or, other than with respect to the
insurability representation if applicable, to substitute mortgage loans
constitutes the sole remedy available to the securityholders or the trustee for
any breach of the representations.
The master servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
servicing agreement. Upon a breach of any representation of the master servicer
which materially and adversely affects the interests of the securityholders, the
master servicer will be obligated to cure the breach in all material respects.
ESTABLISHMENT OF CERTIFICATE ACCOUNT; DEPOSITS TO CERTIFICATE ACCOUNT IN RESPECT
OF TRUST FUND ASSETS
The master servicer 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
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related trust fund assets. These accounts are collectively referred to in this
prospectus and the related prospectus supplement as the certificate account.
The certificate account must be either
o maintained with a bank or trust company, and in a manner,
satisfactory to the rating agency or agencies rating any class of
securities of the series or
o an account or accounts the deposits in which are insured by the BIF or
the SAIF, to the limits established by the FDIC, and the uninsured
deposits in which are otherwise secured so that the securityholders
have a claim with respect to the funds in the certificate account or a
perfected first priority security interest against any collateral
securing the funds that is superior to the claims of any other
depositors or general creditors of the institution with which the
certificate account is maintained.
The collateral eligible to secure amounts in the certificate account is
limited to United States government securities and other high-quality
investments specified in the related servicing agreement as permitted
investments. A certificate account may be maintained as an interest bearing or
a non-interest bearing account, or the funds held in the certificate account may
be invested pending each succeeding distribution date in permitted investments.
Any interest or other income earned on funds in the certificate account will be
paid to the master servicer or the trustee or their designee as additional
compensation. The certificate account may be maintained with an institution that
is an affiliate of the master servicer or the trustee, provided that the
institution meets the standards set forth in the bullet points above. If
permitted by the rating agency or agencies and so specified in the related
prospectus supplement, a certificate account may contain funds relating to more
than one series of pass-through certificates and may, if applicable, contain
other funds respecting payments on mortgage loans belonging to the master
servicer or serviced or master serviced by it on behalf of others.
Each sub-servicer servicing a trust fund asset under a sub-servicing
agreement will establish and maintain one or more separate accounts which may be
interest bearing and which will comply with the standards with respect to
certificate accounts or other standards as may be acceptable to the master
servicer. The sub-servicer is required to credit to the related sub-servicing
account on a daily basis the amount of all proceeds of mortgage loans received
by the sub-servicer, less its servicing compensation. The sub-servicer will
remit to the master servicer by wire transfer of immediately available funds all
funds held in the sub-servicing account with respect to each mortgage loan on
the monthly remittance date or dates specified in the related servicing
agreement.
The master servicer will deposit or cause to be deposited in the
certificate account for each trust fund including mortgage loans, the following
payments and collections received, or advances made, by the master servicer 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 retained interest:
(1) all payments on account of principal, including principal
prepayments, on the mortgage loans;
(2) all payments on account of interest on the mortgage loans, net
of any portion retained by the master servicer or by a sub-servicer as its
servicing compensation and net of any retained interest;
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(3) all proceeds of the hazard insurance policies and any special
hazard insurance policy, to the extent the proceeds are not applied to the
restoration of the property or released to the mortgagor in accordance with
the normal servicing procedures of the master servicer or the related
sub-servicer, subject to the terms and conditions of the related Mortgage
and mortgage note, any primary mortgage insurance policy, any FHA insurance
policy, any VA guarantee, any bankruptcy bond and any mortgage pool
insurance policy and all other amounts received and retained in connection
with the liquidation of defaulted mortgage loans, by foreclosure or
otherwise, 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;
(4) any amounts required to be paid under any letter of credit, as
described below under "Description of Credit Support--Letter of Credit";
(5) any advances made as described below under "Advances by the
Master Servicer in respect of Delinquencies on the Trust Funds Assets";
(6) if applicable, all amounts required to be transferred to the
certificate account from a reserve fund, as described below under
"Description of Credit Support--Reserve Funds";
(7) any buydown funds, and, if applicable, investment earnings
thereon, required to be deposited in the certificate account as described
in the first paragraph below;
(8) all proceeds of any mortgage loan or property in respect of the
mortgage loan purchased by the master servicer, the depositor, any
sub-servicer or any mortgage loan seller as described under "The
Depositor's Mortgage Loan Purchase Program-Representations by or on behalf
of Mortgage Loan Sellers; Remedies for Breach of Representations" or
"--Assignment of Trust Fund Assets; Review of Files by Trustee" above,
exclusive of the retained interest, if any, in respect of the mortgage
loan;
(9) all proceeds of any mortgage loan repurchased as described under
"--Termination" below;
(10) all payments required to be deposited in the certificate account
with respect to any deductible clause in any blanket insurance policy
described under "Description of Primary Insurance Policies--Primary Hazard
Insurance Policies"; and
(11) any amount required to be deposited by the master servicer in
connection with losses realized on investments for the benefit of the
master servicer of funds held in the certificate account.
With respect to each buydown mortgage loan, the master servicer, or a
sub-servicer, will deposit related buydown funds in a custodial account, which
may be interest bearing, and that otherwise meets the standards for certificate
accounts. This account is referred to in this prospectus and the related
prospectus supplement as a buydown account. The terms of all buydown mortgage
loans provide for the contribution of buydown funds in an amount not less than
either (a) the total payments to be made from the buydown funds under the
related buydown plan or (b) if the buydown
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funds are present valued, that amount that, together with investment earnings
thereon at a specified rate, compounded monthly, will support the scheduled
level of payments due under the buydown mortgage loan. Neither the master
servicer, the sub-servicer nor the depositor will be obligated to add to the
buydown funds any of its own funds should investment earnings prove insufficient
to maintain the scheduled level of payments. To the extent that any
insufficiency in buydown funds is not recoverable from the borrower,
distributions to securityholders will be affected. With respect to each buydown
mortgage loan, the master servicer will deposit in the certificate account the
amount, if any, of the buydown funds, and, if applicable, investment earnings
thereon, for each buydown mortgage loan that, when added to the amount due from
the borrower on the buydown mortgage loan, equals the full monthly payment which
would be due on the buydown mortgage loan if it were not subject to the buydown
plan.
If a buydown mortgage loan is prepaid in full or liquidated, the related
buydown funds will be applied as follows. If the mortgagor on a buydown mortgage
loan prepays the loan in its entirety during the buydown period, the master
servicer will withdraw from the buydown account and remit to the mortgagor in
accordance with the related buydown plan any buydown funds remaining in the
buydown account. If a prepayment by a mortgagor during the buydown period
together with buydown funds will result in a prepayment in full, the master
servicer will withdraw from the buydown account for deposit in the certificate
account the buydown funds and investment earnings thereon, if any, which
together with the prepayment will result in a prepayment in full. If the
mortgagor defaults during the buydown period with respect to a buydown mortgage
loan and the mortgaged property is sold in liquidation, either by the master
servicer or the insurer under any related insurance policy, the master servicer
will withdraw from the buydown account the buydown funds and all investment
earnings thereon, if any, for deposit in the certificate account or remit the
same to the insurer if the mortgaged property is transferred to the insurer and
the insurer pays all of the loss incurred in respect of the default. In the case
of any prepaid or defaulted buydown mortgage loan the buydown funds in respect
of which were supplemented by investment earnings, the master servicer will
withdraw from the buydown account and either deposit in the certificate account
or remit to the borrower, depending upon the terms of the buydown plan, any
investment earnings remaining in the related buydown account.
Any buydown funds, and any investment earnings thereon, deposited in the
certificate account in connection with a full prepayment of the related buydown
mortgage loan will be deemed to reduce the amount that would be required to be
paid by the borrower to repay fully the related mortgage loan if the mortgage
loan were not subject to the buydown plan.
DISTRIBUTIONS ON THE SECURITIES
Distributions allocable to principal and interest on the securities of each
series will be made by or on behalf of the trustee each month on each date as
specified in the related prospectus supplement and referred to as a distribution
date, commencing with the month following the month in which the applicable
cut-off date occurs. Distributions will be made to the persons in whose names
the securities are registered at the close of business on 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 and referred to as
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 that class. Payments to the holders of securities of
any class on each distribution date
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will be made to the securityholders of the respective class of record on the
next preceding Record Date, other than in respect of the final distribution,
based on the aggregate fractional undivided interests in that class represented
by their respective securities. Payments will be made by wire transfer in
immediately available funds to the account of a securityholder, if the
securityholder holds securities in the requisite amount specified in the related
prospectus supplement and if the securityholder has so notified the depositor or
its designee no later than the date specified in the related prospectus
supplement. Otherwise, payments will be made by check mailed to the address of
the person entitled to payment as it appears on the security register maintained
by the depositor or its agent. The final distribution in retirement of the
securities will be made only upon presentation and surrender of the securities
at the office or agency of the depositor or its agent specified in the notice to
securityholders of the final distribution. With respect to each series of
certificates or notes, the security register will be referred to as the
certificate register or note register, respectively.
All distributions on the securities of each series on each distribution
date will be made from the available distribution amount described in the next
sentence, in accordance with the terms described in the related prospectus
supplement. The available distribution amount for each distribution date will
equal the sum of the following amounts:
(1) the total amount of all cash on deposit in the related
certificate 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,
(b) all prepayments, together with related payments of the
interest thereon, Liquidation Proceeds, Insurance Proceeds and other
unscheduled recoveries received subsequent to the related Prepayment
Period, and
(c) all amounts in the certificate account that are due or
reimbursable to the depositor, the trustee, a mortgage loan seller, a
sub-servicer or the master servicer or that are payable in respect of
specified expenses of the related trust fund;
(2) if the related prospectus supplement so provides, interest or
investment income on amounts on deposit in the certificate account;
(3) all advances with respect to the distribution date;
(4) if the related prospectus supplement so provides, amounts paid
with respect to interest shortfalls resulting from prepayments during the
related Prepayment Period;
(5) to the extent not on deposit in the related certificate account
as of the corresponding determination date, any amounts collected under,
from or in respect of any credit support with respect to the distribution
date; and
(6) any other amounts described in the related prospectus
supplement.
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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 may
earn interest at a different rate, which may be a fixed, variable or adjustable
security interest rate. The related prospectus supplement will specify the
security interest rate for each class, or, in the case of a variable or
adjustable security interest rate, the method for determining the security
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.
With respect to each series of securities and each distribution date, the
distribution in respect of interest on each security, other than principal only
Strip Securities, will be equal to one month's interest on the outstanding
principal balance of the security immediately prior to the distribution date, at
the applicable security interest rate, subject to the following. As to each
Strip Security with no or a nominal principal balance, the distributions in
respect of interest on any distribution date will be on the basis of a notional
amount and equal one month's Stripped Interest. Prior to the time interest is
distributable on any class of Accrual Securities, interest accrued on that class
will be added to the principal balance thereof on each distribution date.
Interest distributions on each security of a series will be reduced in the event
of shortfalls in collections of interest resulting from prepayments on mortgage
loans, with that shortfall allocated among all of the securities of that series
if specified in the related prospectus supplement unless the master servicer is
obligated to cover the shortfalls from its own funds up to its servicing fee for
the related due period. With respect to each series of certificates or notes,
the interest distributions payable will be referred to in the applicable
prospectus supplement as the accrued certificate interest or accrued note
interest, respectively. SEE "YIELD CONSIDERATIONS".
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES. The principal balance of a
security, at any time, will equal the maximum amount that the holder will be
entitled to receive in respect of principal out of the future cash flow on the
trust fund assets and other assets included in the related trust fund. The
principal balance of each security offered hereby will be stated in the related
prospectus supplement as the certificate principal balance with respect to a
certificate and the note balance with respect to a note. With respect to each
security, distributions generally will be applied to undistributed accrued
interest thereon, and thereafter to principal. The outstanding principal balance
of a security will be reduced to the extent of distributions of principal on
that security, and, if and to the extent so provided on the related prospectus
supplement, by the amount of any realized losses, allocated to that security.
The initial aggregate principal balance of a series and each class of securities
related to a series will be specified in the related prospectus supplement.
Distributions of principal will be made on each distribution date to the class
or classes of securities entitled to principal until the principal balance of
that class has been reduced to zero. With respect to a Senior/Subordinate
Series, distributions allocable to principal of a class of securities will be
based on the percentage interest in the related trust fund evidenced by the
class, which in turn will be based on the principal balance of that class as
compared to the principal balance of all classes of securities of the series.
Distributions of principal of any class of securities will be made on a pro rata
basis among all of the securities of the class. Strip Securities with no
principal balance will not receive distributions of principal.
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ALLOCATION TO SECURITYHOLDERS OF LOSSES ON THE TRUST FUND ASSETS. With
respect to any defaulted mortgage loan that is finally liquidated, through
foreclosure sale or otherwise, the amount of the realized loss incurred in
connection with liquidation will equal the excess, if any, of the unpaid
principal balance of the liquidated loan immediately prior to liquidation, over
the aggregate amount of Liquidation Proceeds derived from liquidation remaining
after application of the proceeds to unpaid accrued interest on the liquidated
loan and to reimburse the master servicer or any sub-servicer for related
unreimbursed servicing expenses. With respect to mortgage loans the principal
balances of which have been reduced in connection with bankruptcy proceedings,
the amount of that reduction also will be treated as a realized loss. As to any
series of securities, other than a Senior/Subordinate Series, any realized loss
not covered as described under "Description of Credit Support" will be allocated
among all of the securities on a pro rata basis. As to any Senior/Subordinate
Series, realizes losses will be allocated first to the most subordinate class of
securities as described below under "Description of Credit
Support--Subordination".
ADVANCES BY MASTER SERVICER IN RESPECT OF DELINQUENCIES ON THE TRUST FUND ASSETS
With respect to any series of securities, the master servicer will advance
on or before each distribution date its own funds or funds held in the
certificate account that are not included in the available distribution amount
for that distribution date unless the master servicer, in good faith, determines
that any advances made will not be reimbursable from proceeds subsequently
recovered on the mortgage loan related to the advance. The amount of each
advance will be equal to the aggregate of payments of interest, net of related
servicing fees and retained interest, that were due during the related Due
Period and were delinquent on the related determination date. In most cases, the
prospectus supplement for a series will also provide that the master servicer
will advance, together with delinquent interest, the aggregate amount of
principal payments that were due during the related Due Period and delinquent as
of the determination date, subject to the same reimbursement determination,
except that, with respect to balloon loans, the master servicer will not have to
advance a delinquent balloon payment.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of securities entitled to
payments, rather than to guarantee or insure against losses. Advances of the
master servicer'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 advances were made; provided, however, that any advance will be
reimbursable from any amounts in the certificate account to the extent that the
master servicer shall determine that the advance is not ultimately recoverable
from Related Proceeds. If advances have been made by the master servicer from
excess funds in the certificate account, the master servicer will replace those
funds in the certificate account on any future distribution date to the extent
that funds in the certificate account on that distribution date are less than
payments required to be made to securityholders on that date. If so specified in
the related prospectus supplement, the obligations of the master servicer to
make advances may be secured by a cash advance reserve fund or a surety bond. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any surety bond, will be set forth in the related prospectus
supplement.
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FORM OF REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of securities of a series,
the master servicer or the trustee, will forward or cause to be forwarded to
each securityholder, to the depositor and to those other parties as may be
specified in the related servicing agreement, a statement setting forth the
following as of the distribution date:
(1) the amount of the distribution to holders of securities of
that class applied to reduce the principal balance of the securities;
(2) the amount of the distribution to holders of securities of
that class allocable to interest;
(3) the amount of related administration or servicing
compensation received by the trustee or the master servicer and any
sub-servicer and any other customary information as the master servicer
deems necessary or desirable, or that a securityholder reasonably requests,
to enable securityholders to prepare their tax returns;
(4) if applicable, the aggregate amount of advances included in
the distribution, and the aggregate amount of unreimbursed advances at the
close of business on that distribution date;
(5) the aggregate stated principal balance of the mortgage loans
at the close of business on that distribution date;
(6) the number and aggregate stated principal balance of
mortgage loans (a) delinquent one month, (b) delinquent two or more months,
and (c) as to which foreclosure proceedings have been commenced;
(7) with respect to any mortgaged property acquired on behalf of
securityholders through foreclosure or deed in lieu of foreclosure during
the preceding calendar month, the stated principal balance of the related
mortgage loan as of the close of business on the distribution date in that
month;
(8) the book value of any mortgaged property acquired on behalf
of securityholders through foreclosure or deed in lieu of foreclosure as of
the close of business on the last business day of the calendar month
preceding the distribution date;
(9) the aggregate principal balance of each class of securities
(including any class of securities not offered hereby) at the close of
business on that distribution date, separately identifying any reduction in
the principal balance due to the allocation of any realized loss;
(10) the amount of any special hazard realized losses allocated
to the subordinate securities, if any, at the close of business on that
distribution date;
(11) the aggregate amount of principal prepayments made and
realized losses incurred during the related Prepayment Period;
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(12) the amount deposited in the reserve fund, if any, on that
distribution date;
(13) the amount remaining in the reserve fund, if any, as of the
close of business on that distribution date;
(14) the aggregate unpaid accrued interest, if any, on each class
of securities at the close of business on that distribution date;
(15) in the case of securities that accrue interest at the
variable rate, the security interest rate applicable to that distribution
date, as calculated in accordance with the method specified in the related
prospectus supplement;
(16) in the case of securities that accrued interest at an
adjustable rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable security interest rate applicable to
the next succeeding distribution date as calculated in accordance with the
method specified in the related prospectus supplement; and
(17) as to any series which includes credit support, the amount
of coverage of each instrument of credit support included in the trust fund
as of the close of business on that distribution date.
In the case of information furnished under subclauses (1)-(3) above, the
amounts shall be expressed as a dollar amount per minimum denomination of
securities or for other specified portion thereof. With respect to each series
of certificates or notes, securityholders will be referred to as the
certificateholders or the noteholders, respectively.
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 (1)-(3) above, aggregated for that calendar year or the applicable
portion thereof during which that person was a securityholder. The 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 in accordance with any requirements of the Code as are
from time to time in force.
COLLECTION AND OTHER SERVICING PROCEDURES EMPLOYED BY THE MASTER SERVICER
The master servicer, directly or through sub-servicers, will make
reasonable efforts to collect all scheduled payments under the mortgage loans
and will follow or cause to be followed the collection procedures as it would
follow with respect to mortgage loans that are comparable to the mortgage loans
and held for its own account, provided these procedures are consistent with the
related servicing agreement and any related insurance policy, bankruptcy bond,
letter of credit or other insurance instrument described under "Description of
Primary Insurance Policies" or "Description of Credit Support". Consistent with
this servicing standard, the master servicer may, in its discretion, waive any
late payment charge in respect of a late mortgage loan payment and, only upon
determining that the coverage under any related insurance instrument will not be
affected, extend or
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cause to be extended the due dates for payments due on a mortgage note for a
period not greater than 180 days.
In instances in which a mortgage loan is in default, or if default is
reasonably foreseeable, and if determined by the master servicer to be in the
best interests of the related securityholders, the master servicer may permit
modifications of the mortgage loan rather than proceeding with foreclosure. In
making that determination, the estimated realized loss that might result if the
mortgage loan were liquidated would be taken into account. Modifications may
have the effect of reducing the interest rate on the mortgage loan, forgiving
the payment of principal or interest or extending the final maturity date of the
mortgage loan. Any modified mortgage loan may remain in the related trust fund,
and the reduction in collections resulting from the modification may result in
reduced distributions of interest, or other amounts, on, or may extend the final
maturity of, one or more classes of the related securities.
In connection with any significant partial prepayment of a mortgage loan,
the master servicer, to the extent not inconsistent with the terms of the
mortgage note and local law and practice, may permit the mortgage loan to be
reamortized so that the monthly payment is recalculated as an amount that will
fully amortize the remaining principal amount of the mortgage loan by the
original maturity date based on the original interest rate. Reamortization will
not be permitted if it would constitute a modification of the mortgage loan for
federal income tax purposes.
In any case in which property securing a mortgage loan, other than an ARM
Loan, has been, or is about to be, conveyed by the borrower, the master servicer
will exercise or cause to be exercised on behalf of the related trust fund the
lender's rights to accelerate the maturity of the mortgage loan under any
due-on-sale or due-on-encumbrance clause applicable to that mortgage loan. The
master servicer will only exercise these rights only if the exercise of any
these rights is permitted by applicable law and will not impair or threaten to
impair any recovery under any related insurance instrument. If these conditions
are not met or if the master servicer reasonably believes it is unable under
applicable law to enforce a due-on-sale or due-on-encumbrance clause, the master
servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom the property has been or is about
to be conveyed or encumbered, under which that person becomes liable under the
mortgage note, cooperative note or manufactured housing contract and, to the
extent permitted by applicable law, the borrower remains liable thereon. The
original mortgagor may be released from liability on a mortgage loan if the
master servicer shall have determined in good faith that a release will not
adversely affect the collectability of the mortgage loan. An ARM Loan may be
assumed if the ARM Loan is by its terms assumable and if, in the reasonable
judgment of the master servicer, the proposed transferee of the related
mortgaged property establishes its ability to repay the loan and the security
for the ARM Loan would not be impaired by the assumption. If a mortgagor
transfers the mortgaged property subject to an ARM Loan without consent, that
ARM Loan may be declared due and payable. 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. In
connection with any assumption, the terms of the related mortgage loan may not
be changed. SEE "LEGAL ASPECTS OF MORTGAGE LOANS--ENFORCEABILITY OF PROVISIONS".
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DESCRIPTION OF SUB-SERVICING
Any master servicer may delegate its servicing obligations in respect of
the mortgage loans to third-party servicers, but the master servicer will remain
obligated under the related servicing agreement. Each sub-servicer will be
required to perform the customary functions of a servicer of comparable loans,
including:
o collecting payments from borrowers and remitting the collections
to the master servicer,
o maintaining primary hazard insurance as described in this
prospectus and in any related prospectus supplement,
o filing and settling claims under primary hazard insurance
policies, which may be subject to the right of the master
servicer to approve in advance any settlement,
o maintaining escrow or impoundment accounts of borrowers for
payment of taxes, insurance and other items required to be paid by
any borrower in accordance with the mortgage loan,
o processing assumptions or substitutions where a due-on-sale clause
is not exercised,
o attempting to cure delinquencies,
o supervising foreclosures or repossessions,
o inspecting and managing mortgaged properties, if applicable, and
o maintaining accounting records relating to the mortgage loans.
The master servicer will be responsible for filing and settling claims in
respect of mortgage loans in a particular mortgage pool under any applicable
mortgage pool insurance policy, bankruptcy bond, special hazard insurance policy
or letter of credit. SEE "DESCRIPTION OF CREDIT SUPPORT".
The sub-servicing agreement between any master servicer and a sub-servicer
will be consistent with the terms of the related servicing agreement and will
not result in a withdrawal or downgrading of any class of securities issued in
accordance with the related agreement. With respect to those mortgage loans
serviced by the master servicer through a sub-servicer, the master servicer will
remain liable for its servicing obligations under the related policy and
servicing agreement or servicing agreement as if the master servicer alone were
servicing those mortgage loans. Although each sub-servicing agreement will be a
contract solely between the master servicer and the sub-servicer, the agreement
under which a series of securities is issued will provide that, if for any
reason the master servicer for the series of securities is no longer acting in a
servicing capacity, the trustee or any successor master servicer must recognize
the sub-servicer's rights and obligations under the sub-servicing agreement.
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 under
the related agreement is sufficient to pay the
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fees. However, a sub-servicer may be entitled to a retained interest in mortgage
loans. Each sub-servicer will be reimbursed by the master servicer for
expenditures which it makes, generally to the same extent the master servicer
would be reimbursed under the related servicing agreement. SEE "DESCRIPTION OF
THE SECURITIES--RETAINED INTEREST, SERVICING OR ADMINISTRATION COMPENSATION AND
PAYMENT OF EXPENSES".
The master servicer may require any sub-servicer to agree to indemnify the
master servicer for any liability or obligation sustained by the master servicer
in connection with any act or failure to act by the sub-servicer in its
servicing capacity. Each sub-servicer is required to maintain a fidelity bond
and an errors and omissions policy with respect to its officers, employees and
other persons acting on its behalf or on behalf of the master servicer.
PROCEDURES FOR REALIZATION UPON DEFAULTED MORTGAGE LOANS
As servicer of the mortgage loans, the master servicer, on behalf of
itself, the trustee and the securityholders, will present claims to the insurer
under each insurance instrument, and will take reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
mortgage loans. As set forth above under "-Collection and Other Servicing
Procedures Employed by the Master Servicer", all collections by or on behalf of
the master servicer under any insurance instrument, other than amounts to be
applied to the restoration of a mortgaged property or released to the mortgagor,
are to be deposited in the certificate account for the related trust fund,
subject to withdrawal as previously described. The master servicer or its
designee will not receive payment under any letter of credit included as an
insurance instrument with respect to a defaulted mortgage loan unless all
Liquidation Proceeds and Insurance Proceeds which it deems to be finally
recoverable have been realized; however, the master servicer will be entitled to
reimbursement for any unreimbursed advances and reimbursable expenses
thereunder.
If any property securing a defaulted mortgage loan is damaged and proceeds,
if any, from the related hazard insurance policy or special hazard insurance
policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the related credit insurance instrument, if
any, the master servicer is not required to expend its own funds to restore the
damaged property unless it determines (a) that the restoration will increase the
proceeds to securityholders on liquidation of the mortgage loan after
reimbursement of the master servicer for its expenses and (b) that its expenses
will be recoverable by it from related Insurance Proceeds or Liquidation
Proceeds.
If recovery on a defaulted mortgage loan under any related credit insurance
instrument is not available for the reasons set forth in the preceding
paragraph, the master servicer nevertheless will be obligated to follow or cause
to be followed the normal practices and procedures as it deems necessary or
advisable to realize upon the defaulted mortgage loan. If the proceeds of any
liquidation of the property securing the defaulted mortgage loan are less than
the outstanding principal balance of the defaulted mortgage loan plus interest
accrued thereon at the interest rate plus the aggregate amount of expenses
incurred by the master servicer in connection with those proceedings and which
are reimbursable under the servicing agreement, the trust fund will realize a
loss in the amount of the difference. The master servicer will be entitled to
withdraw or cause to be withdrawn from the certificate account out of the
Liquidation Proceeds recovered on any defaulted mortgage loan, prior to the
distribution of any Liquidation Proceeds to securityholders, amounts
representing its normal servicing compensation on the mortgage loan,
unreimbursed servicing
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expenses incurred with respect to the mortgage loan and any unreimbursed
advances of delinquent monthly payments made with respect to the mortgage loan.
If the master servicer or its designee recovers Insurance Proceeds with
respect to any defaulted mortgage loan, the master servicer will be entitled to
withdraw or cause to be withdrawn from the certificate account out of Insurance
Proceeds, prior to distribution of that amount to securityholders, amounts
representing its normal servicing compensation on that mortgage loan,
unreimbursed servicing expenses incurred with respect to the mortgage loan and
any unreimbursed advances of delinquent monthly payments made with respect to
the mortgage loan. In the event that the master servicer has expended its own
funds to restore damaged property and those funds have not been reimbursed under
any insurance instrument, it will be entitled to withdraw from the certificate
account out of related Liquidation Proceeds or Insurance Proceeds an amount
equal to the expenses incurred by it, in which event the trust fund may realize
a loss up to the amount so charged. Because Insurance Proceeds cannot exceed
deficiency claims and expenses incurred by the master servicer, no payment or
recovery will result in a recovery to the trust fund which exceeds the principal
balance of the defaulted mortgage loan together with accrued interest thereon at
the interest rate net of servicing fees and the retained interest, if any. In
addition, when property securing a defaulted mortgage loan can be resold for an
amount exceeding the outstanding principal balance of the related mortgage loan
together with accrued interest and expenses, it may be expected that, if
retention of any amount is legally permissible, the insurer will exercise its
right under any related mortgage pool insurance policy to purchase the property
and realize for itself any excess proceeds. SEE "DESCRIPTION OF PRIMARY
INSURANCE POLICIES" AND "DESCRIPTION OF CREDIT SUPPORT".
With respect to collateral securing a cooperative loan, any prospective
purchaser will generally have to obtain the approval of the board of directors
of the relevant cooperative before purchasing the shares and acquiring rights
under the proprietary lease or occupancy agreement securing the cooperative
loan. This approval is usually based on the purchaser's income and net worth and
numerous other factors. The necessity of acquiring board approval could limit
the number of potential purchasers for those shares and otherwise limit the
master servicer's ability to sell, and realize the value of, those shares. SEE
"LEGAL ASPECTS OF MORTGAGE LOANS-FORECLOSURE ON COOPERATIVES".
RETAINED INTEREST; SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF
EXPENSES
The prospectus supplement for a series of securities will specify whether
there will be any retained interest from the trust fund assets, and, if so, the
owner of the retained interest. 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 a trust fund asset represents a specified
portion of the interest payable thereon. The retained interest will be deducted
from borrower payments as received and will not be part of the related trust
fund. Any partial recovery of interest on a mortgage loan, after deduction of
all applicable servicing fees, will be allocated between retained interest, if
any, and interest at the interest rate on the mortgage loan, net of the rates at
which the servicing fees and the retained interest are calculated, on a pari
passu basis.
The master servicer's primary compensation with respect to a series of
securities will come from the monthly payment to it, with respect to each
interest payment on a trust fund asset, of an amount equal to one-twelfth of the
servicing fee rate specified in the related prospectus supplement times the
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scheduled principal balance of the trust fund asset. Since any retained interest
and the master servicer's primary compensation are percentages of the scheduled
principal balance of each trust fund asset, these amounts will decrease in
accordance with the amortization schedule of the trust fund assets. As
additional compensation in connection with a series of securities relating to
mortgage loans, the master servicer or the sub-servicers will retain all
assumption fees, late payment charges and , unless otherwise stated in the
prospectus supplement, prepayment penalties, to the extent collected from
mortgagors. Any interest or other income which may be earned on funds held in
the certificate account or any sub-servicing account may be paid as additional
compensation to the master servicer or the sub-servicers, as the case may be.
Any sub-servicer will receive a portion of the master servicer's primary
compensation as its sub-servicing compensation.
With respect to a series of securities consisting of mortgage loans, in
addition to amounts payable to any sub-servicer, the master servicer will pay
from its servicing compensation expenses incurred in connection with its
servicing of the mortgage loans, 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.
The master servicer is entitled to reimbursement for expenses incurred by
it in connection with the liquidation of defaulted mortgage loans, including
reimbursement of expenditures incurred by it in connection with the restoration
of mortgaged properties, the right of reimbursement being prior to the rights of
securityholders to receive any related Liquidation Proceeds. The master servicer
is also entitled to reimbursement from the certificate account for advances.
ANNUAL EVIDENCE AS TO THE COMPLIANCE OF THE MASTER SERVICER
Each servicing agreement with respect to a series of securities, will
provide that on or before a specified date in each year, the first date being 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 the firm conducted substantially in compliance with
either the Uniform Single Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac, the servicing by or on behalf of the master
servicer of mortgage loans under servicing agreements substantially similar to
each other, including the related servicing agreement, was conducted in
compliance with the terms of those agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for Freddie Mac, or paragraph 4 of the
Uniform Single Program for Mortgage Bankers, requires it to report. In rendering
its statement the accounting 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 Freddie Mac, rendered within one year of the statement, of firms of
independent public accountants with respect to the related sub-servicer.
Each servicing agreement will also provide for delivery to the trustee, on
or before a specified date in each year, of an annual statement signed by two
officers of the master servicer to the effect that the master servicer has
fulfilled its obligations under the related agreement throughout the preceding
year.
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Copies of the annual accountants' statement and the statement of officers
of the master servicer may be obtained by securityholders without charge upon
written request to the master servicer at the address set forth in the related
prospectus supplement.
MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The master servicer under each servicing agreement will be named in the
related prospectus supplement. The entity serving as master servicer may be an
affiliate of the depositor and may have other normal business relationships with
the depositor or the depositor's affiliates.
Each servicing agreement will provide that the master servicer may resign
from its obligations and duties under the related agreement only if its
resignation, and the appointment of a successor, will not result in a
downgrading of any class of securities or upon a determination that its duties
under the related agreement are no longer permissible under applicable law. No
resignation will become effective until the trustee or a successor servicer has
assumed the master servicer's obligations and duties under the related
agreement.
Each servicing agreement will further provide that neither the master
servicer, the depositor nor any director, officer, employee, or agent of the
master servicer or the depositor will be under any liability to the related
trust fund or securityholders for any action taken, or for refraining from the
taking of any action, in good faith under the related agreement, or for errors
in judgment; provided, however, that neither the master servicer, the depositor
nor any such person will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. Each servicing agreement will
further provide that the master servicer, the depositor and any director,
officer, employee or agent of the master servicer or the depositor will be
entitled to indemnification by the related trust fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the related agreement or the securities, other than any loss,
liability or expense that is related to any specific mortgage loan or mortgage
loans, unless that loss, liability or expense is otherwise reimbursable under
the related agreement, and other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each servicing agreement will provide that
neither the master servicer nor the depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the related agreement and which in its opinion
may involve it in any expense or liability. The master servicer or the depositor
may, however, in its discretion undertake any action which it may deem necessary
or desirable with respect to the related agreement and the rights and duties of
the parties and the interests of the securityholders. In that event, the legal
expenses and costs of the action and any resulting liability 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 and to charge
the certificate account for the reimbursement. Except in the case of a series of
Senior/Subordinate securities, any monetary obligation of the securityholders
will be borne among them on a pro rata basis in proportion to the accrued
interest payable to each securityholder, and, notwithstanding any other
provision, their respective distributions will be reduced accordingly.
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Any person into which the master servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the master
servicer is a party, or any person succeeding to the business of the master
servicer, will be the successor of the master servicer under each agreement, so
long as that person is qualified to sell mortgage loans to, and service mortgage
loans on behalf of, Fannie Mae or Freddie Mac.
EVENTS OF DEFAULT UNDER THE GOVERNING AGREEMENT AND RIGHTS UPON EVENTS OF
DEFAULT
POOLING AND SERVICING AGREEMENT
Events of default under each pooling and servicing agreement will include:
o any failure by the master servicer to distribute or cause to
be distributed to securityholders, or to remit to the trustee
for distribution to securityholders, any required payment that
continues unremedied for a specified number of business days
after the giving of written notice of the failure to the
master servicer by the trustee or the depositor, or to the
master servicer, the depositor and the trustee by the holders
of certificates evidencing not less than 25% of the voting
rights;
o 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
a specified number of days after the giving of written notice
of the failure to the master servicer by the trustee or the
depositor, or to the master servicer, the depositor and the
trustee by the holders of certificates evidencing not less
than 25% of the Voting rights; and
o events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and actions by
or on behalf of the master servicer indicating its insolvency
or inability to pay its obligations.
So long as an event of default under a pooling and servicing agreement
remains unremedied, the depositor or the trustee may, and at the direction of
holders of certificates evidencing not less than 51% of the voting rights, the
trustee shall, terminate all of the rights and obligations of the master
servicer under the pooling and servicing agreement relating to the trust fund
and in and to the mortgage loans, other than any retained interest of the master
servicer, whereupon the trustee will succeed to all of the responsibilities,
duties and liabilities of the master servicer under the agreement and will be
entitled to similar compensation arrangements. If the trustee is prohibited by
law from obligating itself to make advances regarding delinquent mortgage loans,
then the trustee will not be so obligated.
If the trustee is unwilling or unable so to act, it may or, at the written
request of the holders of certificates entitled to at least 51% 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 the appointment of at least $1,000,000 to act as
successor to the master servicer under the agreement. Pending the appointment of
a successor, the trustee is obligated to act in the capacity of master servicer.
The trustee and any successor master servicer
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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 related
agreement.
No certificateholder will have the right under any pooling and servicing
agreement to institute any proceeding under the agreement unless:
o the certificateholder previously has given to the trustee written
notice of default,
o the holders of certificates evidencing not less than 25% of the
voting rights have made written request upon the trustee to
institute the proceeding in its own name as trustee thereunder,
o have offered to the trustee reasonable indemnity, and
o the trustee for fifteen days has neglected or refused to institute
a proceeding. The trustee, however, is under no obligation to
exercise any of the trusts or powers vested in it by any pooling
and servicing agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any
litigation under or in relation to the agreement at the request,
order or direction of any of the holders of certificates covered
by the agreement, unless the certificateholders have offered to
the trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred.
SERVICING AGREEMENT
A servicing default under the related servicing agreement will include:
o any failure by the master servicer to make a required
deposit to the certificate account or, if the master
servicer is so required, to distribute to the holders of
any class of notes or equity certificates of the series
any required payment which continues unremedied for a
specified number of business days after the giving of
written notice of the failure to the master servicer by
the trustee or the Issuer;
o any failure by the master servicer duly to observe or
perform in any material respect any other of its covenants
or agreements in the servicing agreement with respect to
the series of notes which continues unremedied for a
specified number of days after the giving of written
notice of the failure to the master servicer by the
trustee or the issuer;
o events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings regarding
the master servicer and actions by the master servicer
indicating its insolvency or inability to pay its
obligations and
o any other servicing default as set forth in the servicing
agreement.
So long as a servicing default remains unremedied, either the depositor or
the trustee may, by written notification to the master servicer and to the
issuer or the trustee or trust fund, as applicable, terminate all of the rights
and obligations of the master servicer under the servicing agreement, other
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than any right of the master servicer as noteholder or as holder of the equity
certificates and other than the right to receive servicing compensation and
expenses for servicing the mortgage loans during any period prior to the date of
the termination. Upon termination of the master servicer the trustee will
succeed to all responsibilities, duties and liabilities of the master servicer
under the servicing agreement, other than the obligation to repurchase mortgage
loans, and will be entitled to similar compensation arrangements. If the trustee
would be obligated to succeed the master servicer but is unwilling to so act, it
may appoint, or if it is unable to so act, it shall appoint, or petition a court
of competent jurisdiction for the appointment of an approved mortgage servicing
institution with a net worth of at least $1,000,000 to act as successor to the
master servicer under the servicing agreement. Pending the appointment of a
successor, the trustee is obligated to act in the capacity of master servicer.
The trustee and the successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation to the initial
master servicer under the servicing agreement.
INDENTURE
An event of default under the indenture will include:
o a default for a specified number of days or more in the payment of
any principal of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture which continues for a specified number
of days after notice of failure is given in accordance with the
procedures described in the related prospectus supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
having been incorrect in a material respect as of the time made,
and the breach is not cured within a specified number of days
after notice of breach is given in accordance with the procedures
described in the related prospectus supplement;
o events of bankruptcy, insolvency, receivership or liquidation of
the depositor or the issuer; or
o any other event of default provided with respect to notes of that
series.
If an event of default with respect to the notes of any series occurs and
is continuing, the trustee or the holders of a majority of the then aggregate
outstanding amount of the notes of the series may declare the principal amount,
or, if the notes of that series are Accrual Securities, the 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 the series to be due and
payable immediately. That declaration may, under the circumstances set forth in
the indenture, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related notes.
If following an event of default with respect to any series of notes, the
notes of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to
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continue to apply payments on the collateral as if there had been no declaration
of acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the notes of a
series following an event of default, unless
o the holders of 100% of the then aggregate outstanding amount of
the notes of the series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series at the date of the sale, or
o the trustee determines that the collateral would not be sufficient
on an ongoing basis to make all payments on the notes as the
payments would have become due if the notes had not been declared
due and payable, and the trustee obtains the consent of the
holders of 66 2/3% of the then aggregate outstanding amount of the
notes of the series.
If the trustee liquidates the collateral in connection with an event of
default, the indenture may provide that the trustee will have a prior lien on
the proceeds of any liquidation for unpaid fees and expenses. As a result, upon
the occurrence of an event of default, the amount available for payments to the
noteholders would be less than would otherwise be the case. However, the 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 an event of default.
If the principal of the notes of a series is declared due and payable, the
holders of those notes issued at a discount from par may be entitled to receive
no more than an amount equal to the unpaid principal amount of the note less the
amount of the discount that is unamortized.
No noteholder or holder of an equity certificate generally will have any
right under an owner trust agreement or indenture to institute any proceeding
with respect to the agreement unless:
o the holder previously has given to the trustee written notice of
default and the default is continuing,
o the holders of notes or equity certificates of any class
evidencing not less than 25% of the aggregate percentage interests
constituting the class (a) have made written request upon the
trustee to institute a proceeding in its own name as trustee
thereunder and (b) have offered to the trustee reasonable
indemnity,
o the trustee has neglected or refused to institute a proceeding for
60 days after receipt of the request and indemnity, and
o no direction inconsistent with the written request has been given
to the trustee during the 60 day period by the holders of a
majority of the note balances of the class. However, the trustee
will be under no obligation to exercise any of the trusts or
powers vested in it by
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the applicable agreement or to institute, conduct or defend any
litigation at the request, order or direction of any of the
holders of notes or equity certificates covered by the agreement,
unless the holders have offered to the trustee reasonable security
or indemnity against the costs, expenses and liabilities which may
be incurred therein or thereby.
AMENDMENT OF THE GOVERNING AGREEMENTS
With respect to each series of certificates, each related pooling and
servicing agreement or trust agreement may be amended by the depositor, the
master servicer, and the trustee, upon consent of the provider of credit
support, if any, without the consent of any of the holders of certificates
covered by the agreement, to cure any ambiguity, to correct, modify or
supplement any provision in the agreement, or to make any other provisions with
respect to matters or questions arising under the agreement which are not
inconsistent with the provisions of the agreement, provided that the action will
not adversely affect in any material respect the interests of any holder of
certificates covered by the agreement. Each agreement may also be amended by the
depositor, the master servicer, if any, and the trustee, with the consent of the
holders of certificates evidencing not less than 66% of the voting rights, for
any purpose; provided, however, that no amendment may
o reduce in any manner the amount of or delay the timing of,
payments received on trust fund assets which are required to be
distributed on any certificate without the consent of the holder
of the certificate,
o adversely affect in any material respect the interests of the
holders of any class of certificates in a manner other than as
described in the above bullet point, without the consent of the
holders of certificates of that class evidencing not less than 66%
of the aggregate voting rights of that class, or
o reduce the percentage of voting rights required by the preceding
bullet point for the consent to any amendment without the consent
of the holders of all certificates covered by the agreement then
outstanding.
However, with respect to any series of certificates 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 the amendment will not cause the trust fund to fail to qualify as a
REMIC at any time that the related certificates are outstanding. The voting
rights evidenced by any certificate will be the portion of the voting rights of
all of the certificates in the related series allocated in the manner described
in the related prospectus supplement.
With respect to each series of notes, each related servicing agreement or
indenture may be amended by the parties to the agreement without the consent of
any of the holders of the notes covered by the agreement, to cure any ambiguity,
to correct, modify or supplement any provision in the agreement, or to make any
other provisions with respect to matters or questions arising under the
agreement which are not inconsistent with the provisions of the agreement,
provided that the action will not adversely affect in any material respect the
interests of any holder of notes covered by the agreement. Each agreement may
also be amended by the parties to the agreement with the consent of the holders
of notes evidencing not less than 66% of the voting rights, for any purpose,
that no amendment may
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o reduce in any manner the amount of or delay the timing of,
payments received on trust fund assets which are required to be
distributed on any note without the consent of the holder of that
note,
o adversely affect in any material respect the interests of the
holders of any class of notes in a manner other than as described
in the preceding bullet point, without the consent of the holders
of notes of that class evidencing not less than 66% of the
aggregate voting rights of that class, or
o reduce the percentage of voting rights required by the preceding
bullet point for the consent to any amendment without the consent
of the holders of all notes covered by the agreement then
outstanding. The voting rights evidenced by any note will be the
portion of the voting rights of all of the notes in the related
series allocated in the manner described in the related prospectus
supplement.
TERMINATION OF THE TRUST FUND AND DISPOSITION OF TRUST FUND ASSETS
The obligations created by the related agreements for each series of
securities will terminate upon the payment to securityholders of that series of
all amounts held in the certificate account or by the master servicer and
required to be paid to them under the agreements following the earlier of
o the final payment or other liquidation of the last asset included
in the related trust fund or the disposition of all underlying
property subject to the trust fund assets acquired upon
foreclosure of the trust fund assets, and
o the purchase of all of the assets of the trust fund by the party
entitled to effect the 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 related agreements
continue beyond the date specified in the related prospectus supplement. Written
notice of termination of the related agreements will be given to each
securityholder, and the final distribution will be made only upon surrender and
cancellation of the securities at an office or agency appointed by the trustee
which will be specified in the notice of termination.
Any purchase of assets of the trust fund in connection with a termination,
shall be made at the price set forth in the related prospectus supplement which
in most cases will be equal to the greater of:
o the sum of (a) 100% of the stated principal balance of each
mortgage loan as of the day of the purchase plus accrued interest
thereon at the applicable interest rate net of the rates at which
the servicing fees and the retained interest, if any, are
calculated to the first day of the month following the purchase
plus (b) the appraised value of any underlying property subject to
the mortgage loans acquired for the benefit of securityholders,
and
o the aggregate fair market value of all of the assets in the trust
fund, as determined by the trustee, the master servicer, and, if
different than both such persons, the person entitled to
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effect the termination, in each case taking into account accrued
interest at the applicable interest rate net of the rates at which
the servicing fees and the retained interest, if any, are
calculated to the first day of the month following the purchase.
The exercise of an optimal termination right will effect early retirement
of the securities of that series, but the right of the person entitled to effect
the termination is subject to the aggregate principal balance of the outstanding
trust fund assets for the series at the time of purchase being less than the
percentage of the aggregate principal balance of the trust fund assets at the
cut-off date for that series specified in the related prospectus supplement,
which percentage will be between 25% and 0%.
In addition to the repurchase of the assets in the related trust fund
at the Clean-up Call, if so specified in the related prospectus supplement, a
holder of a non-offered class of securities described in the preceding paragraph
will have the right, solely at its discretion, to terminate the related trust
fund on any distribution date after the 12th distribution date following the
date of initial issuance of the related series of securities and until the date
as the Clean-up Call becomes exercisable and thereby effect early retirement of
the securities of the series. Any call of this type will be of the entire trust
fund at one time; multiple calls with respect to any series of securities will
not be permitted. If the call option is exercised, the Call Class must remit to
the trustee a price equal to 100% of the principal balance of the securities
offered hereby as of the day of the purchase plus accrued interest thereon at
the applicable security interest rate during the related period on which
interest accrues on the securities which the trustee will distribute to
securityholders. If funds to terminate are not deposited with the related
trustee, the securities will remain outstanding. There will not be any
additional remedies available to securityholders. In addition, in the case of a
trust fund for which a REMIC election or elections have been made, an early
termination will constitute a "qualified liquidation" under Section 860F of the
Code. In connection with a call by the Call Class, the final payment to the
securityholders will be made upon surrender of the related securities to the
trustee. Once the securities have been surrendered and paid in full, there will
not be any continuing liability from the securityholders or from the trust fund
to securityholders.
OPTIONAL PURCHASE BY THE MASTER SERVICER OF DEFAULTED MORTGAGE LOANS
The master servicer under the related servicing agreement will have the
option to purchase from the trust fund any mortgage loan 90 days or more
delinquent at a purchase price generally equal to the outstanding principal
balance of the delinquent mortgage loan as of the date of purchase, plus all
accrued and unpaid interest on that principal balance.
DUTIES OF THE TRUSTEE
The trustee makes no representations as to the validity or sufficiency of
any agreement, the securities or any mortgage loan or related document and is
not accountable for the use or application by or on behalf of the master
servicer of any funds paid to the master servicer or its designee in respect of
the securities or the mortgage loans, or deposited into or withdrawn from the
certificate 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.
However, upon receipt of the various certificates, reports or other
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instruments required to be furnished to it, the trustee is required to examine
the documents and to determine whether they conform to the requirements of the
related agreement.
DESCRIPTION OF THE TRUSTEE
The trustee or indenture trustee, each referred to as the trustee, under
each pooling and servicing agreement, trust agreement or indenture will be named
in the related prospectus supplement. The owner trustee for each series of notes
will be named in the related prospectus supplement. The commercial bank,
national banking association or trust company serving as trustee or owner
trustee may have normal banking relationships with the depositor and its
affiliates and with the master servicer and its affiliates.
DESCRIPTION OF CREDIT SUPPORT
If so provided in the related prospectus supplement, the trust fund for a
series of securities may include credit support for that series or for one or
more classes of securities comprising the series, which credit support may
consist of any combination of the following separate components, any of which
may be limited to a specified percentage of the aggregate principal balance of
the mortgage loans covered thereby or a specified dollar amount:
o coverage with respect to realized losses incurred on liquidated
loans;
o coverage with respect to realized losses that are attributable to
physical damage to mortgaged properties of a type that is not
covered by standard hazard insurance policies; and
o coverage with respect to specific actions that may be taken by a
bankruptcy court in connection with a mortgage loan, including a
reduction of the interest rate on a mortgage loan, an extension
of its maturity or a reduction in the principal balance of the
mortgage loan.
As set forth in the following paragraphs and in the related prospectus
supplement, credit support coverage may be provided by subordination of one or
more classes to other classes of securities in a series, one or more insurance
policies, a bankruptcy bond, a letter of credit, a reserve fund,
overcollateralization, cross support, or another method of credit support
described in the related prospectus supplement or any combination of the
foregoing. The amount and type of any credit support with respect to a series of
securities or with respect to one or more classes of securities comprising that
series, and the obligors on the credit support, will be set forth in the related
prospectus supplement. A copy of the policy or agreement, as applicable,
governing the applicable credit support will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the related series.
SUBORDINATION
With respect to any Senior/Subordinate Series, in the event of any realized
losses on mortgage loans not in excess of the limitations described in the
following paragraph, the rights of the subordinate securityholders to receive
distributions with respect to the mortgage loans will be
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subordinate to the rights of the senior securityholders to the extent described
in the related prospectus supplement.
All realized losses will be allocated to the subordinate securities of the
related series, or, if the series includes more than one class of subordinate
securities, to the outstanding class of subordinate securities having the first
priority for allocation of realized losses and then to additional outstanding
classes of subordinate securities, if any, until the principal balance of the
applicable subordinate securities has been reduced to zero. Any additional
realized losses will be allocated to the senior securities or, if the series
includes more than one class of senior securities, either on a pro rata basis
among all of the senior securities in proportion to their respective outstanding
principal balances or as otherwise provided in the related prospectus
supplement. However, with respect to realized losses that are attributable to
physical damage to mortgaged properties of a type that is not covered by
standard hazard insurance policies, the amount thereof that may be allocated to
the subordinate securities of the related series may be limited to an amount
specified in the related prospectus supplement. If so, any realized losses of
this type in excess of the amount allocable to the subordinate securities will
be allocated among all outstanding classes of securities of the related series,
on a pro rata basis in proportion to their respective outstanding principal
balances, regardless of whether any subordinate securities remain outstanding,
or as otherwise provided in the related prospectus supplement. Any allocation of
a realized loss to a security will be made by reducing the principal balance
thereof as of the distribution date following the Prepayment Period in which the
realized loss was incurred.
As set forth under "Description of the Securities--Distributions of
Principal of the Securities", the rights of holders of the various classes of
securities of any series to receive distributions of principal and interest is
determined by the aggregate principal balance of each class. The principal
balance of any security will be reduced by all amounts previously distributed on
that security in respect of principal, and by any realized losses allocated to
that security. If there were no realized losses or prepayments of principal on
any of the mortgage loans, the respective rights of the holders of securities of
any series to future distributions would not change. However, to the extent so
provided in the related prospectus supplement, holders of senior securities may
be entitled to receive a disproportionately larger amount of prepayments
received, which will have the effect of accelerating the amortization of the
senior securities and increasing the respective percentage interest in future
distributions evidenced by the subordinate securities in the related trust fund,
with a corresponding decrease in the senior percentage, as well as preserving
the availability of the subordination provided by the subordinate securities. In
addition, as set forth in the paragraph above, realized losses will be first
allocated to subordinate securities by reduction of the principal balance
thereof, which will have the effect of increasing the respective interest in
future distributions evidenced by the senior securities in the related trust
fund.
If so provided in the related prospectus supplement, amounts otherwise
payable on any distribution date to holders of subordinate securities may be
deposited into a reserve fund. Amounts held in any reserve fund may be applied
as described below under "--Reserve Funds" and in the related prospectus
supplement.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described in the preceding paragraphs and
any variation will be described in the related prospectus supplement.
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If so provided in the related prospectus supplement, the credit support for
the senior securities of a Senior/Subordinate Series may include, in addition to
the subordination of the subordinate securities of the series and the
establishment of a reserve fund, any of the other forms of credit support
described in this prospectus supplement. If any of the other forms of credit
support described below is maintained solely for the benefit of the senior
securities of a Senior/Subordinate Series, then that coverage described may be
limited to the extent necessary to make required distributions on the senior
securities or as otherwise specified in the related prospectus supplement. If so
provided in the related prospectus supplement, the obligor on any other forms of
credit support maintained for the benefit of the senior securities of a
Senior/Subordinate Series may be reimbursed for amounts paid thereunder out of
amounts otherwise payable on the subordinate securities.
LETTER OF CREDIT
As to any series of securities to be covered by a letter of credit, a bank
will deliver to the trustee an irrevocable letter of credit. The master servicer
or trustee will exercise its best reasonable efforts to keep or cause to be kept
the letter of credit in full force and effect, unless coverage thereunder has
been exhausted through payment of claims. The master servicer will agree to pay
the fees for the letter of credit on a timely basis unless, as described in the
related prospectus supplement, the payment of those fees is otherwise provided
for.
The master servicer or the trustee will make or cause to be made draws on
the letter of credit bank under each letter of credit. Subject to any
differences as will be described in the related prospectus supplement, letters
of credit may cover all or any of the following amounts, in each case up to a
maximum amount set forth in the letter of credit:
(1) For any mortgage loan that became a liquidated loan during
the related Prepayment Period, other than mortgage loans as to which
amounts paid or payable under any related hazard insurance instrument,
including the letter of credit as described in (2) below, are not
sufficient either to restore the mortgaged property or to pay the
outstanding principal balance of the mortgage loan plus accrued interest,
an amount which, together with all Liquidation Proceeds, Insurance
Proceeds, and other collections on the liquidated loan, net of amounts
payable or reimbursable therefrom to the master servicer for related unpaid
servicing fees and unreimbursed servicing expenses, will equal the sum of
(A) the unpaid principal balance of the liquidated loan, plus accrued
interest at the applicable interest rate net of the rates at which the
servicing fee and retained interest are calculated, plus (B) the amount of
related servicing expenses, if any, not reimbursed to the master servicer
from Liquidation Proceeds, Insurance Proceeds and other collections on the
liquidation loan, which shall be paid to the master servicer;
(2) For each mortgage loan that is delinquent and as to which
the mortgaged property has suffered damage, other than physical damage
caused by hostile or warlike action in time of war or peace, by any weapons
of war, by any insurrection or rebellion, or by any nuclear reaction or
nuclear radiation or nuclear contamination whether controlled or
uncontrolled, or by any action taken by any governmental authority in
response to any of the foregoing, and for which any amounts paid or payable
under the related primary hazard insurance policy or any special hazard
insurance policy are not sufficient to pay either of the following amounts,
an amount which, together with all Insurance Proceeds paid or payable under
the related primary hazard insurance policy or any special hazard insurance
policy, net, if the proceeds are not to be applied
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to restore the mortgaged property, of all amounts payable or reimbursable
therefrom to the master servicer for related unpaid servicing fees and
unreimbursed servicing expenses, will be equal to the lesser of (A) the
amount required to restore the mortgaged property and (B) the sum of (1)
the unpaid principal balance of the mortgage loan plus accrued interest at
the applicable interest rate net of the rates at which the servicing fees
and retained interest, if any, are calculated, plus (2) the amount of
related servicing expenses, if any, not reimbursed to the master servicer
from Insurance Proceeds paid under the related primary hazard insurance
policy or any special hazard insurance policy; and
(3) For any mortgage loan that has been subject to bankruptcy
proceedings as described above, the amount of any debt service reduction or
the amount by which the principal balance of the mortgage loan has been
reduced by the bankruptcy court.
If the related prospectus supplement so provides, upon payment by the
letter of credit bank with respect to a liquidated loan, or a payment of the
full amount owing on a mortgage loan as to which the mortgaged property has been
damaged, as described in (2)(B) above, the liquidated loan will be removed from
the related trust fund in accordance with the terms set forth in the related
prospectus supplement and will no longer be subject to the agreement. Unless
otherwise provided in the related prospectus supplement, mortgage loans that
have been subject to bankruptcy proceedings, or as to which payment under the
letter of credit has been made for the purpose of restoring the related
mortgaged property, as described in (2)(A) above, will remain part of the
related trust fund. The maximum dollar coverages provided under any letter of
credit will each be reduced to the extent of related unreimbursed draws
thereunder.
In the event that the bank that has issued a letter of credit ceases to be
a duly organized commercial bank, or its debt obligations are rated lower than
the highest rating on any class of the securities on the date of issuance by the
rating agency or agencies, the master servicer or trustee will use its best
reasonable efforts to obtain or cause to be obtained, as to each letter of
credit, a substitute letter of credit issued by a commercial bank that meets
these requirements and providing the same coverage; provided, however, that, if
the fees charged or collateral required by the successor bank shall be more than
the fees charged or collateral required by the predecessor bank, each component
of coverage thereunder may be reduced proportionately to a level as results in
the fees and collateral being not more than the fees then charged and collateral
then required by the predecessor bank.
MORTGAGE POOL INSURANCE POLICY
As to any series of securities to be covered by a mortgage pool insurance
policy with respect to any realized losses on liquidated loans, the master
servicer will exercise its best reasonable efforts to maintain or cause to be
maintained the mortgage pool insurance policy in full force and effect, unless
coverage thereunder has been exhausted through payment of claims. The master
servicer will agree to pay the premiums for each mortgage pool insurance policy
on a timely basis unless, as described in the related prospectus supplement, the
payment of those fees is otherwise provided.
The master servicer will present or cause to be presented claims to the
insurer under each mortgage pool insurance policy. Mortgage pool insurance
policies, however, are not blanket policies against loss, since claims
thereunder may be made only upon satisfaction of certain
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conditions, as described in the next paragraph and, if applicable, in the
related prospectus supplement.
Mortgage pool insurance policies do not cover losses arising out of the
matters excluded from coverage under the primary mortgage insurance policy, or
losses due to a failure to pay or denial of a claim under a primary mortgage
insurance policy, irrespective of the reason therefor.
Mortgage pool insurance policies in general provide that no claim may
validly be presented thereunder with respect to a mortgage loan unless:
o an acceptable primary mortgage insurance policy, if the
initial loan-to-value ratio of the mortgage loan exceeded 80%,
has been kept in force until the loan-to-value ratio is
reduced to 80%;
o premiums on the primary hazard insurance policy have been paid
by the insured and real estate taxes and foreclosure,
protection and preservation expenses have been advanced by or
on behalf of the insured, as approved by the insurer;
o if there has been physical loss or damage to the mortgaged
property, it has been restored to its physical condition at
the time the mortgage loan became insured under the mortgage
pool insurance policy, subject to reasonable wear and tear;
and
o the insured has acquired good and merchantable title to the
mortgaged property, free and clear of all liens and
encumbrances, except permitted encumbrances, including any
right of redemption by or on behalf of the mortgagor, and if
required by the insurer, has sold the property with the
approval of the insurer.
Assuming the satisfaction of these conditions, the insurer has the option
to either (a) acquire the property securing the defaulted mortgage loan for a
payment equal to the principal balance of the defaulted mortgage loan plus
accrued and unpaid interest at the interest rate on the mortgage loan to the
date of acquisition and expenses described above advanced by or on behalf of the
insured, on condition that the insurer must be provided with good and
merchantable title to the mortgaged property, unless the property has been
conveyed under the terms of the applicable primary mortgage insurance policy, or
(b) pay the amount by which the sum of the principal balance of the defaulted
mortgage loan and accrued and unpaid interest at the interest rate to the date
of the payment of the claim and the expenses exceed the proceeds received from a
sale of the mortgaged property which the insurer has approved. In both (a) and
(b), the amount of payment under a mortgage pool insurance policy will be
reduced by the amount of the loss paid under the primary mortgage insurance
policy.
Unless earlier directed by the insurer, a claim under a mortgage pool
insurance policy must be filed (a) in the case when a primary mortgage insurance
policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the insurer, whichever is
later, or (b) in the case when a primary mortgage insurance policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the
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insurer. A claim must be paid within a specified period (typically, 30 days)
after the claim is made by the insured.
The amount of coverage under each mortgage pool insurance policy will
generally be reduced over the life of the securities of any series by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the insurer upon disposition of all acquired properties. The amount
of claims paid includes certain expenses incurred by the master servicer as well
as accrued interest on delinquent mortgage loans to the date of payment of the
claim. Accordingly, if aggregate net claims paid under a mortgage pool insurance
policy reach the applicable policy limit, coverage thereunder will be exhausted
and any further losses will be borne by securityholders of the related series.
SEE "LEGAL ASPECTS OF MORTGAGE LOANS--FORECLOSURE ON MORTGAGES" AND
"--REPOSSESSIon WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS".
If an insurer under a mortgage pool insurance policy ceases to be a private
mortgage guaranty insurance company duly qualified as such under applicable laws
and approved as an insurer by Freddie Mac or Fannie Mae and having a
claims-paying ability acceptable to the rating agency or agencies, the master
servicer will use its best reasonable efforts to obtain or cause to be obtained
from another qualified insurer a replacement insurance policy comparable to the
mortgage pool insurance policy with a total coverage equal to the then
outstanding coverage of the mortgage pool insurance policy; provided, however,
that if the cost of the replacement policy is greater than the cost of the
original mortgage pool insurance policy, the coverage of the replacement policy
may be reduced to the level that its premium rate does not exceed the premium
rate on the original mortgage pool insurance policy. However, if the insurer
ceases to be a qualified insurer solely because it ceases to be approved as an
insurer by Freddie Mac or Fannie Mae, the master servicer will review, or cause
to be reviewed, the financial condition of the insurer with a view towards
determining whether recoveries under the mortgage pool insurance policy are
jeopardized for reasons related to the financial condition of the insurer. If
the master servicer determines that recoveries are so jeopardized, it will
exercise its best reasonable efforts to obtain from another qualified insurer a
replacement policy, subject to the same cost limitation.
Because each mortgage pool insurance policy will require that the property
subject to a defaulted mortgage loan be restored to its original condition prior
to claiming against the insurer, the policy will not provide coverage against
hazard losses. As set forth in the immediately following paragraph, the primary
hazard insurance policies covering the mortgage loans typically exclude from
coverage physical damage resulting from a number of causes and, even when the
damage is covered, may afford recoveries that are significantly less than the
full replacement cost of the losses. Further, a special hazard insurance policy,
or a letter of credit that covers special hazard realized losses, will not cover
all risks, and the coverage thereunder will be limited in amount. These hazard
risks will, as a result, be uninsured and will therefore be borne by
securityholders.
SPECIAL HAZARD INSURANCE POLICY
As to any series of securities to be covered by an insurance instrument
that does not cover losses that are attributable to physical damage to the
mortgaged properties of a type that is not covered by standard hazard insurance
policies, in other words, "special hazard realized losses", the related
prospectus supplement may provide that the master servicer will exercise its
best reasonable efforts to maintain or cause to be maintained a special hazard
insurance policy in full force and effect
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covering the special hazard amount, unless coverage thereunder has been
exhausted through payment of claims; provided, however, that the master servicer
will be under no obligation to maintain the policy if any insurance instrument
covering the series as to any realized losses on liquidated loans is no longer
in effect. The master servicer will agree to pay the premiums on each special
hazard insurance policy on a timely basis unless, as described in the related
prospectus supplement, payment of those premiums is otherwise provided for.
Each special hazard insurance policy will, subject to the limitations
described in the next paragraph, protect holders of securities of the related
series from
o loss by reason of damage to mortgaged properties caused by certain
hazards, including earthquakes and mudflows, not insured against
under the primary hazard insurance policies or a flood insurance
policy if the property is in a designated flood area, and
o loss from partial damage caused by reason of the application of
the co-insurance clause contained in the primary hazard insurance
policies.
Special hazard insurance policies usually will not cover losses occasioned
by normal wear and tear, war, civil insurrection, governmental actions, errors
in design, nuclear or chemical reaction or contamination, faulty workmanship or
materials, except under some circumstances, flood, if the property is located in
a designated flood area, and other risks.
Subject to the foregoing limitations, each special hazard insurance policy
will provide that, when there has been damage to property securing a defaulted
mortgage loan acquired by the insured and to the extent the damage is not
covered by the related primary hazard insurance policy or flood insurance
policy, the insurer will pay the lesser of:
(1) the cost of repair to the property and
(2) upon transfer of the property to the insurer, the unpaid principal
balance of the mortgage loan at the time of acquisition of the property
by foreclosure, deed in lieu of foreclosure or repossession, plus
accrued interest to the date of claim settlement and expenses
incurred by or on behalf of the master servicer with respect to the
property.
The amount of coverage under the special hazard insurance policy will be
reduced by the sum of (a) the unpaid principal balance plus accrued interest and
certain expenses paid by the insurer, less any net proceeds realized by the
insurer from the sale of the property, plus (b) any amount paid as the
cost of repair of the property.
Restoration of the property with the proceeds described under clause (1) of
the immediately preceding paragraph will satisfy the condition under an
insurance instrument providing coverage as to credit, or other non-hazard risks,
that the property be restored before a claim thereunder may be validly presented
with respect to the defaulted mortgage loan secured by the property. The payment
described under clause (2) of the immediately preceding paragraph will render
unnecessary presentation of a claim in respect of the mortgage loan under an
insurance instrument providing coverage as to credit, or other non-hazard risks,
as to any realized losses on a liquidated loan. Therefore, so long as the
insurance instrument providing coverage as to credit, or other non-hazard
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risks, remains in effect, the payment by the insurer of either of the above
alternative amounts will not affect the total insurance proceeds paid to
securityholders, but will affect the relative amounts of coverage remaining
under any special hazard insurance policy and any credit insurance instrument.
The sale of a mortgaged property must be approved by the insurer under any
special hazard insurance policy and funds received by the insured in excess of
the unpaid principal balance of the mortgage loan plus interest thereon to the
date of sale plus expenses incurred by or on behalf of the master servicer
with respect to the property, not to exceed the amount actually paid by the
insurer, must be refunded to the insurer and, to that extent, coverage under the
special hazard insurance policy will be restored. If aggregate claim payments
under a special hazard insurance policy reach the policy limit, coverage
thereunder will be exhausted and any further losses will be borne by
securityholders.
A claim under a special hazard insurance policy generally must be filed
within a specified number of days, typically 60 days, after the insured has
acquired good and merchantable title to the property, and a claim payment is
payable within a specified number of days, typically 30 days, after a claim is
accepted by the insurer. Special hazard insurance policies provide that no claim
may be paid unless primary hazard insurance policy premiums, flood insurance
premiums, if the property is located in a federally designated flood area, and,
as approved by the insurer, real estate property taxes, property protection and
preservation expenses and foreclosure or repossession costs have been paid by or
on behalf of the insured, and unless the insured has maintained the primary
hazard insurance policy and, if the property is located in a federally
designated flood area, flood insurance, as required by the special hazard
insurance policy.
If a special hazard insurance policy is canceled or terminated for any
reason, other than the exhaustion of total policy coverage, the master servicer
will use its best reasonable efforts to obtain or cause to be obtained from
another insurer a replacement policy comparable to that special hazard insurance
policy with a total coverage that is equal to the then existing coverage of the
replaced special hazard insurance policy; provided, however, that if the cost of
the replacement policy is greater than the cost of that special hazard insurance
policy, the coverage of the replacement policy may be reduced to a level so that
its premium rate does not exceed the premium rate on that special hazard
insurance policy.
Since each special hazard insurance policy is designed to permit full
recoveries as to any realized losses on liquidated loans under a credit
insurance instrument in circumstances in which recoveries would otherwise be
unavailable because property has been damaged by a cause not insured against by
a primary hazard insurance policy and thus would not be restored, each agreement
governing the trust fund will provide that, if the related credit insurance
instrument shall have lapsed or terminated or been exhausted through payment of
claims, the master servicer will be under no further obligation to maintain the
special hazard insurance policy.
BANKRUPTCY BOND
As to any series of securities to be covered by a bankruptcy bond with
respect to actions that may be taken by a bankruptcy court in connection with a
mortgage loan, the master servicer will exercise its best reasonable efforts to
maintain or cause to be maintained the bankruptcy bond in full force and effect,
unless coverage thereunder has been exhausted through payment of claims. The
master
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servicer will pay or cause to be paid the premiums for each bankruptcy bond on a
timely basis, unless, as described in the related prospectus supplement, payment
of those premiums is otherwise provided for. Subject to the limit of the dollar
amount of coverage provided, each bankruptcy bond will cover certain losses
resulting from an extension of the maturity of a mortgage loan, or a reduction
by the bankruptcy court of the principal balance of or the interest rate on a
mortgage loan, and the unpaid interest on the amount of a principal reduction
during the pendency of a proceeding under the Bankruptcy Code. SEE "LEGAL
ASPECTS OF MORTGAGE LOANS--FORECLOSURE ON MORTGAGES" AND "--REPOSSESSION WITH
RESPECT TO MANUFACTURED HOUSING CONTRACTS".
FINANCIAL GUARANTEE INSURANCE
Financial guarantee insurance, if any, with respect to a series of
securities will be provided by one or more insurance companies. The financial
guarantee insurance will guarantee, with respect to one or more classes of
securities of the related series, timely distributions of interest and full
distributions of principal on the basis of a schedule of principal distributions
set forth in or determined in the manner specified in the related prospectus
supplement. If so specified in the related prospectus supplement, the financial
guarantee insurance will also guarantee against any payment made to a
securityholder that is subsequently recovered as a voidable preference payment
under federal bankruptcy law. A copy of the financial guarantee insurance policy
for a series, if any, will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the securities of the related series.
RESERVE FUND
If so provided in the related prospectus supplement, the depositor will
deposit or cause to be deposited in an account, a reserve fund, any combination
of cash, one or more irrevocable letters of credit or one or more permitted
investments in specified amounts, or any other instrument satisfactory to the
rating agency or agencies, which will be applied and maintained in the manner
and under the conditions specified in the prospectus supplement. In the
alternative or in addition to a deposit, the prospectus supplement for a
Senior/Subordinate Series may provide that, a reserve fund be funded through
application of all or a portion of amounts otherwise payable on the subordinate
securities. Amounts in a reserve fund may be distributed to securityholders, or
applied to reimburse the master servicer for outstanding advances, or may be
used for other purposes, in the manner specified in the related prospectus
supplement. A reserve fund will typically not be deemed to be part of the
related trust fund.
Amounts deposited in any reserve fund for a series will be invested in
permitted investments by, or at the direction of, the master servicer or any
other person named in the related prospectus supplement.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest collections
on the mortgage loans may exceed interest payments on the securities for the
related distribution date. The excess interest may be deposited into a reserve
fund or applied as an additional payment of principal on the securities. If
excess interest is applied as principal payments on the securities, the effect
will be to reduce the principal balance of the securities relative to the
outstanding balance of the mortgage
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loans, thereby creating overcollateralization and additional protection to the
securityholders, as specified in the related prospectus supplement. If so
provided in the related prospectus supplement, overcollateralization may also be
provided on the date of issuance of the securities by the issuance of securities
in an initial aggregate principal amount which is less than the aggregate
principal amount of the mortgage loans in the related trust fund.
CROSS-SUPPORT FEATURES
If the trust fund assets for a series are divided into separate asset
groups, the beneficial ownership of which is evidenced by a separate class or
classes of a series, credit support may be provided by a cross-support feature
which requires that distributions be made on senior securities evidencing the
beneficial ownership of one asset group prior to distributions on subordinate
securities evidencing the beneficial ownership interest in another asset group
within the trust fund. The related prospectus supplement for a series which
includes a cross-support feature will describe the manner and conditions for
applying that cross-support feature. As to any trust fund that includes a
cross-support feature, only assets of the trust fund will be used to provide
cross-support, and cross-support will be provided only to securities issued by
the trust fund. A trust fund will not provide a cross-support feature that
benefits securities issued by any other trust fund, and a trust fund will not
receive cross- support from any other trust fund.
CASH FLOW AGREEMENTS
If so provided in the related prospectus supplement, the trust fund may
include other agreements, such as guarantees, interest rate exchange agreements,
interest rate cap or floor agreements, currency exchange agreements or similar
agreements designed to reduce the effects of interest rate or currency exchange
rate fluctuations on the trust fund assets and on one or more classes of
securities. The principal terms of any agreement of this type, and the identity
of each obligor, will be described in the prospectus supplement for a series of
securities.
DESCRIPTION OF PRIMARY INSURANCE POLICIES
Each mortgage loan will be covered by a primary hazard insurance policy
and, if required as described in the paragraphs following, a primary mortgage
insurance policy.
PRIMARY MORTGAGE INSURANCE POLICIES
As set forth under "Description of the Securities--Procedures for
Realization Upon Defaulted Mortgage Loans", the master servicer will maintain or
cause to be maintained with respect to each mortgage loan, a primary mortgage
insurance policy in accordance with the underwriting standards described herein
and in the related prospectus supplement. Although the terms and conditions of
primary mortgage insurance policies differ, each primary mortgage insurance
policy will generally cover losses up to an amount equal to the excess of the
unpaid principal amount of a defaulted mortgage loan, plus accrued and unpaid
interest thereon and approved expenses, over a specified percentage of the
value of the related mortgaged property.
As conditions to the filing or payment of a claim under a primary mortgage
insurance policy, the insured will typically be required, in the event of
default by the borrower, to:
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o advance or discharge (a) hazard insurance premiums and (b) as
necessary and approved in advance by the insurer, real estate
taxes, property protection and preservation expenses
and foreclosure and related costs,
o in the event of any physical loss or damage to the mortgaged
property, have the mortgaged property restored to at least its
condition at the effective date of the primary mortgage insurance
policy, ordinary wear and tear excepted, and
o tender to the insurer good and merchantable title to, and
possession of, the mortgaged property.
PRIMARY HAZARD INSURANCE POLICIES
Each pooling and servicing agreement and servicing agreement will require
the master servicer to cause the borrower on each mortgage loan to maintain a
primary hazard insurance policy providing for coverage of the standard form of
fire insurance policy with extended coverage customary in the state in which the
mortgaged property is located. The primary hazard coverage will be in general in
an amount equal to the lesser of the principal balance owing on the mortgage
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
primary hazard insurance policy and under any flood insurance policy referred to
in the paragraph below, and upon the borrower furnishing information to the
master servicer in respect of a claim. All amounts collected by the master
servicer under any primary hazard insurance policy, except for amounts to be
applied to the restoration or repair of the mortgaged property or released to
the borrower in accordance with the master servicer's normal servicing
procedures, and subject to the terms and conditions of the related Mortgage and
mortgage note, will be deposited in the certificate account. The agreement will
provide that the master servicer may satisfy its obligation to cause each
borrower to maintain a hazard insurance policy by the master servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the master servicer
will deposit in the certificate account all sums that would have been deposited
in the certificate account but for that clause. The master servicer also is
required to maintain a fidelity bond and errors and omissions policy with
respect to its officers and employees that provides coverage against losses that
may be sustained as a result of an officer's or employee's misappropriation of
funds or errors and omissions in failing to maintain insurance, subject to
limitations as to amount of coverage, deductible amounts, conditions, exclusions
and exceptions.
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 mortgage loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most hazard insurance policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes,
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earth movement, including earthquakes, landslides and mudflows, nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in some cases, vandalism. This list is merely indicative of the kinds of
uninsured risks and is not intended to be all-inclusive. When a mortgaged
property is located at origination in a federally designated flood area and
flood insurance is available, each agreement will require the master servicer to
cause the borrower to acquire and maintain flood insurance in an amount equal in
general to the lesser of (a) the amount necessary to fully compensate for any
damage or loss to the improvements which are part of the mortgaged property on a
replacement cost basis and (b) the maximum amount of insurance available under
the federal flood insurance program, whether or not the area is participating in
the program.
The hazard insurance policies covering the mortgaged properties 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, the co-insurance clause generally provides that the
insurer's liability in the event of partial loss does not exceed the lesser of
(a) the replacement cost of the improvements less physical depreciation and (b)
the proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of the improvements.
The master servicer will not require that a hazard or flood insurance
policy be maintained for any cooperative loan. Generally, the cooperative is
responsible for maintenance of hazard insurance for the property owned by the
cooperative, and the tenant-stockholders of that cooperative do not maintain
individual hazard insurance policies. However, if a cooperative and the related
borrower on a cooperative note do not maintain hazard insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to the related borrower's
cooperative apartment or the cooperative's building could significantly reduce
the value of the collateral securing the cooperative note.
Since the amount of hazard insurance the master servicer will cause to be
maintained on the improvements securing the mortgage loans declines as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds collected
in connection with a partial loss may be insufficient to restore fully the
damaged property. The terms of the mortgage loans provide that borrowers are
required to present claims to insurers under hazard insurance policies
maintained on the mortgaged properties. The master servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
mortgaged properties. However, the ability of the master servicer to present or
cause to be presented these claims is dependent upon the extent to which
information in this regard is furnished to the master servicer by borrowers.
FHA INSURANCE
The Federal Housing Administration is responsible for administering various
federal programs, including mortgage insurance, authorized under The Housing Act
and the United States Housing Act of 1937, as amended. If so provided in the
related prospectus supplement, a number of the mortgage loans will be insured by
the FHA.
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Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The master servicer will be obligated to purchase any
debenture issued in satisfaction of a defaulted FHA insured mortgage loan
serviced by it for an amount equal to the principal amount of that debenture.
The master servicer will be required to take steps as are reasonably
necessary to keep FHA insurance in full force and effect.
VA GUARANTEES
The United States Department of Veterans Affairs is an Executive Branch
Department of the United States, headed by the Secretary of Veterans Affairs.
The VA currently administers a variety of federal assistance programs on behalf
of eligible veterans and their dependents and beneficiaries. The VA administers
a loan guaranty program under which the VA guarantees a portion of loans made to
eligible veterans. If so provided in the prospectus supplement, a number of the
mortgage loans will be guaranteed by the VA.
Under the VA loan guaranty program, a VA loan may be made to any eligible
veteran by an approved private sector mortgage lender. The VA guarantees payment
to the holder of that loan of a fixed percentage of the loan indebtedness, up to
a maximum dollar amount, in the event of default by the veteran borrower. When a
delinquency is reported to the VA and no realistic alternative to foreclosure is
developed by the loan holder or through the VA's supplemental servicing of the
loan, the VA determines, through an economic analysis, whether the VA will (a)
authorize the holder to convey the property securing the VA loan to the
Secretary of Veterans Affairs following termination or (b) pay the loan guaranty
amount to the holder. The decision as to disposition of properties securing
defaulted VA loans is made on a case-by-case basis using the procedures set
forth in 38 U.S.C. Section 3732(c), as amended.
The master servicer will be required to take steps as are reasonably
necessary to keep the VA guarantees in full force and effect.
LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of legal aspects of
loans secured by residential properties. Because these legal aspects are
governed in part by applicable state law, which laws may differ substantially
from state to state, the summaries do not purport to be complete
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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. If there is
a concentration of the mortgage loans included in a trust fund in a particular
state, the prospectus supplement for the related series of securities will
discuss any laws of that state that could materially impact the interest of the
securityholders.
All of the mortgage loans, except as described below, are loans to
homeowners. All of the single-family loans are evidenced by notes or bonds and
secured by instruments which may be mortgages, deeds of trust, security deeds or
deeds to secure debt, depending upon the type of security instrument customary
to grant a security interest in real property in the state in which the
single-family property, as the case may be, is located. If specified in the
prospectus supplement relating to a series of securities, a trust fund may also
contain (1) cooperative loans evidenced by promissory notes secured by security
interests in shares issued by private cooperative housing corporations and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the related buildings or (2) manufactured
housing contracts evidencing both (a) the obligation of the obligor to repay the
loan evidenced thereby and (b) the grant of a security interest in the related
manufactured home to secure repayment of the loan. Any of the foregoing types of
encumbrance 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 the order of recordation or filing of the
instrument in the appropriate public office. A lien of this type is not prior to
the lien for real estate taxes and assessments.
SINGLE-FAMILY LOANS
The single-family loans will be secured by either mortgages, deeds of
trust, security deeds or deeds to secure debt depending upon the type of
security instrument customary to grant a security interest according to the
prevailing practice in the state in which the property subject to a
single-family loan is located. The filing of a mortgage or a deed of trust
creates a lien upon or conveys title to the real property encumbered by that
instrument and represents the security for the repayment of an obligation that
is customarily evidenced by a promissory note. It is not prior to the lien for
real estate taxes and assessments. Priority with respect to mortgages and deeds
of trust depends on their terms and generally on the order of recording with the
applicable state, county or municipal office. There are two parties to a
mortgage, the mortgagor, who is the borrower/homeowner or the land trustee, and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, title to the property is held by a land trustee under a land trust
agreement, while the borrower/homeowner is the beneficiary of the land trust; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust normally has three parties, the trustor, similar to a
mortgagor, who may or may not be the borrower, the beneficiary, similar to a
mortgagee, who is the lender, and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. A security deed and a deed to secure debt are special types
of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until the time as the underlying debt is repaid. The
mortgagee's authority under a mortgage and the trustee's authority under a deed
of trust, security deed or deed to secure debt are governed by
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the law of the state in which the real property is located, the express
provisions of the mortgage, deed of trust, security deed or deed to secure debt
and, in some cases, the directions of the beneficiary.
COOPERATIVE LOANS
The cooperative owns 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 project management and, in most
cases, payment of real estate taxes, other governmental impositions and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and underlying land, or one or the other, the cooperative, as
project mortgagor, is also responsible for meeting these blanket mortgage
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 the obtaining of capital by the cooperative. In some cases
there is a lease on the underlying land and the cooperative, as lessee, is also
responsible for meeting the rental obligation. The interests of the occupants
under proprietary leases or occupancy agreements as to which the cooperative is
the landlord are generally subordinate to the interests of the holder of the
blanket mortgage and to the interest of the holder of a land lease. If the
cooperative is unable to meet the payment obligations (a) arising under its
blanket mortgage, the mortgagee holding the blanket mortgage could foreclose on
that mortgage and terminate all subordinate proprietary leases and occupancy
agreements or (b) 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, the blanket mortgage on a cooperative may
provide financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at final
maturity. The inability of the cooperative to refinance this mortgage and its
consequent inability to make the final payment could lead to foreclosure by the
mortgagee. 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 cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
foreclosure by the holder of the 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 trust fund, the
collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing the tenant-stockholder's pro rata share
of the cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights is 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. 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
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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 as described
under "Foreclosure on Cooperative Shares" below.
MANUFACTURED HOUSING CONTRACTS
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Financing statements are
effective for five years and must be renewed at the end of each five years. The
certificate of title laws adopted by the majority of states provide that
ownership of motor vehicles and manufactured housing shall be evidenced by a
certificate of title issued by the motor vehicles department, or a similar
entity, of the state. In the states that have enacted certificate of title laws,
a security interest in a unit of manufactured housing, so long as it is not
attached to land in so permanent a fashion as to become a fixture, is generally
perfected by the recording of the interest on the certificate of title to the
unit in the appropriate motor vehicle registration office or by delivery of the
required documents and payment of a fee to such office, depending on state law.
The master servicer will be required under the related servicing agreement
to effect the notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any manufactured home is registered. If the master servicer
fails, due to clerical errors or otherwise, to effect the notation or delivery,
or files the security interest under the wrong law, for example, under a motor
vehicle title statute rather than under the UCC, in a few states, the trustee
may not have a first priority security interest in the manufactured home
securing a manufactured housing contract. As manufactured homes have become
larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
manufactured homes may become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must file either a fixture filing under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located. Generally, manufactured housing contracts will
contain provisions prohibiting the obligor from permanently attaching the
manufactured home to its site. So long as the obligor does not violate this
agreement, a security interest in the manufactured home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site,
other parties could obtain an interest in the manufactured home that is prior to
the security interest originally retained by the seller and transferred to the
depositor.
The depositor will assign or cause to be assigned a security interest in
the manufactured homes to the trustee, on behalf of the securityholders. Neither
the depositor, the master servicer nor the trustee will amend the certificates
of title to identify the trustee, on behalf of the securityholders, as
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the new secured party and, accordingly, the depositor or the mortgage loan
seller will continue to be named as the secured party on the certificates of
title relating to the manufactured homes. In most states, an assignment is an
effective conveyance of a security interest in a manufactured home without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the depositor's rights as the secured party. However,
in several states there exists a risk that, in the absence of an amendment to
the certificate of title, the assignment of the security interest might not be
held effective against creditors of the depositor or mortgage loan seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the trustee against the rights of subsequent purchasers of
a manufactured home or subsequent lenders who take a security interest in the
manufactured home. If there are any manufactured homes as to which the depositor
has failed to perfect or cause to be perfected the security interest assigned to
the trust fund, the security interest would be subordinate to subsequent
purchasers for value of manufactured homes and holders of perfected security
interests. There also exists a risk in not identifying the trustee, on behalf of
the securityholders, as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the trustee could be
released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws of
most states, the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter until the owner
re-registers the manufactured home in that state. If the owner were to relocate
a manufactured home to another state and re-register the manufactured home in
the new state, and if the depositor did not take steps to re-perfect its
security interest in the new state, the security interest in the manufactured
home would cease to be perfected. A majority of states generally require
surrender of a certificate of title to re-register a manufactured home.
Accordingly, the depositor must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states that provide for notation of lien, the depositor would
receive notice of surrender if the security interest in the manufactured home is
noted on the certificate of title. Accordingly, the depositor would have the
opportunity to re-perfect its security interest in the manufactured home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related servicing agreement, the master servicer will be
obligated to take those steps, at the master servicer's expense, as are
necessary to maintain perfection of security interests in the manufactured
homes.
Under the laws of most states, liens for repairs performed on a
manufactured home take priority even over a perfected security interest. The
depositor will obtain the representation of the mortgage loan seller that it has
no knowledge of any liens of that type with respect to any manufactured home
securing a manufactured home loan. However, liens could arise at any time during
the term of a manufactured home loan. No notice will be given to the trustee or
securityholders in the event a lien for repairs arises.
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FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust, which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In several states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in several states must provide notice to any other
individual having an interest in the real property, including any junior
lienholder. The trustor, borrower, or any person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorneys' fees, that may be recovered by a lender. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specific period of time in one or
more newspapers. In addition, several state laws require that a copy of the
notice of sale be posted on the property, recorded and sent to all parties
having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage and in the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. A mortgagor is usually bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action established a
waiver of fraud, bad faith, oppressive or unconscionable conduct warranted a
court of equity to refuse affirmative relief to the mortgagee. A court of equity
may relieve the mortgagor from an entirely technical default where the default
was not willful.
A foreclosure action or sale in accordance with a power of sale is subject
to most of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring up to several years to
complete. Moreover, recent judicial decisions suggest that a non-collusive,
regularly conducted foreclosure sale or sale in accordance with a power of sale
may be challenged as a fraudulent conveyance, regardless of the parties' intent,
if a court determines that the sale was for less than fair consideration and the
sale occurred while the mortgagor was insolvent and within one year, or within
the state statute of limitations if the trustee in bankruptcy elects to proceed
under state fraudulent conveyance law, of the filing of bankruptcy. Similarly, a
suit against the debtor on the mortgage note may take several years.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty potential third party purchasers at the sale
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust plus accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burdens of ownership, including obtaining
casualty insurance, paying taxes and making repairs at its own expense as are
necessary to render the
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property suitable for sale. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Any loss may be reduced by the receipt of any mortgage insurance
proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages if the mortgagor is in
default thereunder. In either event the amounts expended will be added to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, if the foreclosure of a junior mortgage triggers
the enforcement of a due-on-sale clause in a senior mortgage, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees.
Accordingly, with respect to those mortgage loans which are junior mortgage
loans, if the lender purchases the property, the lender's title will be subject
to all senior liens and claims and some governmental liens. The proceeds
received by the referee or trustee from the sale are applied first to the costs,
fees and expenses of sale, real estate taxes and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceedings.
If the master servicer were to foreclose on any junior lien it would do so
subject to any related senior lien. In order for the debt related to the junior
mortgage loan to be paid in full at the sale, a bidder at the foreclosure sale
of the junior mortgage loan would have to bid an amount sufficient to pay off
all sums due under the junior mortgage loan and the senior lien or purchase the
mortgaged property subject to the senior lien. If proceeds from a foreclosure or
similar sale of the mortgaged property are insufficient to satisfy all senior
liens and the junior mortgage loan in the aggregate, the trust fund as the
holder of the junior lien and, accordingly, holders of one or more classes of
related securities bear (1) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (2) the risk of loss if
the deficiency judgment is not realized upon. Moreover, deficiency judgments may
not be available in a jurisdiction. In addition, liquidation expenses with
respect to defaulted junior mortgage loans do not vary directly with the
outstanding principal balance of the loans at the time of default. Therefore,
assuming that the master servicer took the same steps in realizing upon a
defaulted junior mortgage loan having a small remaining principal balance as it
would in the case of a defaulted junior mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the outstanding principal balance of the small junior
mortgage loan that would be the case with the defaulted junior mortgage loan
having a large remaining principal balance.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In a few cases, courts have substituted their judgment for
the lender's judgment and have required that
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lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to foreclose if the default under the
mortgage instrument is not monetary, for example, the borrower's failure to
adequately maintain the property or the borrower's execution of a second
mortgage or deed of trust affecting the property. Finally, a few courts have
been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under deeds of trust or mortgages receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that the sale by a trustee
under a deed of trust, or under a mortgage having a power of sale, does not
involve sufficient state action to afford constitutional protection to the
borrower.
FORECLOSURE ON MORTGAGED PROPERTIES LOCATED IN THE COMMONWEALTH OF PUERTO RICO
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a real
estate mortgage usually follows an ordinary civil action filed in the Superior
Court for the district where the mortgaged property is located. If the defendant
does not contest the action filed, a default judgment is rendered for the
plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property.
If the defendant contests the foreclosure, the case may be tried and judgment
rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of these actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale upon
foreclosure of a mortgaged property that (a) is subject to a mortgage loan that
was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of the property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after the sale. This payment
would reduce the amount of sales proceeds available to satisfy the mortgage loan
and may increase the amount of the loss.
FORECLOSURE ON COOPERATIVE SHARES
The cooperative shares and proprietary lease or occupancy agreement 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 in the proprietary lease or
occupancy agreement, and may be canceled by the cooperative for failure by the
tenant-
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stockholder to pay rent or other obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by the tenant-stockholder. Typically, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate the
lease or agreement in the event the tenant- stockholder fails to make payments
or defaults in the performance of covenants required thereunder.
Typically, the lender and the cooperative enter into a recognition agreement
that, together with any lender protection provisions contained in the
proprietary lease, establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and 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 a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under the
proprietary lease or occupancy agreement or that have become liens on the shares
relating to the proprietary lease or occupancy agreement. The total amount owed
to the cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and unpaid
interest 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.
Under the laws applicable in most states, foreclosure on the cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to those shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a foreclosure sale has been conducted in a commercially reasonable
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the method,
manner, time, place and terms of the foreclosure. Generally, a sale conducted
according to the usual practice of banks selling similar collateral will be
considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest.
The recognition agreement, however, generally provides that the lender's right
to reimbursement is subject to the right of the cooperative corporation 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-
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stockholder is generally responsible for the deficiency. SEE
"--ANTI-DEFICIENCY LEGISLATION ANd OTHER LIMITATIONS ON LENDERS" BELOW.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of the manufactured
home in the event of a default by the obligor will generally be governed by the
UCC. Article 9 of the UCC provides the statutory framework for the repossession
of manufactured housing. While the UCC as adopted by the various states may vary
in minimal ways, the general repossession procedure established by the UCC is as
follows:
o Except in those states where the debtor must receive
notice of the right to cure a default, repossession can
commence immediately upon default without prior notice.
Repossession may be effected either through self-help
pursuant to a peaceable retaking without court order,
voluntary repossession or through judicial process by
means of repossession under a court-issued writ of
replevin. The self-help or voluntary repossession methods
are more commonly employed, and are accomplished simply by
retaking possession of the manufactured home. In cases in
which the debtor objects or raises a defense to
repossession, a court order must be obtained from the
appropriate state court, and the manufactured home must
then be repossessed in accordance with that order. Whether
the method employed is self-help, voluntary repossession
or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the
manufactured home to a secure location for refurbishment
and resale or by removing the occupants and their
belongings from the manufactured home and maintaining
possession of the manufactured home on the location where
the occupants were residing. Various factors may affect
whether the manufactured home is physically removed or
left on location, such as the nature and term of the lease
of the site on which it is located and the condition of
the unit. In many cases, leaving the manufactured home on
location is preferable if the home is already set up
because the expenses of retaking and redelivery will be
saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be
incurred.
o Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can
commence. The disposition may be by public or private sale
provided the method, manner, time, place and terms of the
sale are commercially reasonable.
o Sale proceeds are to be applied first to repossession
expenses like those expenses incurred in retaking,
storage, preparing for sale including refurbishing costs
and selling, and then to satisfaction of the indebtedness.
While several states impose prohibitions or limitations on
deficiency judgments if the net proceeds from
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resale do not cover the full amount of the indebtedness,
the remainder may be sought from the debtor in the form of
a deficiency judgment in those states that do not prohibit
or limit deficiency judgments. The deficiency judgment is
a personal judgment against the debtor for the shortfall.
Occasionally, after resale of a manufactured home and
payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the party
suing for the deficiency judgment to remit the surplus to
the debtor. Because the defaulting owner of a manufactured
home generally has very little capital or income available
following repossession, a deficiency judgment may not be
sought in many cases or, if obtained, will be settled at a
significant discount in light of the defaulting owner's
strained financial condition.
RIGHTS OF REDEMPTION WITH RESPECT TO SINGLE-FAMILY PROPERTIES
In several states, after sale in accordance with a deed of trust or
foreclosure of a mortgage, the trustor or mortgagor and several foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. The right of redemption should be distinguished from the
equity of redemption, which is a nonstatutory right that must be exercised prior
to the foreclosure sale. In several states, redemption may occur only upon
payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower 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 right of redemption would defeat the title of any
purchaser acquired at a public sale. Consequently, the practical effect of a
right of redemption is to force the lender to retain the property and pay the
expenses of ownership and maintenance of the property until the redemption
period has expired. In several states, there is no right to redeem property
after a trustee's sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given to debtors prior
to repossession, many states do require delivery of a notice of default and of
the debtor's right to cure defaults before repossession. The law in most states
also requires that the debtor be given notice of sale prior to the resale of the
home so that the owner may redeem at or before resale. In addition, the sale
must comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Several states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
several states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the
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public sale. The purpose of these statutes is generally to prevent a beneficiary
or a mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other 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, the filing of a
petition acts as a stay against the enforcement of remedies of collection of a
debt. Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 13 rehabilitative plan to cure a monetary default
with respect to 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
property had yet occurred) prior to the filing of the debtor's Chapter 13
petition. Several 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 if
the borrower has filed a petition under Chapter 13. These courts have suggested
that the modifications may include reducing the amount of each monthly payment,
changing the rate of interest, altering the repayment schedule and reducing the
lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan.
Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor. In all cases, the secured
creditor is entitled to the value of its security plus post-petition interest,
attorneys' fees and costs to the extent the value of the security exceeds the
debt.
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission for purposes of analyzing the nation's bankruptcy laws and
making recommendations to Congress for legislative changes to the bankruptcy
laws. A similar commission was involved in developing the Bankruptcy Code. The
NBRC delivered its report to Congress, the President of the United States and
the Chief Justice of the Supreme Court on October 20, 1997. Among other topics,
high leverage loans were addressed in the NBRC's report. Despite several
ambiguities, the NBRC's report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a debtor's principal residence as protected only to the
extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than that
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a debtor's principal residence may not be
modified to reduce the claim below the appraised value of the property at the
time the security interest was made. A strong dissent by some members of the
NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2) be
extended to creditors principally secured by the debtor's principal residence.
Additionally, the NBRC's report recommends that a creditor's secured claim in
real property should be determined by the property's fair market value, less
hypothetical costs of sale. The standard advocated by this recommendation would
not apply to mortgages on the primary residence of a Chapter 11 or 13 debtor who
retains the residence if the
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mortgages are protected from modification such as those senior mortgages not
subject to modification under Bankruptcy Code Sections 1322(b)(2) and
1123(b)(5). The final NBRC report may ultimately lead to substantive changes to
the existing Bankruptcy Code, such as reducing outstanding loan balances to the
appraised value of a debtor's principal residence at the time the security
interest in the property was taken, which could affect the mortgage loans
included in a trust fund and the enforcement of rights therein.
Several tax liens arising under the Code, may 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 single family mortgage loans by numerous federal and state consumer
protection laws. These laws include the Federal Truth- in-Lending Act,
Regulation Z, Real Estate Settlement Procedures Act, Regulation X, Equal Credit
Opportunity Act, Regulation B, Fair Credit Billing Act, Fair Housing 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. This liability may affect assignees of
the mortgage loans. In particular, the originators' failure to comply with
requirements of the Federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of the obligations to monetary
penalties and could result in obligors' rescinding loans against either
originators or assignees.
In addition, the mortgage loans included in a trust fund may also
be subject to the Home Ownership and Equity Protection Act of 1994, if the
mortgage loans were originated on or after October 1, 1995, are not mortgage
loans made to finance the purchase of the mortgaged property and have interest
rates or origination costs in excess of prescribed levels. The Homeownership Act
requires additional disclosures, specifies the timing of the disclosures and
limits or prohibits inclusion of specific provisions in mortgages subject to the
Homeownership Act. Remedies available to the mortgagor include monetary
penalties, as well as recission rights if the appropriate disclosures were not
given as required or if the particular mortgage includes provisions prohibited
by law. The Homeownership Act also provides that any purchaser or assignee of a
mortgage covered by the Homeownership Act is subject to all of the claims and
defenses to loan payment, whether under the Federal Truth-in-Lending Act, as
amended by the Homeownership Act or other law, which the borrower could assert
against the original lender unless the purchaser or assignee did not know and
could not with reasonable diligence have determined that the mortgage loan was
subject to the provisions of the Homeownership Act. The maximum damages that may
be recovered under the Homeownership Act from an assignee is the remaining
amount of indebtedness plus the total amount paid by the borrower in connection
with the mortgage loan.
FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Several 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.
JUNIOR MORTGAGES
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The mortgage loans may be secured by junior mortgages or deeds of trust,
which are junior to senior mortgages or deeds of trust which are not part of the
trust fund. The rights of the securityholders as the holders of a junior deed of
trust or a junior mortgage are subordinate in lien priority and in payment
priority 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 in
accordance with 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 ON MORTGAGES".
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. If there is a
conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. 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 senior mortgagee expends sums, these sums will generally
have priority over all sums due under the junior mortgage.
HOME EQUITY LINE OF CREDIT LOANS
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make home equity line of credit loans typically
contains a 'future advance' clause, which provides, in essence, that additional
amounts advanced to or on behalf of the borrower by the beneficiary or lender
are to be secured by the deed of trust or mortgage. Any amounts so advances
after the cut-off date with respect to any Mortgage will not be included in the
trust fund. The priority of the lien securing any advance made under the clause
may depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of the intervening junior trust deeds
or mortgages and other liens at the time of the advance. In most states, the
trust deed or mortgage liens securing mortgage loans of the type which includes
home equity credit lines applies retroactively to the date of the original
recording of the trust deed or mortgage, provided that the total amount of
advances under the home equity credit line does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
CONSUMER PROTECTION LAWS WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act, Regulation Z, the Equal Credit Opportunity Act,
Regulation B, the Fair Credit Reporting Act, the
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Real Estate Settlement Procedures Act, Regulation X, the Fair Housing Act and
related statutes. These laws can impose specific statutory liabilities upon
creditors who fail to comply with their provisions. This liability may affect an
assignee's ability to enforce a contract. In particular, the originators'
failure to comply with requirements of the Federal Truth-in-Lending Act, as
implemented by Regulation Z, could subject both originators and assignees of the
obligations to monetary penalties and could result in obligors' rescinding the
contracts against either the originators or assignees. Further, if the
manufactured housing contracts are deemed High Cost Loans within the meaning of
the Homeownership Act, they would be subject to the same provisions of the
Homeownership Act as mortgage loans as described in "--Anti-Deficiency
Legislation and Other Limitations on Lenders" above.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. Federal and state
law may specifically limit the amount of late charges that may be collected.
Unless the prospectus supplement indicates otherwise, under the related
servicing agreement, late charges will be retained by the master servicer as
additional servicing compensation, and any inability to collect these amounts
will not affect payments to securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission
has the effect of subjecting a seller, and related creditors and their
assignees, in a consumer credit transaction and any assignee of the creditor to
all claims and defenses which the debtor in the transaction could assert against
the seller of the goods. Liability under the FTC Rule is limited to the amounts
paid by a debtor on the contract, and the holder of the contract may also be
unable to collect amounts still due thereunder.
Most of the manufactured housing contracts in a trust fund will be subject
to the requirements of the FTC Rule. Accordingly, the trustee, as holder of the
manufactured housing contracts, will be subject to any claims or defenses that
the purchaser of the related manufactured home may assert against the seller of
the manufactured home, subject to a maximum liability equal to the amounts paid
by the obligor on the manufactured housing contract. If an obligor is successful
in asserting this type of claim or defense, and if the mortgage loan seller had
or should have had knowledge of that claim or defense, the master servicer will
have the right to require the mortgage loan seller to repurchase the
manufactured housing contract because of a breach of its mortgage loan seller's
representation and warranty that no claims or defenses exist that would affect
the obligor's obligation to make the required payments under the manufactured
housing contract. The mortgage loan seller would then have the right to require
the originating dealer to repurchase the manufactured housing contract from it
and might also have the right to recover from the dealer for any losses
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suffered by the mortgage loan seller with respect to which the dealer would have
been primarily liable to the obligor.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions including federal bankruptcy laws and
related state laws may interfere with or affect the ability of a lender to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
lender from repossessing a home, and as part of the rehabilitation plan reduce
the amount of the secured indebtedness to the market value of the home at the
time of bankruptcy, as determined by the court, leaving the party providing
financing as a general unsecured creditor for the remainder of the indebtedness.
A bankruptcy court may also reduce the monthly payments due under a contract or
change the rate of interest and time of repayment of the indebtedness.
ENFORCEABILITY OF PROVISIONS
The mortgage loans in a trust fund will in most cases contain due-on-sale
clauses. These clauses permit the lender to accelerate the maturity of the loan
if the borrower sells, transfers, or conveys the property without the prior
consent of the lender. The enforceability of these clauses has been impaired in
various ways in several states by statute or decisional law. The ability of
lenders and their assignees and transferees to enforce due-on-sale clauses was
addressed by the Garn-St Germain Depository Institutions Act of 1982. This
legislation, subject to exceptions, preempts state constitutional, statutory and
case law that prohibits the enforcement of due-on-sale clauses. The Garn-St
Germain Act does encourage lenders to permit assumptions of loans at the
original rate of interest or at another rate less than the average of the
original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act, including federal savings
and loan associations and federal savings banks, may not exercise a due-on-sale
clause, even though a transfer of the property may have occurred. These include
intra-family transfers, some 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
penalty upon the acceleration of a loan in accordance with a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the mortgage loans related to a series and the number of mortgage loans
that may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES UNDER MANUFACTURED HOUSING CONTRACTS
Generally, manufactured housing contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
the contracts by the obligee on the contract upon any sale or transfer that is
not consented to. The master servicer will, to the extent it has knowledge of
the conveyance or proposed conveyance, exercise or cause to be exercised its
rights to accelerate the maturity of the
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related manufactured housing contract through enforcement of due-on-sale
clauses, subject to applicable state law. The transfer may be made by a
delinquent obligor in order to avoid a repossession proceeding with respect to a
manufactured home.
In the case of a transfer of a manufactured home as to which the master
servicer desires to accelerate the maturity of the related manufactured housing
contract, the master servicer's ability to do so will depend on the
enforceability under state law of the due-on-sale clause. The Garn-St Germain
Act preempts, subject to exceptions and conditions, state laws prohibiting
enforcement of due-on-sale clauses applicable to the manufactured homes.
Consequently, the master servicer may be prohibited from enforcing a due-on-sale
clause in respect of those manufactured homes.
PREPAYMENT CHARGES AND PREPAYMENTS
Generally, mortgage loans may be prepaid in full or in part without
penalty. The regulations of the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage to a refinancing lender.
SUBORDINATE FINANCING
When the 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 an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan or
any junior loan, or both, 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
proceeds by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 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 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
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charges on mortgage loans covered by Title V. Several states have taken action
to reimpose interest rate limits or to limit discount points or other charges.
The depositor has been advised by counsel that a court interpreting Title V
would hold that mortgage loans 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 the mortgage
loans, any such limitation under the state's usury law would not apply to the
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
loans originated after the date of that state action will be eligible for
inclusion in a trust fund if the mortgage loans bear interest or provide for
discount points or charges in excess of permitted levels. No mortgage loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
Title V also provides that, subject to the following conditions, state
usury limitations do not apply to any loan that is secured by a first lien on
specific kinds of manufactured housing. The manufactured housing contract would
be covered if they satisfy conditions, among other things, governing the terms
of any prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of or foreclosure
with respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline.
In addition, even where Title V was not so rejected, any state is authorized by
the law to adopt a provision limiting discount points or other charges on loans
covered by Title V. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no manufactured housing contract which imposes finance charges or
provides for discount points or charges in excess of permitted levels has been
included in the trust fund.
ALTERNATIVE MORTGAGE INSTRUMENTS
ARM Loans originated by non-federally chartered lenders have historically
been subject to a variety of restrictions. These restrictions differed from
state to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender complied
with applicable law. These difficulties were simplified substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act. Title VIII
provides that, notwithstanding any state law to the contrary,
o state-chartered banks may originate alternative mortgage
instruments, including ARM Loans, in accordance with regulations
promulgated by the Comptroller of the Currency with respect to
origination of alternative mortgage instruments by national banks,
o state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the
National Credit Union Administration
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with respect to origination of alternative mortgage instruments by
federal credit unions, and
o all other non-federally chartered housing creditors, including,
without limitation, state-chartered savings and loan associations,
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 further 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 these
provisions. Several states have taken this type of action.
The depositor has been advised by counsel that a court interpreting Title
VIII would hold that ARM Loans that were originated by state-chartered lenders
before the date of enactment of any state law or constitutional provision
rejecting applicability of Title VIII would not be subject to state laws
imposing restrictions or prohibitions on the ability of state-chartered lenders
to originate alternative mortgage instruments.
All of the ARM Loans in a trust fund that were originated by a
state-chartered lender after the enactment of a state law or constitutional
provision rejecting the applicability of Title VIII will have complied with
applicable state law. All of the ARM Loans in a trust fund that were originated
by federally chartered lenders or that were originated by state-chartered
lenders prior to enactment of a state law or constitutional provision rejecting
the applicability of Title VIII will have been originated in compliance with all
applicable federal regulations.
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials including components of manufactured housing such as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any manufactured housing contract secured by a manufactured
home with respect to which a formaldehyde claim has been successfully asserted
may be liable to the obligor for the amount paid by the obligor on the related
manufactured housing contract and may be unable to collect amounts still due
under the manufactured housing contract. The successful assertion of this type
of claim will constitute a breach of a representation or warranty of the
mortgage loan seller, and the securityholders would suffer a loss only to the
extent that:
o the mortgage loan seller breached its obligation to repurchase the
manufactured housing contract in the event an obligor is successful in
asserting the claim, and
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o the mortgage loan seller, the depositor or the trustee were
unsuccessful in asserting any claim of contribution or subrogation on
behalf of the securityholders against the manufacturer or other persons
who were directly liable to the plaintiff for the damages.
Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from the
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, a borrower who enters military service after the origination of that
borrower's mortgage loan, including a borrower 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 that borrower's active duty status unless a court orders otherwise
upon application of the lender. The Relief Act applies to borrowers 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 borrowers 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 the
master servicer to collect full amounts of interest on the applicable 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 securities, and would not be covered by
advances or, unless specified in the related prospectus supplement, any form of
credit support provided in connection with the securities. In addition, the
Relief Act imposes limitations that would impair the ability of the master
servicer to foreclose on an affected single-family loan, cooperation loan or
enforce rights under a manufactured housing contract during the borrower's
period of active duty status, and, sometimes, during an additional three month
period thereafter. Thus, if the Relief Act applies to any mortgage loan that
goes into default, there may be delays in payment and losses incurred by the
related securityholders.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended, and under several state laws, a secured party which
takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property may become liable for the
costs of cleaning up hazardous substances regardless of whether they have
contaminated the property. CERCLA imposes strict, as well as joint and several,
liability on several classes of potentially responsible parties, including
current owners and operators of the property who did not cause or contribute to
the contamination. Furthermore, liability under CERCLA is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Lenders may be held liable under CERCLA as owners or
operators unless they qualify for the secured creditor exemption to CERCLA. This
exemption exempts from the definition of owners and operators those who, without
participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility. What constitutes
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sufficient participation in the management of a property securing a loan or
the business of a borrower to render the exemption unavailable to a lender has
been a matter of interpretation by the courts. CERCLA has been interpreted to
impose liability on a secured party, even absent foreclosure, where the party
participated in the financial management of the borrower's business to a degree
indicating a capacity to influence waste disposal decisions. However, court
interpretations of the secured creditor exemption have been inconsistent. In
addition, when lenders foreclose and become owners of collateral property,
courts are inconsistent as to whether that ownership renders the secured
creditor exemption unavailable. Other federal and state laws may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead- based paint. Environmental cleanup costs may be
substantial. It is possible that the cleanup costs could become a liability of a
trust fund and reduce the amounts otherwise distributable to the holders of the
related series of securities. Moreover, there are federal statutes and state
statutes that by statute impose an environmental lien for any cleanup costs
incurred by the state on the property that is the subject of the cleanup costs.
All subsequent liens on a property generally are subordinated to an
environmental lien and in some states even prior recorded liens are subordinated
to environmental liens. In the latter states, the security interest of the trust
fund in a related parcel of real property that is subject to an environmental
lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the master servicer has
not made and will not make these kinds of evaluations prior to the origination
of the mortgage loans. Neither the master servicer nor any replacement servicer
will be required by any servicing agreement to undertake any environmental
evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure. The
master servicer will not make any representations or warranties or assume any
liability with respect to the absence or effect of contaminants on any related
real property or any casualty resulting from the presence or effect of
contaminants. The master servicer will not be obligated to foreclose on related
real property or accept a deed-in-lieu of foreclosure if it knows or reasonably
believes that there are material contaminated conditions on a property. A
failure so to foreclose may reduce the amounts otherwise available to
securityholders of the related series.
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 statute can be seized by the government if the property
was used in or purchased with the proceeds of these crimes. Under procedures
contained in the Comprehensive Crime Control Act of 1984 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: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2)
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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.
NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First Circuit,
held that state restrictions on the compounding of interest are not preempted by
the provisions of the Depository Institutions Deregulation and Monetary Control
Act of 1980 and as a result, a mortgage loan that provided for negative
amortization violated New Hampshire's requirement that first mortgage loans
provide for computation of interest on a simple interest basis. The holding was
limited to the effect of DIDMC on state laws regarding the compounding of
interest and the court did not address the applicability of the Alternative
Mortgage Transaction Parity Act of 1982, which authorizes lender to make
residential mortgage loans that provide for negative amortization. The First
Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is the opinion of Thacher Proffitt & Wood, counsel
to the depositor, with respect to the material federal income tax consequences
of the purchase, ownership and disposition of the securities offered under this
prospectus and the prospectus supplement. This discussion is for securityholders
that hold the securities as capital assets within the meaning of Section 1221 of
the Code and does not purport to discuss all federal income tax consequences
that may be applicable to the individual circumstances of banks, insurance
companies, foreign investors, tax-exempt organizations, dealers in securities or
currencies, mutual funds, real estate investment trusts, S corporations, estates
and trusts, securityholders that hold the securities as part of a hedge,
straddle or, an integrated or conversion transaction, or securityholders whose
functional currency is not the United States dollar.
The authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Prospective investors should note that no rulings have been
or will be sought from the IRS with respect to any of the federal income tax
consequences discussed below, and no assurance can be given that the IRS will
not take contrary positions. Taxpayers and preparers of tax returns should be
aware that under applicable Treasury regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice (1) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (2) is directly relevant to the determination of an
entry on a tax return. Accordingly, it is suggested that taxpayers consult their
own tax advisors and tax return preparers regarding the preparation of any item
on a tax return, even where the anticipated tax treatment has been discussed in
this prospectus. In addition to the federal income tax consequences described in
this prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
securities. See "State and Other Tax Consequences."
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The following discussion addresses securities of four general types:
o REMIC Certificates representing interests in a trust fund, or a portion
thereof, that the Trustee will elect to have treated as a REMIC under
the REMIC Provisions of the Code,
o Notes representing indebtedness of an owner trust for federal income
tax purposes,
o Grantor Trust Certificates representing interests in a Grantor Trust
Fund as to which no REMIC election will be made,
o Partnership Certificates representing interests in a Partnership Trust
Fund which is treated as a partnership for federal income tax purposes,
and
o Debt Certificates representing indebtedness of a Partnership Trust Fund
for federal income tax purposes.
The prospectus supplement for each series of certificates will indicate whether
one or more REMIC elections will be made for the related trust fund and will
identify all regular interests and residual interests in the REMIC or REMICs.
For purposes of this tax discussion, references to a securityholder or a holder
are to the beneficial owner of a security.
The following discussion is based in part upon the OID Regulations and in
part upon REMIC Regulations. The OID Regulations do not adequately address
issues relevant to the offered securities. As described at "Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount," in some instances the
OID Regulations provide that they are not applicable to securities like the
offered securities.
REMICS
CLASSIFICATION OF REMICS. On or prior to the date of the related prospectus
supplement with respect to the issuance of each series of REMIC Certificates,
counsel to the depositor will provide its opinion that, assuming compliance with
all provisions of the related pooling and servicing agreement, for federal
income tax purposes, the related trust fund or each applicable portion of the
related trust fund will qualify as a REMIC and the offered REMIC Certificates
will be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in that REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for status as a REMIC during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and for later years. In that event, the entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described under "Taxation
of Owners of REMIC Regular Certificates" and "Taxation of Owners of REMIC
Residual Certificates". Although the Code authorizes the Treasury Department to
issue regulations providing relief in the event of an inadvertent termination of
REMIC status, these regulations have not been issued. If these regulations are
issued, relief in the event of an inadvertent termination may be accompanied by
sanctions, which may include the imposition of a corporate tax on all or a
portion of the REMIC's income for the
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period in which the requirements for status as a REMIC are not satisfied. The
pooling and servicing agreement with respect to each REMIC will include
provisions designed to maintain the trust fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any trust fund as a
REMIC will be inadvertently terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. Except as provided
in the following sentence, the REMIC Certificates will be real estate assets
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion as the assets of the
REMIC underlying the certificates. If 95% or more of the assets of the REMIC
qualify for either of the treatments described in the previous sentence at all
times during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest,
including original issue discount, on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that the certificates are
treated as real estate assets within the meaning of Section 856(c)(4)(A) of the
Code. In addition, the REMIC Regular Certificates will be qualified mortgages
within the meaning of Section 860G(a)(3) of the Code if transferred to another
REMIC on its startup day in exchange for regular or residual interests of that
REMIC. The determination as to the percentage of the REMIC's assets that
constitute assets described in these sections of the Code will be made for each
calendar quarter based on the average adjusted basis of each category of the
assets held by the REMIC during the calendar quarter. The Trustee will report
those determinations to certificateholders in the manner and at the times
required by Treasury regulations.
The assets of the REMIC will include mortgage loans, payments on mortgage
loans held prior to the distribution of these payments to the REMIC Certificates
and any property acquired by foreclosure held prior to the sale of this
property, and may include amounts in reserve accounts. It is unclear whether
property acquired by foreclosure held prior to the sale of this property and
amounts in reserve accounts would be considered to be part of the mortgage
loans, or whether these assets otherwise would receive the same treatment as the
mortgage loans for purposes of all of the Code sections discussed in the
immediately preceding paragraph. The related prospectus supplement will describe
the mortgage loans that may not be treated entirely as assets described in the
sections of the Code discussed in the immediately preceding paragraph. The REMIC
Regulations do provide, however, that cash received from payments on mortgage
loans held pending distribution is considered part of the mortgage loans for
purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property
will qualify as real estate assets under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES. For a series of REMIC Certificates, two or more
separate elections may be made to treat designated portions of the related trust
fund as REMICs for federal income tax purposes, creating a tiered REMIC
structure. As to each series of REMIC Certificates that is a tiered REMIC
structure, in the opinion of counsel to the depositor, assuming compliance with
all provisions of the related pooling and servicing agreement, each of the
REMICs in that series will qualify as a REMIC and the REMIC Certificates issued
by these REMICs 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.
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Solely for purposes of determining whether the REMIC Certificates will be
real estate assets within the meaning of Section 856(c)(4)(A) of the Code, and
loans secured by an interest in real property under Section 7701(a)(19)(C) of
the Code, and whether the income on the certificates is interest described in
Section 856(c)(3)(B) of the Code, all of the REMICs in that series will be
treated as one REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
GENERAL. Except as described in "Taxation of Owners of REMIC Residual
Certificates--Possible Pass-Through of Miscellaneous Itemized Deductions," 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 ordinarily
report income under a cash method of accounting will be required to report
income for REMIC Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT. A REMIC Regular Certificate may be issued with
original issue discount within the meaning of Section 1273(a) of the Code. Any
holder of a REMIC Regular Certificate issued with original issue discount will
be required to include original issue discount in income as it accrues, in
accordance with the constant yield method, in advance of the receipt of the cash
attributable to that income if the original issue discount exceeds a DE MINIMIS
amount. In addition, Section 1272(a)(6) of the Code provides special rules
applicable to REMIC Regular Certificates and other debt instruments issued with
original issue discount. Regulations have not been issued under that section.
The Code requires that a reasonable Prepayment Assumption be used for
mortgage loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of that discount to
reflect differences between the actual prepayment rate and the Prepayment
Assumption. The Prepayment Assumption is to be determined in a manner prescribed
in Treasury regulations; as noted in the preceding paragraph, those regulations
have not been issued. The committee report indicates that the regulations will
provide that the Prepayment Assumption used for a REMIC Regular Certificate must
be the same as that used in pricing the initial offering of the REMIC Regular
Certificate. The Prepayment Assumption used in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
none of the depositor, the master servicer or the trustee will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold, excluding sales to bond houses, brokers and underwriters. If
less than a substantial amount of a class of REMIC Regular Certificates is sold
for cash on or prior to the closing date, the issue price for that class will be
the fair market value of that class on the closing date. Under the OID
Regulations, the stated redemption price of a REMIC Regular Certificate is equal
to the total of all payments to be made on the certificate other than qualified
stated interest. Qualified stated interest is interest that is unconditionally
payable at least annually during the entire
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term of the instrument at a single fixed rate, a qualified floating rate, an
objective rate, a combination of a single fixed rate and one or more qualified
floating rates or one qualified inverse floating rate, or a combination of
qualified floating rates that does not operate in a manner that accelerates or
defers interest payments on the REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
the REMIC Regular Certificates. If the original issue discount rules apply to
the certificates in a particular series, the related prospectus supplement will
describe the manner in which these rules will be applied with respect to the
certificates in that series that bear an adjustable interest rate in preparing
information returns to the certificateholders and the IRS.
The first interest payment on a REMIC Regular Certificate may be made more
than one month after the date of issuance, which is a period longer than the
subsequent monthly intervals between interest payments. Assuming the accrual
period for original issue discount is each monthly period that ends on the day
prior to each distribution date, as a consequence of this long first accrual
period some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
If the accrued interest to be paid on the first distribution date is
computed for a period that begins prior to the closing date, a portion of the
purchase price paid for a REMIC Regular Certificate will reflect the accrued
interest. In these cases, information returns to the certificateholders and the
IRS will take the position that the portion of the purchase price paid for the
interest accrued for periods prior to the closing date is part of the overall
cost of the REMIC Regular Certificate, and not a separate asset the cost of
which is recovered entirely out of interest received on the next distribution
date, and that portion of the interest paid on the first distribution date in
excess of interest accrued for a number of days corresponding to the number of
days from the closing date to the first distribution date should be included in
the stated redemption price of the REMIC Regular Certificate. However, the OID
Regulations state that all or a portion of the accrued interest may be treated
as a separate asset the cost of which is recovered entirely out of interest paid
on the first distribution date. It is unclear how an election to do so would be
made under the OID Regulations and whether this election could be made
unilaterally by a certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of a REMIC Regular Certificate is computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of the REMIC Regular Certificate, by multiplying (1) the number of
complete years from the issue date until that payment is expected to be made,
presumably taking into account the Prepayment Assumption, by (2) a fraction, the
numerator of which is the amount of the payment, and the denominator of which is
the stated redemption price at maturity of the REMIC Regular Certificate. Under
the OID Regulations, original issue discount of only a de minimis amount, other
than de minimis original issue discount attributable to a teaser interest rate
or an initial interest holiday, will be included in income as each
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payment of stated principal is made, based on the product of the total amount of
the de minimis original issue discount attributable to that certificate and a
fraction, the numerator of which is the amount of the principal payment and the
denominator of which is the outstanding stated principal amount of the REMIC
Regular Certificate. The OID Regulations also would permit a certificateholder
to elect to accrue de minimis original issue discount into income currently
based on a constant yield method. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount" for a description of this election under the OID
Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of the certificate must include in ordinary gross
income the sum of the daily portions of original issue discount for each day
during its taxable year on which it held the REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as described in the following
paragraph.
An accrual period is a period that ends on the day prior to a distribution
date and begins on the first day following the immediately preceding accrual
period, except that the first accrual period begins on the closing date. As to
each accrual period, a calculation will be made of the portion of the original
issue discount that accrued during the accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess of (1)
the sum of (a) the present value, as of the end of the accrual period, of all of
the distributions remaining to be made on the REMIC Regular Certificate in
future periods and (b) the distributions made on the REMIC Regular Certificate
during the accrual period of amounts included in the stated redemption price,
over (2) the adjusted issue price of the REMIC Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated assuming
that distributions on the REMIC Regular Certificate will be received in future
periods based on the mortgage loans being prepaid at a rate equal to the
Prepayment Assumption, using a discount rate equal to the original yield to
maturity of the certificate and taking into account events, including actual
prepayments, that have occurred before the close of the accrual period. For
these purposes, the original yield to maturity of the certificate will be
calculated based on its issue price and assuming that distributions on the
certificate will be made in all accrual periods based on the mortgage loans
being prepaid at a rate equal to the Prepayment Assumption. The adjusted issue
price of a REMIC Regular Certificate at the beginning of any accrual period will
equal the issue price of the certificate, increased by the aggregate amount of
original issue discount that accrued with respect to the certificate in prior
accrual periods, and reduced by the amount of any distributions made on the
certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual period
will be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for that day.
If a REMIC Regular Certificate issued with original issue discount is
purchased at a cost, excluding any portion of the cost attributable to accrued
qualified stated interest, less than its remaining stated redemption price, the
purchaser will also be required to include in gross income the daily portions of
any original issue discount for the certificate. However, if the cost of the
certificate is in excess of its adjusted issue price, each daily portion will be
reduced in proportion to the ratio the excess bears to the aggregate original
issue discount remaining to be accrued on the REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (1) the adjusted issue price or, in the case of the first accrual period,
the issue
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price, of the certificate at the beginning of the accrual period which includes
that day and (2) the daily portions of original issue discount for all days
during the accrual period prior to that day.
MARKET DISCOUNT. A certificateholder that purchases a REMIC Regular
Certificate at a market discount will recognize gain upon receipt of each
distribution representing stated redemption price. A REMIC Regular Certificate
issued without original issue discount will have market discount if purchased
for less than its remaining stated principal amount and a REMIC Regular
Certificate issued with original issue discount will have market discount if
purchased for less than its adjusted issue price. Under Section 1276 of the
Code, a certificateholder that purchases a REMIC Regular Certificate at a market
discount in excess of a DE MINIMIS amount will be required to allocate the
portion of each distribution representing stated redemption price 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. If made, the election will apply to all market discount bonds
acquired by the certificateholder on or after the first day of the first taxable
year to which the election applies. In addition, the OID Regulations permit a
certificateholder to elect to accrue all interest and discount in income as
interest, and to amortize premium, based on a constant yield method. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that the certificateholder acquires during
the taxable year of the election or later taxable years, and possibly previously
acquired instruments. Similarly, a certificateholder that made this election for
a certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the certificateholder owns or acquires. SEE
"Taxation of Owners of REMIC Regular Certificates--Premium" beloW. Each of these
elections to accrue interest, discount and premium with respect to a certificate
on a constant yield method or as interest would be irrevocable, except with the
approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if the
market discount is less than 0.25% of the remaining stated redemption price of
the REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular Certificates--
Original Issue Discount" above. This treatment would result in discount being
included in income at a slower rate than discount would be required to be
included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, the rules
described in the committee report apply. The committee report indicates that in
each accrual period market discount on REMIC Regular Certificates should accrue,
at the certificateholder's option:
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(1) on the basis of a constant yield method,
(2) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid in the accrual
period bears to the total amount of stated interest remaining to be
paid on the REMIC Regular Certificate as of the beginning of the
accrual period, or
(3) in the case of a REMIC Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining on the
REMIC Regular Certificate at the beginning of the accrual period.
Moreover, the Prepayment Assumption used in calculating the accrual of
original issue discount is also used in calculating the accrual of market
discount. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect these regulations might have
on the tax treatment of a REMIC Regular Certificate purchased at a discount in
the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of the certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of these methods,
less any accrued market discount previously reported as ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate 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 a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule applies. Any such deferred interest
expense would not exceed the market discount that accrues during the taxable
year and is, in general, allowed as a deduction not later than the year in which
the market discount is includible in income. If a holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by the holder in that taxable year or later taxable years,
the interest deferral rule will not apply.
PREMIUM. A REMIC Regular Certificate purchased at a cost, excluding any
portion of the cost attributable to accrued qualified stated interest, greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of a REMIC Regular Certificate may elect under Section 171
of the Code to amortize the premium under the constant yield method over the
life of the certificate. If made, the election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the certificateholder as having made the election to amortize premium
generally. See "Taxation of
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Owners of REMIC Regular Certificates--Market Discount" above. The committee
report states that the same rules that apply to accrual of market discount,
which rules will require use of a Prepayment Assumption in accruing market
discount with respect to REMIC Regular Certificates without regard to whether
the certificates have original issue discount, will also apply in amortizing
bond premium under Section 171 of the Code.
REALIZED LOSSES. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire the certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more realized losses on the mortgage loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until the holder's certificate
becomes wholly worthless, i.e., until its outstanding principal balance has been
reduced to zero, and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to the certificate, without
giving effect to any reduction in distributions attributable to defaults or
delinquencies on the mortgage loans or the certificate underlying the REMIC
Certificates, as the case may be, until it can be established the reduction
ultimately will not be recoverable. As a result, the amount of taxable income
reported in any period by the holder of a REMIC Regular Certificate could exceed
the amount of economic income actually realized by that holder in the period.
Although the holder of a REMIC Regular Certificate eventually will recognize a
loss or reduction in income attributable to previously accrued and included
income that as the result of a realized loss ultimately will not be realized,
the law is unclear with respect to the timing and character of this loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not subject to entity-level taxation, except with regard to
prohibited transactions and some other transactions. See "--Prohibited
Transactions Tax and Other Taxes" below. Rather, the taxable income or net loss
of a REMIC is generally taken into account by the holder of the REMIC Residual
Certificates. Accordingly, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the mortgage loans or as debt instruments issued by the
REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that the holder owned the REMIC Residual Certificate. For this
purpose, the taxable income or net loss of the REMIC will be allocated to each
day in the calendar quarter ratably using a 30 days per month/90 days per
quarter/360 days per year convention unless otherwise disclosed in the related
prospectus supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or
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loss. The taxable income of the REMIC will be determined under the rules
described below in "Taxable Income of the REMIC" and will be taxable to the
REMIC Residual Certificateholders without regard to the timing or amount 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 limitations under Section 469 of the Code on the deductibility of
passive losses.
A holder of a REMIC Residual Certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income, or net loss, of the REMIC for each day that it holds the REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss. The committee report indicates that some modifications of
the general rules may be made, by regulations, legislation or otherwise to
reduce, or increase, the income of a REMIC Residual Certificateholder that
purchased the REMIC Residual Certificate from a prior holder of the certificate
at a price greater than, or less than, the adjusted basis, the REMIC Residual
Certificate would have had in the hands of an original holder of the
certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of the REMIC Residual Certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that any of these payments would be
includible in income immediately upon its receipt, the IRS might assert that
these payments should be included in income over time according to an
amortization schedule or according to method. Because of the uncertainty
concerning the treatment of these payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of these
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report, or the tax liability associated with the income, may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to excess inclusions, and
noneconomic residual interests discussed at "-Noneconomic REMIC Residual
Certificates". The fact that the tax liability associated with the income
allocated to REMIC Residual Certificateholders may exceed the cash distributions
received by the REMIC Residual Certificateholders for the corresponding period
may significantly adversely affect the REMIC Residual Certificateholders'
after-tax rate of return. This disparity between income and distributions may
not be offset by corresponding losses or reductions of income attributable to
the REMIC Residual Certificateholder until subsequent tax years and, then, may
not be completely offset due to changes in the Code, tax rates or character of
the income or loss.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC will equal the
income from the mortgage loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest, including original issue discount and reduced by any premium on
issuance, on the REMIC Regular Certificates, whether or not offered by the
prospectus, amortization of any premium on the mortgage loans, bad debt losses
with respect to the mortgage loans and, except as described below, for
servicing, administrative and other expenses.
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For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates, or if a class of REMIC Certificates is not sold
initially, their fair market values. The aggregate basis will be allocated among
the mortgage loans and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any offered REMIC Certificates
will be determined in the manner described above under "--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount." The issue price of a REMIC
Certificate received in exchange for an interest in the mortgage loans or other
property will equal the fair market value of the interests in the mortgage loans
or other property. Accordingly, if one or more classes of REMIC Certificates are
retained initially rather than sold, the Trustee may be required to estimate the
fair market value of the interests in order to determine the basis of the REMIC
in the mortgage loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to mortgage loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates. However, a REMIC that acquires loans at a market discount must
include the market discount in income currently, as it accrues, on a constant
yield basis. See "--Taxation of Owners of REMIC Regular Certificates" above,
which describes a method for accruing discount income that is analogous to that
required to be used by a REMIC as to mortgage loans with market discount that it
holds.
A mortgage loan will be deemed to have been acquired with either discount
or premium to the extent that the REMIC's basis in the mortgage loan is either
less than or greater than its stated redemption price. Any discount will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to the income, under a method similar to the method
described above for accruing original issue discount on the REMIC Regular
Certificates. It is anticipated that each REMIC will elect under Section 171 of
the Code to amortize any premium on the mortgage loans. Premium on any mortgage
loan to which the election applies may be amortized under a constant yield
method, presumably taking into account a Prepayment Assumption. This election
would not apply to any mortgage loan originated on or before September 27, 1985,
premium on which should be allocated among the principal payments on that
mortgage loan and be deductible by the REMIC as those payments become due or
upon the prepayment of the mortgage loan.
A REMIC will be allowed deductions for interest, including original issue
discount, on the REMIC Regular Certificates, whether or not offered by this
prospectus, equal to the deductions that would be allowed if these REMIC Regular
Certificates were indebtedness of the REMIC. Original issue discount will be
considered to accrue for this purpose as described above under "--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount," except that the
de minimis rule and the adjustments for subsequent holders of these REMIC
Regular Certificates will not apply.
Issue premium is the excess of the issue price of a REMIC Regular
Certificate over its stated redemption price. If a class of REMIC Regular
Certificates is issued with issue premium, the net amount of interest deductions
that are allowed the REMIC in each taxable year for the REMIC Regular
Certificates of that class will be reduced by an amount equal to the portion of
the issue premium that is considered to be amortized or repaid in that year.
Although the matter is not entirely clear, it is likely that issue premium would
be amortized under a constant yield method in a manner
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analogous to the method of accruing original issue discount described above
under "--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount."
Subject to the exceptions described in the following sentences, the taxable
income of a REMIC will be determined in the same manner as if the REMIC were an
individual having the calendar year as its taxable year and using the accrual
method of accounting. However, no item of income, gain, loss or deduction
allocable to a prohibited transaction will be taken into account. See
"--Prohibited Transactions Tax and Other Taxes" below. Further, the limitation
on miscellaneous itemized deductions imposed on individuals by Section 67 of the
Code, allowing these deductions only to the extent they exceed in the aggregate
two percent of the taxpayer's adjusted gross income, will not be applied at the
REMIC level and the REMIC will be allowed deductions for servicing,
administrative and other non-interest expenses in determining its taxable
income. These expenses will be allocated as a separate item to the holders of
REMIC Certificates, subject to the limitation of Section 67 of the Code. SEE
"--Possible Pass-Through of Miscellaneous Itemized Deductions" beloW. If the
deductions allowed to the REMIC exceed its gross income for a calendar quarter,
the excess will be the net loss for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for the REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased, but not below zero, by distributions made, and
by net losses allocated, to the REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent the net loss exceeds the REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of the calendar quarter, determined without regard to the net loss.
Any loss that is not currently deductible by reason of this limitation may be
carried forward indefinitely to future calendar quarters and, subject to the
same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds this adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. Holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that the distributions will be
treated as nontaxable returns of capital. Their bases in the REMIC Residual
Certificates will initially equal the amount paid for the REMIC Residual
Certificates and will be increased by the REMIC Residual Certificateholders'
allocable shares of taxable income of the REMIC. However, these bases increases
may not occur until the end of the calendar quarter, or perhaps the end of the
calendar year, with respect to which the REMIC taxable income is allocated to
the REMIC Residual Certificateholders. To the extent the REMIC Residual
Certificateholders' initial bases are less than the distributions to the REMIC
Residual Certificateholders, and increases in initial bases either occur after
the distributions or, together with their initial bases, are less than the
amount of the distributions, gain will be recognized by the REMIC Residual
Certificateholders on these distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
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The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of the REMIC Residual Certificate to the REMIC Residual
Certificateholder and the adjusted basis the REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS. Any excess inclusions with respect to a REMIC Residual
Certificate will be subject to federal income tax in all events.
In general, the excess inclusions with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of
(1) the daily portions of REMIC taxable income allocable to the REMIC
Residual Certificate over
(2) the sum of the daily accruals for each day during the quarter that the
REMIC Residual Certificate was held by the REMIC Residual
Certificateholder.
The daily accruals of a REMIC Residual Certificateholder will be determined
by allocating to each day during a calendar quarter its ratable portion of the
product of the adjusted issue price of the REMIC Residual Certificate at the
beginning of the calendar quarter and 120% of the long-term Federal rate in
effect on the closing date. For this purpose, the adjusted issue price of a
REMIC Residual Certificate as of the beginning of any calendar quarter will be
equal to the issue price of the REMIC Residual Certificate, increased by the sum
of the daily accruals for all prior quarters and decreased, but not below zero,
by any distributions made with respect to the REMIC Residual Certificate before
the beginning of that quarter. The issue price of a REMIC Residual Certificate
is the initial offering price to the public, excluding bond houses and brokers,
at which a substantial amount of the REMIC Residual Certificates were sold. The
long-term Federal 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. Although it has not done so, the Treasury has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered to have significant value.
For REMIC Residual Certificateholders, an excess inclusion:
(1) will not be permitted to be offset by deductions, losses or loss
carryovers from other activities,
(2) will be treated as unrelated business taxable income to an otherwise
tax-exempt organization and
(3) will not be eligible for any rate reduction or exemption under any
applicable tax treaty with respect to the 30% United States withholding
tax imposed on distributions to REMIC
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Residual Certificateholders that are foreign investors. See, however,
"--Foreign Investors in REMIC Certificates," below.
Furthermore, for purposes of the alternative minimum tax, excess inclusions
will not be permitted to be offset by the alternative tax net operating loss
deduction and alternative minimum taxable income may not be less than the
taxpayer's excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the REMIC
Residual Certificates, as reduced, but not below zero, by the real estate
investment trust taxable income, will be allocated among the shareholders of the
trust in proportion to the dividends received by the shareholders from the
trust, and any amount so allocated will be treated as an excess inclusion with
respect to a REMIC Residual Certificate as if held directly by the shareholder.
"Real estate investment trust taxable income" is defined by Section 857(b)(2) of
the Code, and as used in the prior sentence does not include any net capital
gain. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and cooperatives; the REMIC
Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the REMIC Regulations,
transfers of noneconomic REMIC Residual Certificates will be disregarded for all
federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the noneconomic REMIC Residual
Certificate. The REMIC Regulations provide that a REMIC Residual Certificate is
"noneconomic" unless, based on the Prepayment Assumption and on any required or
permitted clean up calls, or required liquidation provided for in the REMIC's
organizational documents, the present value of the expected future
distributions, discounted using the applicable Federal rate for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, on the REMIC
Residual Certificate equals at least the present value of the expected tax on
the anticipated excess inclusions, and the transferor reasonably expects that
the transferee will receive distributions with respect to the REMIC Residual
Certificate at or after the time the taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. Accordingly,
all transfers of REMIC Residual Certificates that may constitute noneconomic
residual interests will be subject to restrictions under the terms of the
related pooling and servicing agreement that are intended to reduce the
possibility of a transfer of REMIC Residual Certificates being disregarded.
These restrictions will require each party to a transfer to provide an affidavit
that no purpose of the transfer is to impede the assessment or collection of
tax, including representations as to the financial condition of the prospective
transferee, for which the transferor is also required to make a reasonable
investigation to determine the transferee's historic payment of its debts and
ability to continue to pay its debts as they come due in the future. Prior to
purchasing a REMIC Residual Certificate, a prospective purchaser should consider
the possibility that a purported transfer of the REMIC Residual Certificate by
that prospective purchaser to another purchaser at a future date may be
disregarded in accordance with the rule described in the first sentence of this
paragraph, which would result in the retention of tax liability by the
purchaser.
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The related prospectus supplement will disclose whether offered REMIC
Residual Certificates may be considered noneconomic residual interests under the
REMIC Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will not be considered noneconomic will be based upon assumptions,
and the depositor will make no representation that a REMIC Residual Certificate
will not be considered noneconomic for purposes of the rules described in the
preceding paragraph. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES. In general, all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment, must be marked to market in accordance with the applicable Code
provision and the related regulations. However, the IRS recently issued
regulations which provide that for purposes of this mark-to-market requirement a
REMIC Residual Certificate acquired after January 4, 1995 is not treated as a
security and thus may not be marked to market. Prospective purchasers of a REMIC
Residual Certificate should consult their tax advisors regarding the possible
application of the mark-to-market requirement to REMIC Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of these fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Except as stated in the
related prospectus supplement, these fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a pass-through entity beneficially owned by one or more individuals,
estates or trusts,
o an amount equal to the individual's, estate's or trust's share of the
fees and expenses will be added to the gross income of the holder, and
o the individual's, estate's or trust's share of the fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject
to the limitation of Section 67 of the Code.
Section 67 of the Code permits these deductions only to the extent they
exceed in the aggregate two percent of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (1) 3% of the excess of the
individual's adjusted gross income over that amount or (2) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of a holder of a REMIC Certificate that is an individual, estate or trust, or a
pass-
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through entity beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for the holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of the fees and other deductions will be
included in the holder's gross income. Accordingly, these REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. Prospective investors should consult with their own tax advisors prior
to making an investment in the certificates.
SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will be:
o equal the cost of the REMIC Regular Certificate to the
certificateholder,
o increased by income reported by such certificateholder with
respect to the REMIC Regular Certificate, including original issue
discount and market discount income, and
o reduced, but not below zero, by distributions on the REMIC Regular
Certificate received by the certificateholder and by any amortized
premium.
The adjusted basis of a REMIC Residual Certificate will be determined as
described under "--Taxation of Owners of REMIC Residual Certificates--Basis
Rules, Net Losses and Distributions." Except as provided in the following four
paragraphs, gain or loss from the sale of a REMIC Certificate will be capital
gain or loss, provided the REMIC Certificate is held as a capital asset within
the meaning of Section 1221 of the Code.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent the gain does not
exceed the excess, if any, of (1) the amount that would have been includible in
the seller's income with respect to the REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the applicable Federal
rate, determined as of the date of purchase of the REMIC Regular Certificate,
over (2) the amount of ordinary income actually includible in the seller's
income prior to the sale. In addition, gain recognized on the sale of a REMIC
Regular Certificate by a seller who purchased the REMIC Regular Certificate at a
market discount will be taxable as ordinary income in an amount not exceeding
the portion of the discount that accrued during the period the REMIC Certificate
was held by the holder, reduced by any market discount included in income under
the rules described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium."
REMIC Certificates will be evidences of indebtedness within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which this section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a conversion transaction within the
meaning of Section 1258 of the Code. A conversion transaction
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includes a transaction in which the taxpayer has taken two or more positions in
the same or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value of
the taxpayer's net investment in the transaction. The amount of gain so realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate applicable Federal rate at the time
the taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include the net capital
gain in total net investment income for the taxable year, for purposes of the
rule that limits the deduction of interest on indebtedness incurred to purchase
or carry property held for investment to a taxpayer's net investment income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires the REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a taxable mortgage pool, as defined in Section 7701(i) of the Code,
during the period beginning six months before, and ending six months after, the
date of the sale, such sale will be subject to the wash sale rules of Section
1091 of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to the REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. In the event a
REMIC engages in a prohibited transaction, the Code imposes a 100% tax on the
income derived by the REMIC from the prohibited transaction. A prohibited
transaction may occur upon the disposition of a mortgage loan, the receipt of
income from a source other than a mortgage loan or other permitted investments,
the receipt of compensation for services, or gain from the disposition of an
asset purchased with the payments on the mortgage loans for temporary investment
pending distribution on the REMIC Certificates. It is not anticipated that any
REMIC will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, a contribution to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition on the REMIC of
a tax equal to 100% of the value of the contributed property. Each pooling and
servicing agreement will include provisions designed to prevent the acceptance
of any contributions that would be subject to this tax.
REMICs also are 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 gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
It is not anticipated that any REMIC will recognize net income from foreclosure
property subject to federal income tax.
To the extent permitted by then applicable laws, any tax resulting from a
prohibited transaction, tax resulting from a contribution made after the closing
date, tax on net income from foreclosure property or state or local income or
franchise tax that may be imposed on the REMIC will be borne
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by the related master servicer or trustee in either case out of its own funds,
provided that the master servicer or the trustee has sufficient assets to do so,
and provided that the tax arises out of a breach of the master servicer's or the
trustee's obligations under the related pooling and servicing agreement and in
respect of compliance with applicable laws and regulations. Any of these taxes
not borne by the master servicer or the trustee will be charged against the
related trust fund resulting in a reduction in amounts payable to holders of the
related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS. If a REMIC Residual Certificate is transferred to a disqualified
organization, a tax would be imposed in an amount equal to the product of:
o the present value, discounted using the applicable Federal rate for
obligations whose term ends on the close of the last quarter in which
excess inclusions are expected to accrue with respect to the REMIC
Residual Certificate, of the total anticipated excess inclusions with
respect to the REMIC Residual Certificate for periods after the
transfer and
o the highest marginal federal income tax rate applicable to
corporations.
The anticipated excess inclusions must be determined as of the date that
the REMIC Residual Certificate is transferred and must be based on events that
have occurred up to the time of the transfer, the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. The tax would be imposed on the transferor of
the REMIC Residual Certificate, except that where the transfer is through an
agent for a disqualified organization, the tax would instead be imposed on the
agent. However, a transferor of a REMIC Residual Certificate would in no event
be liable for the tax with respect to a transfer if the transferee furnishes to
the transferor an affidavit that the transferee is not a disqualified
organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. Moreover, an entity will not
qualify as a REMIC unless there are reasonable arrangements designed to ensure
that
o residual interests in the entity are not held by disqualified
organizations and
o information necessary for the application of the tax described herein
will be made available. Restrictions on the transfer of REMIC Residual
Certificates and other provisions that are intended to meet this
requirement will be included in the pooling and servicing agreement,
and will be discussed more fully in any prospectus supplement relating
to the offering of any REMIC Residual Certificate.
In addition, if a pass-through entity includes in income excess inclusions
with respect to a REMIC Residual Certificate, and a disqualified organization is
the record holder of an interest in the entity, then a tax will be imposed on
the entity equal to the product of (1) the amount of excess inclusions on the
REMIC Residual Certificate that are allocable to the interest in the
pass-through entity held by the disqualified organization and (2) the highest
marginal federal income tax rate imposed on corporations. A pass-through entity
will not be subject to this tax for any period, however, if each record holder
of an interest in the pass-through entity furnishes to the pass-through entity
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o the holder's social security number and a statement under penalties of
perjury that the social security number is that of the record holder or
o a statement under penalties of perjury that the record holder is not a
disqualified organization. Notwithstanding the preceding two sentences,
in the case of a REMIC Residual Certificate held by an electing large
partnership, as defined in Section 775 of the Code, all interests in
the partnership shall be treated as held by disqualified organizations,
without regard to whether the record holders of the partnership furnish
statements described in the preceding sentence, and the amount that is
subject to tax under the second preceding sentence is excluded from the
gross income of the partnership allocated to the partners, in lieu of
allocating to the partners a deduction for the tax paid by the
partnership.
For these purposes, a disqualified organization means:
o the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of the foregoing, not including, however,
instrumentalities described in Section 168(h)(2)(D) of the Code or the
Federal Home Loan Mortgage Corporation,
o any organization, other than a cooperative described in Section 521 of
the Code, that is exempt from federal income tax, unless it is subject
to the tax imposed by Section 511 of the Code or
o any organization described in Section 1381(a)(2)(C) of the Code.
For these purposes, a pass-through entity means any regulated investment
company, real estate investment trust, trust, partnership or other entity
described in Section 860E(e)(6)(B) of the Code. In addition, a person holding an
interest in a pass-through entity as a nominee for another person will, with
respect to the interest, be treated as a pass-through entity.
TERMINATION. A REMIC will terminate immediately after the distribution
date following receipt by the REMIC of the final payment in respect of the
mortgage loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual certificate, if the last
distribution on the REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in the Certificate, the REMIC Residual
Certificateholder should, but may not, be treated as realizing a loss equal to
the amount of the difference, and the loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
The Trustee or other party specified in the related prospectus supplement will
file REMIC federal income tax returns on behalf of the related REMIC, and under
the terms of the related Agreement, will either (1) be irrevocably appointed by
the holders of the largest percentage interest in the related REMIC Residual
Certificates as their agent to perform all of the duties of the tax matters
person with respect to the REMIC in all respects or (2)
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will be designated as and will act as the tax matters person with respect to the
related REMIC in all respects and will hold at least a nominal amount of REMIC
Residual Certificates.
The Trustee, as the tax matters person or as agent for the tax matters
person, subject to notice requirements and various restrictions and limitations,
generally will have the authority to act on behalf of the REMIC and the REMIC
Residual Certificateholders in connection with the administrative and judicial
review of items of income, deduction, gain or loss of the REMIC, as well as the
REMIC's classification. REMIC Residual Certificateholders generally will be
required to report such REMIC items consistently with their treatment on the
REMIC's tax return and may be bound by a settlement agreement between the
Trustee, as either tax matters person or as agent for the tax matters person,
and the IRS concerning any REMIC item subject to that settlement agreement.
Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of a REMIC Residual Certificateholder's return. 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 the person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC regular interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and some other non-individuals will be provided interest and
original issue discount income information and the information set forth in the
following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring the information to be reported to the IRS. Reporting with respect
to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
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 required
by regulations with respect to computing the accrual of any market discount.
Because exact computation of the accrual of market discount on a constant yield
method would require information relating to the holder's purchase price that
the REMIC may not have, Treasury regulations only require that information
pertaining to the appropriate proportionate method of accruing market discount
be provided. See "--Taxation of Owners of REMIC Regular Certificates--Market
Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by the Trustee or other party designated in the related prospectus
supplement.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the backup
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withholding tax under Section 3406 of the Code at a rate of 31% if recipients of
the payments fail to furnish to the payor information including their taxpayer
identification numbers, or otherwise fail to establish an exemption from the
backup withholding tax. Any amounts deducted and withheld from a distribution to
a recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of payments
that is required to supply information but that does not do so in the proper
manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular
Certificateholder that is not a United States Person and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate, will
not be subject to United States federal income or withholding tax in respect of
a distribution on a REMIC Regular Certificate, provided that the holder complies
to the extent necessary with identification requirements including delivery of a
statement signed by the certificateholder under penalties of perjury, certifying
that the certificateholder is not a United States Person and providing the name
and address of the certificateholder. The IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to the holder may be subject to a
tax rate of 30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on the United
States shareholder's allocable portion of the interest income received by the
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, it is suggested that certificateholders who
are non-resident alien individuals consult their tax advisors concerning this
question.
Except as stated in the related prospectus supplement, transfers of REMIC
Residual Certificates to investors that are not United States Persons will be
prohibited under the related pooling and servicing agreement.
NEW WITHHOLDING REGULATIONS
The IRS has issued 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. These regulations will generally be effective for payments
made after December 31, 2000, subject to transition rules. Prospective investors
are urged to consult their tax advisors regarding these regulations.
NOTES
On or prior to the date of the related prospectus supplement with respect
to the proposed issuance of each series of notes, counsel to the depositor will
provide its opinion that, assuming compliance with all provisions of the
indenture, owner trust agreement and other related documents,
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for federal income tax purposes (1) the notes will be treated as indebtedness
and (2) the issuer, as created under the owner trust agreement, will not be
characterized as an association or publicly traded partnership taxable as a
corporation or as a taxable mortgage pool. For purposes of this tax discussion,
references to a noteholder or a holder are to the beneficial owner of a note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not constitute
"loans . . . secured by an interest in real property" within the meaning of Code
section 7701(a)(19)(C)(v); and notes held by a real estate investment trust will
not constitute real estate assets within the meaning of Code section
856(c)(4)(A) and interest on notes will not be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, except that (1) income reportable on the
notes is not required to be reported under the accrual method unless the holder
otherwise uses the accrual method and (2) the special rule treating a portion of
the gain on sale or exchange of a REMIC Regular Certificate as ordinary income
is inapplicable to the notes. See "--REMICs --Taxation of Owners of REMIC
Regular Certificates" and "-- Sales of REMIC Certificates."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
On or prior to the date of the related prospectus supplement with respect
to the proposed issuance of each series of Grantor Trust Certificates, counsel
to the depositor will provide its opinion that, assuming compliance with all
provisions of the related pooling and servicing agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of Chapter 1 of the Code and not as a partnership or an association
taxable as a corporation.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
prospectus supplement, counsel to the depositor will provide its opinion that
Grantor Trust Fractional Interest Certificates will represent interests in
"loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Code; and real estate assets within the meaning of
Section 856(c)(4)(A) of the Code. In addition, counsel to the depositor will
deliver its opinion that interest on Grantor Trust Fractional Interest
Certificates will to the same extent be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code.
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The assets constituting certain Grantor Trust Funds may include buydown
mortgage loans. The characterization of an investment in buydown mortgage loans
will depend upon the precise terms of the related buydown agreement, but to the
extent that the buydown mortgage loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the preceding paragraph. No directly applicable precedents exist with respect
to the federal income tax treatment or the characterization of investments in
buydown mortgage loans. Accordingly, holders of Grantor Trust Certificates
should consult their own tax advisors with respect to the characterization of
investments in Grantor Trust Certificates representing an interest in a Grantor
Trust Fund that includes buydown mortgage loans.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of mortgage loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, and real estate assets within the meaning
of Section 856(c)(4)(A) of the Code, and the interest on the mortgage loans is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and income from the Grantor Trust Certificates will be
characterized the same way. However, the policies underlying these sections, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts, suggest that this characterization is
appropriate. Counsel to the depositor will not deliver any opinion on these
questions. It is suggested that prospective purchasers to which the
characterization of an investment in Grantor Trust Strip Certificates is
material consult their tax advisors regarding whether the Grantor Trust Strip
Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . .[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the mortgage loans, including amounts used to
pay reasonable servicing fees and other expenses, and will be entitled to deduct
their shares of any reasonable servicing fees and other expenses. Because of
stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable on the same
certificate representing interest on the mortgage loans. Under Section 67 of the
Code, an individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through some pass-through entities will be allowed a
deduction for the reasonable servicing fees and expenses only to the extent that
the aggregate of the holder's miscellaneous itemized deductions exceeds two
percent of the holder's adjusted gross income. In addition, Section 68 of the
Code provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (1) 3% of the excess of the individual's adjusted gross
income over the amount or (2) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
reportable by holders of Grantor Trust Fractional Interest Certificates who are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Further, certificateholders other than corporations subject to the
alternative minimum tax may not deduct
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miscellaneous itemized deductions in determining the holder's alternative
minimum taxable income. Although it is not entirely clear, it appears that in
transactions in which multiple classes of Grantor Trust Certificates, including
Grantor Trust Strip Certificates, are issued, the fees and expenses should be
allocated among the classes of Grantor Trust Certificates using a method that
recognizes that each class benefits from the related services. In the absence of
statutory or administrative clarification as to the method to be used, it is
intended to base information returns or reports to the IRS and
certificateholders on a method that allocates the expenses among classes of
Grantor Trust Certificates with respect to each period on the distributions made
to each class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
stripped bond rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates or
(2) the depositor or any of its affiliates retains, for its own account or for
purposes of resale, a right to receive a specified portion of the interest
payable on the mortgage loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages the IRS has established safe harbors. The servicing fees paid
with respect to the mortgage loans for a series of Grantor Trust Certificates
may be higher than those safe harbors and, accordingly, may not constitute
reasonable servicing compensation. The related prospectus supplement will
include information regarding servicing fees paid to the master servicer, any
subservicer or their respective affiliates necessary to determine whether the
safe harbor rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with original issue discount within the meaning of Section 1273(a) of the
Code, subject, however, to the discussion in the sixth following paragraph
regarding the possible treatment of stripped bonds as market discount bonds and
the discussion regarding DE MINIMIS market discount. See "--Taxation of Owners
of Grantor Trust Fractional Interest Certificates-- Discount" below. Under the
stripped bond rules, the holder of a Grantor Trust Fractional Interest
Certificate, whether a cash or accrual method taxpayer, will be required to
report interest income from its Grantor Trust Fractional Interest Certificate
for each month in an amount equal to the income that accrues on the certificate
in that month calculated under a constant yield method, in accordance with the
rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of the certificate's stated redemption price over
its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by the purchaser
for the Grantor Trust Fractional Interest Certificate. The stated redemption
price of a Grantor Trust Fractional Interest Certificate will be the sum of all
payments to be made on the certificate, other than qualified stated interest, if
any, as well as the certificate's share of reasonable servicing fees and other
expenses. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates-- Stripped Bond Rules Do Not Apply" for a definition of qualified
stated interest. In general, the amount of the income that accrues in any month
would equal the product of the holder's adjusted basis in the Grantor Trust
Fractional Interest Certificate at the beginning of the month, see "Sales of
Grantor Trust Certificates", and the yield of the Grantor Trust Fractional
Interest Certificate to the
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holder. This yield is equal to a rate that, compounded based on the regular
interval between distribution dates and used to discount the holder's share of
future payments on the mortgage loans, causes the present value of those future
payments to equal the price at which the holder purchased the certificate. In
computing yield under the stripped bond rules, a certificateholder's share of
future payments on the mortgage loans will not include any payments made in
respect of any ownership interest in the mortgage loans retained by the
depositor, the master servicer, any subservicer or their respective affiliates,
but will include the certificateholder's share of any reasonable servicing fees
and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates represent
an interest in any pool of debt instruments the yield on which may be affected
by reason of prepayments, Section 1272(a)(6) of the Code requires (1) the use of
a reasonable Prepayment Assumption in accruing original issue discount and (2)
adjustments in the accrual of original issue discount when prepayments do not
conform to the Prepayment Assumption. It is unclear whether those provisions
would be applicable to the Grantor Trust Fractional Interest Certificates that
do not represent an interest in any pool of debt instruments the yield on which
may be affected by reason of prepayments, or whether use of a reasonable
Prepayment Assumption may be required or permitted without reliance on these
rules. It is also uncertain, if a Prepayment Assumption is used, whether the
assumed prepayment rate would be determined based on conditions at the time of
the first sale of the Grantor Trust Fractional Interest Certificate or, for a
particular holder, at the time of purchase of the Grantor Trust Fractional
Interest Certificate by that holder. It is suggested that Certificateholders
consult their own tax advisors concerning reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates and, in particular,
whether a Prepayment Assumption should be used in reporting original issue
discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the mortgage loans allocable to the
certificate, the use of a Prepayment Assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a price less than or greater than the principal amount of the
certificate, that is, at a discount or a premium, the use of a reasonable
Prepayment Assumption would increase or decrease the yield, and thus accelerate
or decelerate, respectively, the reporting of income.
If a Prepayment Assumption is not used, then when a mortgage loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the mortgage loan that is allocable to the certificate and the portion of the
adjusted basis of the certificate that is allocable to the certificateholder's
interest in the mortgage loan. If a Prepayment Assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See "--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount." It is unclear
whether any other adjustments would be required to reflect differences between
an assumed prepayment rate and the actual rate of prepayments.
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It is intended to base information reports or returns to the IRS and
certificateholders in transactions subject to the stripped bond rules on a
Prepayment Assumption that will be disclosed in the related prospectus
supplement and on a constant yield computed using a representative initial
offering price for each class of certificates. However, none of the depositor,
the master servicer or the trustee will make any representation that the
mortgage loans will in fact prepay at a rate conforming to the Prepayment
Assumption or any other rate and certificateholders should bear in mind that the
use of a representative initial offering price will mean that the information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial certificateholders of each series
who bought at that price.
Under Treasury regulation Section 1.1286-1, stripped bonds may to be
treated as market discount bonds and any purchaser of a stripped bond treated as
a market discount bond is to account for any discount on the bond as market
discount rather than original issue discount. This treatment only applies,
however, if immediately after the most recent disposition of the bond by a
person stripping one or more coupons from the bond and disposing of the bond or
coupon (1) there is no, or only a de minimis amount of, original issue discount
or (2) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan, before subtracting any servicing fee or any stripped
coupon. If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the mortgage loans, the related prospectus supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the mortgage loans, then that original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Characteristics of
Investments in Grantor Trust Certificates-- If Stripped Bond Rules Do Not Apply"
and "--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the certificateholder will be required to
report its share of the interest income on the mortgage loans in accordance with
the certificateholder's normal method of accounting. The original issue discount
rules will apply to a Grantor Trust Fractional Interest Certificate to the
extent it evidences an interest in mortgage loans issued with original issue
discount.
The original issue discount, if any, on the mortgage loans will equal the
difference between the stated redemption price of the mortgage loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on the mortgage loan other than qualified
stated interest. Qualified stated interest is interest that is unconditionally
payable at least annually at a single fixed rate, a qualified floating rate, an
objective rate, a combination of a single fixed rate and one or more qualified
floating rates or one qualified inverse floating rate, or a combination of
qualified floating rates that does not operate in a manner that accelerates or
defers interest payments on the mortgage loan. In general, the issue price of a
mortgage loan will be the amount received by the borrower from the lender under
the terms of the mortgage loan, less any points paid by the borrower, and the
stated redemption price of a mortgage loan will equal its principal amount,
unless the mortgage loan provides for an initial below-market rate of interest
or
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the acceleration or the deferral of interest payments. The determination as to
whether original issue discount will be considered to be de minimis will be
calculated using the same test described in the REMIC discussion. See
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount"
above.
In the case of mortgage loans bearing adjustable or variable interest
rates, the related prospectus supplement will describe the manner in which the
rules will be applied with respect to those mortgage loans by the master
servicer or the trustee in preparing information returns to the
certificateholders and the IRS.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a Prepayment Assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by these pools, it is intended to base information reports and returns to the
IRS and certificateholders on the use of a Prepayment Assumption. However, in
the case of certificates not backed by these pools, it currently is not intended
to base the reports and returns on the use of a Prepayment Assumption. It is
suggested that certificateholders consult their own tax advisors concerning
whether a Prepayment Assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
Certificateholders should refer to the related prospectus supplement with
respect to each series to determine whether and in what manner the original
issue discount rules will apply to mortgage loans in the series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases the Grantor Trust Fractional Interest Certificate at a cost less than
the certificate's allocable portion of the aggregate remaining stated redemption
price of the mortgage loans held in the related trust fund will also be required
to include in gross income the certificate's daily portions of any original
issue discount with respect to the mortgage loans. However, the daily portion
will be reduced, if the cost of the Grantor Trust Fractional Interest
Certificate to the purchaser is in excess of the certificate's allocable portion
of the aggregate adjusted issue prices of the mortgage loans held in the related
trust fund, approximately in proportion to the ratio the excess bears to the
certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on the mortgage loans. The adjusted issue price of a
mortgage loan on any given day equals the sum of (1) the adjusted issue price,
or, in the case of the first accrual period, the issue price, of the mortgage
loan at the beginning of the accrual period that includes that day and (2) the
daily portions of original issue discount for all days during the accrual period
prior to that day. The adjusted issue price of a mortgage loan at the beginning
of any accrual period will equal the issue price of the mortgage loan, increased
by the aggregate amount of original issue discount with respect to the mortgage
loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on the mortgage loan in prior accrual periods of amounts included
in its stated redemption price.
In addition to its regular reports, the master servicer or the trustee,
except as provided in the related prospectus supplement, will provide to any
holder of a Grantor Trust Fractional Interest Certificate such information as
the holder may reasonably request from time to time with respect to original
issue discount accruing on Grantor Trust Fractional Interest Certificates. See
"Grantor Trust Reporting" below.
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MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a mortgage loan is considered to have been purchased at a market
discount, that is, in the case of a mortgage loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price,
or in the case of a mortgage loan issued with original issue discount, at a
purchase price less than its adjusted issue price. If market discount is in
excess of a de minimis amount, the holder generally will be required to include
in income in each month the amount of the discount that has accrued through the
month that has not previously been included in income, but limited, in the case
of the portion of the discount that is allocable to any mortgage loan, to the
payment of stated redemption price on the mortgage loan that is received by, or,
in the case of accrual basis certificateholders, due to, the trust fund in that
month. A certificateholder may elect to include market discount in income
currently as it accrues under a constant yield method based on the yield of the
certificate to the holder rather than including it on a deferred basis under
rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until regulations are issued by the Treasury Department, rules described in the
committee report will apply. Under those rules, in each accrual period market
discount on the mortgage loans should accrue, at the certificateholder's option:
(1) on the basis of a constant yield method, (2) in the case of a mortgage loan
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total stated interest remaining to be paid on the
mortgage loan as of the beginning of the accrual period, or (3) in the case of a
mortgage loan issued with original issue discount, in an amount that bears the
same ratio to the total remaining market discount as the original issue discount
accrued in the accrual period bears to the total original issue discount
remaining at the beginning of the accrual period. The Prepayment Assumption, if
any, used in calculating the accrual of original issue discount is to be used in
calculating the accrual of market discount. The effect of using a Prepayment
Assumption could be to accelerate the reporting of the discount income. Because
the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect the regulations might have on the tax treatment
of a mortgage loan purchased at a discount in the secondary market.
Because the mortgage loans will provide for periodic payments of stated
redemption price, the market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which the discount
would be included in income if it were original issue discount.
Market discount with respect to mortgage loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" with the exception that it is less likely
that a Prepayment Assumption will be used for purposes of these rules with
respect to the mortgage loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued
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market discount not yet includible in income, unless an election has been made
to report market discount currently as it accrues. This rule applies without
regard to the origination dates of the mortgage loans.
PREMIUM. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, that is, at a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of the premium
allocable to mortgage loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to mortgage loans originated before September 28, 1985 or to mortgage
loans for which an amortization election is not made, should be allocated among
the payments of stated redemption price on the mortgage loan and be allowed as a
deduction as these payments are made, or, for a certificateholder using the
accrual method of accounting, when the payments of stated redemption price are
due.
It is unclear whether a Prepayment Assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a Prepayment Assumption and a mortgage loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the mortgage loan that is
allocable to the certificate and the portion of the adjusted basis of the
certificate that is allocable to the mortgage loan. If a Prepayment Assumption
is used to amortize this premium, it appears that this loss would be
unavailable. Instead, if a Prepayment Assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the Prepayment
Assumption used, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The stripped coupon
rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "Characterization of Investments in
Grantor Trust Certificates--If Stripped Bond Rules Apply," no regulations or
published rulings under Section 1286 of the Code have been issued and
uncertainty exists as to how it will be applied to securities like the Grantor
Trust Strip Certificates. Accordingly, it is suggested that holders of Grantor
Trust Strip Certificates consult their own tax advisors concerning the method to
be used in reporting income or loss with respect to the certificates.
The OID Regulations do not apply to stripped coupons, although they provide
general guidance as to how the original issue discount sections of the Code will
be applied. In addition, the discussion below is subject to the discussion under
"--Application of Contingent Payment Rules" and assumes that the holder of a
Grantor Trust Strip Certificate will not own any Grantor Trust Fractional
Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In
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effect, each holder of Grantor Trust Strip Certificates would include as
interest income in each month an amount equal to the product of the holder's
adjusted basis in the Grantor Trust Strip Certificate at the beginning of that
month and the yield of the Grantor Trust Strip Certificate to the holder. The
yield would be calculated based on the price paid for that Grantor Trust Strip
Certificate by its holder and the payments remaining to be made thereon at the
time of the purchase, plus an allocable portion of the servicing fees and
expenses to be paid with respect to the mortgage loans. See "Characterization of
Investments in Grantor Trust Certificates--Stripped Bond Rules Apply" above.
As noted, Section 1272(a)(6) of the Code requires that a Prepayment
Assumption be used in computing the accrual of original issue discount with
respect to some categories of debt instruments, and that adjustments be made in
the amount and rate of accrual of the discount when prepayments do not conform
to the Prepayment Assumption. To the extent the Grantor Trust Strip Certificates
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, those provisions apply to Grantor Trust Strip
Certificates. It is unclear whether those provisions would be applicable to the
Grantor Trust Strip Certificates that do not represent an interest in any such
pool, or whether use of a Prepayment Assumption may be required or permitted in
the absence of these provisions. It is also uncertain, if a Prepayment
Assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust Strip
Certificate or, with respect to any subsequent holder, at the time of purchase
of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a Prepayment Assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and certificateholders on the
Prepayment Assumption disclosed in the related prospectus supplement and on a
constant yield computed using a representative initial offering price for each
class of certificates. However, none of the depositor, the master servicer or
the trustee will make any representation that the mortgage loans will in fact
prepay at a rate conforming to the Prepayment Assumption or at any other rate
and certificateholders should bear in mind that the use of a representative
initial offering price will mean that the information returns or reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate only
as to the initial certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
mortgage loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument rather than an interest in discrete mortgage loans and the effect of
prepayments is taken into account in computing yield with respect to the Grantor
Trust Strip Certificate, it appears that no loss may be available as a result of
any particular prepayment unless prepayments occur at a rate faster than the
Prepayment Assumption. However, if a Grantor Trust Strip Certificate is treated
as an interest in discrete mortgage loans, or if the Prepayment Assumption is
not used, then, when a mortgage loan is prepaid, the holder of a Grantor Trust
Strip Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of the Grantor Trust Strip Certificate that is allocable to
the mortgage loan.
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POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the mortgage loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments, the
"Contingent Payment Regulations", but it appears that Grantor Trust Strip
Certificates, to the extent subject to Section 1272(a)(6) of the Code as
described above, or due to their similarity to other mortgage-backed securities,
such as REMIC regular interests and debt instruments subject to Section
1272(a)(6) of the Code, that are expressly excepted from the application of the
Contingent Payment Regulations, are or may be excepted from these regulations.
Like the OID Regulations, the Contingent Payment Regulations do not specifically
address securities, like the Grantor Trust Strip Certificates, that are subject
to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the Contingent Payment Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply the noncontingent bond method. Under the noncontingent bond method, the
issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment schedule consists of all noncontingent payments and a projected amount
for each contingent payment based on the projected yield of the Grantor Trust
Strip Certificate.
The projected amount of each payment is determined so that the projected
payment schedule reflects the projected yield. The projected amount of each
payment must reasonably reflect the relative expected values of the payments to
be received by the holder of a Grantor Trust Strip Certificate. The projected
yield referred to above is a reasonable rate, not less than the applicable
Federal rate that, as of the issue date, reflects general market conditions, the
credit quality of the issuer, and the terms and conditions of the mortgage
loans. The holder of a Grantor Trust Strip Certificate would be required to
include as interest income in each month the adjusted issue price of the Grantor
Trust Strip Certificate at the beginning of the period multiplied by the
projected yield, and would add to, or subtract from, the income any variation
between the payment actually received in that month and the payment originally
projected to be made in that month.
Assuming that a Prepayment Assumption were used, if the Contingent Payment
Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis recognized on the sale or exchange of a
Grantor Trust Certificate by an investor who holds the Grantor Trust Certificate
as a capital asset will be capital gain or loss, except to the extent of accrued
and unrecognized market discount, which will be treated as ordinary income, and,
in the case of banks and other financial institutions, except as provided under
Section 582(c) of the Code. The adjusted
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basis of a Grantor Trust Certificate generally will equal its cost, increased by
any income reported by the seller, including original issue discount and market
discount income, and reduced, but not below zero, by any previously reported
losses, any amortized premium and by any distributions with respect
to the Grantor Trust Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in some circumstances. Gain attributable to
accrued and unrecognized market discount will be treated as ordinary income, as
will gain or loss recognized by banks and other financial institutions subject
to Section 582(c) of the Code. Furthermore, a portion of any gain that might
otherwise be capital gain may be treated as ordinary income to the extent that
the Grantor Trust Certificate is held as part of a conversion transaction within
the meaning of Section 1258 of the Code. A conversion transaction generally is
one in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate applicable Federal rate at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction. Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for that taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
GRANTOR TRUST REPORTING. The master servicer or the trustee will furnish to
each holder of a Grantor Trust Fractional Interest Certificate with each
distribution a statement setting forth the amount of the distribution allocable
to principal on the underlying mortgage loans and to interest thereon at the
related pass-through rate. In addition, the master servicer or the trustee will
furnish, within a reasonable time after the end of each calendar year, to each
holder of a Grantor Trust Certificate who was a holder at any time during that
year, information regarding the amount of any servicing compensation received by
the master servicer and subservicer and any other customary factual information
as the master servicer or the trustee deems necessary or desirable to enable
holders of Grantor Trust Certificates to prepare their tax returns and will
furnish comparable information to the IRS as and when required by law to do so.
Because the rules for accruing discount and amortizing premium with respect to
the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the trust fund's information reports of these
items of income and expense. Moreover, these information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial certificateholders that bought their certificates at the
representative initial offering price used in preparing the reports.
Except as disclosed in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the master servicer or the trustee.
BACKUP WITHHOLDING. In general, the rules described in "--REMICS--Backup
Withholding with Respect to REMIC Certificates" will also apply to Grantor Trust
Certificates.
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FOREIGN INVESTORS. In general, the discussion with respect to REMIC Regular
Certificates in "REMICS--Foreign Investors in REMIC Certificates" applies to
Grantor Trust Certificates except that Grantor Trust Certificates will, except
as disclosed in the related prospectus supplement, be eligible for exemption
from U.S. withholding tax, subject to the conditions described in the
discussion, only to the extent the related mortgage loans were originated after
July 18, 1984 and only to the extent such mortgage loans have not been converted
to real property.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
certificateholder's trade or business in the United States, the Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS. With respect to each series of
Partnership Certificates, counsel to the depositor will provide its opinion that
the trust fund will not be a taxable mortgage pool or 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
related pooling and servicing agreement and related documents will be complied
with, and on counsel's conclusions that the nature of the income of the trust
fund will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
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 on the
related mortgage loans, possibly reduced by its interest expense on any
outstanding debt securities. Any corporate income tax could materially reduce
cash available to make distributions on the Partnership Certificates and
certificateholders could be liable for any tax that is unpaid by the trust fund.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP CERTIFICATES. For federal
income tax purposes,
(1) Partnership Certificates held by a thrift institution taxed as a
domestic building and loan association will not constitute "loans ...
secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v);
(2) Partnership Certificates held by a real estate investment trust will
constitute real estate assets within the meaning of Code Section
856(c)(4)(A) and interest on Partnership Certificates will be treated
as "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section
856(c)(3)(B), based on the real estate investments trust's
proportionate interest in the assets of the Partnership Trust Fund
based on capital accounts; and
(3) Partnership Certificates held by a regulated investment company will
not constitute Government securities within the meaning of Code Section
851(b)(3)(A)(i).
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
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TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP. If specified in
the prospectus supplement, the depositor will agree, and the certificateholders
will agree by their purchase of Certificates, to treat the Partnership 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 Partnership Trust Fund, the
partners of the partnership being the certificateholders, including the
depositor. However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Certificates and the depositor is not
clear, because there is no authority on transactions closely comparable to that
contemplated in the prospectus.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Certificates have certain
features characteristic of debt, the Partnership Certificates might be
considered debt of the depositor or the Partnership Trust Fund. Any alternative
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Partnership Certificates as equity in a partnership. The following discussion
assumes that the Partnership Certificates represent equity interests in a
partnership.
PARTNERSHIP TAXATION. As a partnership, the Partnership Trust Fund will not
be subject to federal income tax. Rather, each Certificateholder will be
required to separately take into account the holder's allocated share of income,
gains, losses, deductions and credits of the Partnership Trust Fund. It is
anticipated that the Partnership Trust Fund's income will consist primarily of
interest earned on the mortgage loans, including appropriate adjustments for
market discount, original issue discount and bond premium, as described above
under "-- Grantor Trust Funds -- Taxation of Owners of Grantor Trust Fractional
Interest Certificates - If Stripped Bond Ruled Do Not Apply--", "-- Market
Discount" and "--Premium", and any gain upon collection or disposition of
mortgage loans. The Partnership Trust Fund's deductions will consist primarily
of interest accruing with respect to any outstanding debt securities, servicing
and other fees, and losses or deductions upon collection or disposition of any
outstanding debt securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement, which will
include a pooling and servicing agreement and related documents. The pooling and
servicing agreement will provide, in general, that the Certificateholders will
be allocated taxable income of the Partnership Trust Fund for each due period
equal to the sum of (1) the interest that accrues on the Partnership
Certificates in accordance with their terms for the due period, including
interest accruing at the applicable pass-through rate for the due period and
interest on amounts previously due on the Partnership Certificates but not yet
distributed; (2) any Partnership Trust Fund income attributable to discount on
the mortgage loans that corresponds to any excess of the principal amount of the
Partnership Certificates over their initial issue price; and (3) any other
amounts of income payable to the certificateholders for the due period. The
allocation will be reduced by any amortization by the Partnership Trust Fund of
premium on mortgage loans that corresponds to any excess of the issue price of
Partnership Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the depositor. Based
on the economic arrangement of the parties, this approach for allocating
Partnership 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 that method of
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allocation, certificateholders may be allocated income equal to the entire
pass-through rate plus the other items described under that method even though
the Trust Fund might not have sufficient cash to make current cash distributions
of these amounts. Thus, cash basis holders will in effect be required to report
income from the Partnership Certificates on the accrual basis and
certificateholders may become liable for taxes on Partnership Trust Fund income
even if they have not received cash from the Partnership Trust Fund to pay these
taxes.
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 that holder under the Code.
A share of expenses of the Partnership Trust Fund, including fees of the
master servicer but not interest expense, allocable to an individual, estate or
trust certificateholder would be miscellaneous itemized deductions subject to
the limitations described above under "--Grantor Trust Funds -- Taxation of
Owners of Grantor Trust Fractional Interest Certificates." Accordingly,
deductions for these expenses might be disallowed to the individual in whole or
in part and might result in that holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the Partnership Trust Fund.
Discount income or premium amortization with respect to each mortgage loan
would be calculated in a manner similar to the description under "-- Grantor
Trust Funds -- Taxation of Owners of Grantor Trust Fractional Interest
Certificates - If Stripped Bond Rules Do Not Apply." Notwithstanding this
description, it is intended that the Partnership Trust Fund will make all tax
calculations relating to income and allocations to certificateholders on an
aggregate basis for all mortgage loans held by the Partnership Trust Fund rather
than on a mortgage loan-by-mortgage loan basis. If the IRS were to require that
these calculations be made separately for each mortgage loan, the Partnership
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. Unless indicated otherwise in the applicable
prospectus supplement, it is not anticipated that the mortgage loans will have
been issued with original issue discount and, therefore, the Partnership Trust
Fund should not have original issue discount income. However, the purchase price
paid by the Partnership Trust Fund for the mortgage loans may be greater or less
than the remaining principal balance of the mortgage loans at the time of
purchase. If so, the mortgage loans will have been acquired at a premium or
discount, as the case may be. See "--Grantor Trust Funds -- Taxation of Owners
of Grantor Trust Fractional Interest Certificates -- Market Discount" and
"Premium." As stated in the previous paragraph, the Partnership Trust Fund
intends to make any calculation of original issue discount on an aggregate
basis, but might be required to recompute it on a mortgage loan-by-mortgage loan
basis.
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
stated in the second preceding paragraph, a portion of the market discount
income or premium deduction may be allocated to certificateholders.
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SECTION 708 TERMINATION. Under Section 708 of the Code, the Partnership
Trust Fund will be deemed to terminate for federal income tax purposes if 50% or
more of the capital and profits interests in the Partnership Trust Fund are sold
or exchanged within a 12-month period. A 50% or greater transfer would cause a
deemed contribution of the assets of a Partnership Trust Fund, the old
partnership, to a new Partnership Trust Fund, the new partnership, in exchange
for interests in the new partnership. These 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 Partnership Certificates in an amount equal to the
difference between the amount realized and the seller's tax basis in the
Partnership Certificates sold. A certificateholder's tax basis in an Partnership
Certificate will generally equal the holder's cost increased by the holder's
share of Partnership Trust Fund income includible in income and decreased by any
distributions received with respect to the Partnership Certificate. In addition,
both the tax basis in the Partnership Certificates and the amount realized on a
sale of an Partnership Certificate would include the holder's share of any
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Certificates, and, upon sale or other
disposition of some of the Partnership Certificates, allocate a portion of the
aggregate tax basis to the Partnership Certificates sold, rather than
maintaining a separate tax basis in each Partnership Certificate for purposes of
computing gain or loss on a sale of that Partnership Certificate.
Any gain on the sale of an Partnership 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 Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership 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,
over the life of the Partnership Certificates that exceeds the aggregate cash
distributions with respect thereto, the excess will generally give rise to a
capital loss upon the retirement of the Partnership Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Partnership Trust Fund's taxable income and losses will be determined each due
period and the tax items for a particular due period will be apportioned among
the certificateholders in proportion to the principal amount of Partnership
Certificates owned by them as of the close of the last day of such due period.
As a result, a holder purchasing Partnership 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 a due period convention may not be permitted by existing
regulations. If a due period convention is not allowed or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the Partnership Trust Fund might be reallocated among the certificateholders.
The depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
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SECTION 731 DISTRIBUTIONS. In the case of any distribution to a
certificateholder, no gain will be recognized to that certificateholder to the
extent that the amount of any money distributed with respect to the Partnership
Certificate exceeds the adjusted basis of the certificateholder's interest in
the Partnership Certificate. To the extent that the amount of money distributed
exceeds the certificateholder's adjusted basis, gain will be currently
recognized. In the case of any distribution to a certificateholder, no loss will
be recognized except upon a distribution in liquidation of a certificateholder's
interest. Any gain or loss recognized by a certificateholder will be capital
gain or loss.
SECTION 754 ELECTION. In the event that a certificateholder sells its
Partnership Certificates at a profit, the purchasing certificateholder will have
a higher basis in the Partnership Certificates than the selling
certificateholder had. An opposite result will follow if the Partnership
Certificate is sold at a loss. The tax basis of the Partnership Trust Fund's
assets would not be adjusted to reflect that higher or lower basis unless the
Partnership 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 Partnership Trust Fund will not make such election.
As a result, a certificateholder might be allocated a greater or lesser amount
of Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the Partnership Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Partnership Trust Fund 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 Partnership Trust Fund and will report each
certificateholder's allocable share of items of Partnership Trust Fund income
and expense to holders and the IRS on Schedule K-1. The trustee will provide the
Schedule K-1 information to nominees that fail to provide the Partnership Trust
Fund with the information statement described below and the nominees will be
required to forward this information to the beneficial owners of the Partnership
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership 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 Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing information on
the nominee, the beneficial owners and the Partnership Certificates so held.
Such information includes (1) the name, address and taxpayer identification
number of the nominee and (2) as to each beneficial owner (x) the name, address
and identification number of that person, (y) whether that 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) information relating to Partnership Certificates that were
held, bought or sold on behalf of that person throughout the year. In addition,
brokers and financial institutions that hold Partnership Certificates through a
nominee are required to furnish directly to the trustee information as to
themselves and their ownership of Partnership Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
information statement to the Partnership Trust Fund. The information referred to
above for any calendar year must be furnished to the Partnership Trust Fund on
or before the following January 31. Nominees,
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brokers and financial institutions that fail to provide the Partnership Trust
Fund with the information described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the pooling
and servicing agreement and 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 until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
certificateholders, and a certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Partnership 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 Partnership
Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether the
Partnership 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-United States Persons, because there is no clear authority dealing with that
issue under facts substantially similar to those in this case. Although it is
not expected that the Partnership Trust Fund would be engaged in a trade or
business in the United States for these purposes, the Partnership Trust Fund
will withhold as if it were so engaged in order to protect the Partnership Trust
Fund from possible adverse consequences of a failure to withhold. The
Partnership Trust Fund expects to withhold on the portion of its taxable income
that is allocable to foreign certificateholders pursuant to Section 1446 of the
Code as if this 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. Amounts withheld will be deemed distributed to
the foreign certificateholders. Subsequent adoption of Treasury regulations or
the issuance of other administrative pronouncements may require the Partnership
Trust Fund to change its withholding procedures. In determining a holder's
withholding status, the Partnership 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 Partnership Trust Fund's income. Each foreign
holder must obtain a taxpayer identification number from the IRS and submit that
number to the Partnership 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
Partnership Trust Fund, taking the position that no taxes were due because the
Partnership 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 Partnership 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 who are foreign persons 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 that event, a foreign holder
would only be entitled 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.
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BACKUP WITHHOLDING. Distributions made on the Partnership Certificates and
proceeds from the sale of the Partnership Certificates will be subject to a
backup withholding tax of 31% if the certificateholder fails to comply with
certain identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code.
It is suggested that prospective purchasers consult their tax advisors with
respect to the tax consequences to them of the purchase, ownership and
disposition of REMIC Certificates, Notes, Grantor Trust Certificates and
Partnership Certificates, including the tax consequences under state, local,
foreign and other tax laws and the possible effects of changes in federal or
other tax laws.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences", potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion described under "Federal
Income Tax Consequences" does not purport to describe any aspect of the tax laws
of any state or other jurisdiction. Therefore, prospective investors should
consult their own tax advisors with respect to the various tax consequences of
investments in the securities offered hereunder.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
INVESTORS AFFECTED
A federal law called the Employee Retirement Income Security Act of 1974,
as amended, the Code and a variety of state laws may affect your decision
whether to invest in the securities if you are investing for:
o a pension or other employee benefit plan of employers in the private
sector that are regulated under ERISA, referred to as an ERISA plan,
o an individual retirement account or annuity, called an IRA, or a
pension or other benefit plan for self-employed individuals, called a
Keogh plan,
o a pension and other benefit plan for the employees of state and local
governments, called a government plan, or
o an insurance company general or separate account, a bank collective
investment fund or other pooled investment vehicle which includes the
assets of ERISA plans, IRAs, Keogh plans, and/or government plans.
A summary of the effects of those laws follows.
FIDUCIARY STANDARDS FOR ERISA PLANS AND RELATED INVESTMENT VEHICLES
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ERISA imposes standards of fiduciary conduct on those who are responsible
for operating ERISA plans or investing their assets. These standards include
requirements that fiduciaries act prudently in making investment decisions and
diversify investments so as to avoid large losses unless under the circumstances
it is clearly prudent not to do so. If you are a fiduciary of an ERISA plan, you
are subject to these standards in deciding whether to invest the plan's assets
in securities. You may find the full text of the applicable standards of
fiduciary conduct in section 404 of ERISA. If you are a fiduciary of an ERISA
Plan, you should consult with your advisors concerning your investment decision
in the context of section 404 of ERISA.
PROHIBITED TRANSACTION ISSUES FOR ERISA PLANS, KEOGH PLANS, IRAS AND RELATED
INVESTMENT VEHICLES
GENERAL. Transactions involving the assets of an ERISA plan, a Keogh
plan or an IRA, called prohibited transactions, may result in the imposition
of excise taxes and, in the case of an ERISA plan, civil money penalties and
certain other extraordinary remedies. A prohibited transaction occurs when a
person with a pre-existing relationship to an ERISA plan, a Keogh plan or IRA,
known as a party in interest or a disqualified person, engages in a transaction
involving the assets of the plan or IRA. You may find the laws applicable to
prohibited transactions in section 406 of ERISA and section 4975 of the Code.
There are statutory and regulatory prohibited transaction exemptions, as well as
administrative exemptions granted by the United States Department of Labor.
Prohibited transactions exemptions waive the excise taxes, civil money penalties
and other remedies for certain prohibited transactions which are structured to
satisfy prescribed conditions.
PURCHASE AND SALE OF SECURITIES. If an ERISA plan, a Keogh plan, an IRA or
a related investment vehicle acquires securities from, or sells securities to, a
party in interest or a disqualified person, a prohibited transaction may occur.
In such a case, the party in interest or disqualified person might be liable for
excise taxes unless a prohibited transaction exemption is available. Where a
prohibited transaction involves an ERISA plan or related investment vehicle, the
fiduciary who causes or permits the prohibited transaction may also be liable
for civil money penalties.
TRANSACTIONS INCIDENTAL TO THE OPERATION OF THE TRUST. Transactions
involving the assets of the trust may also give rise to prohibited transactions
to the extent that an investment in securities causes the assets of a trust to
be considered assets, commonly known as plan assets, of an ERISA plan, a Keogh
plan, an IRA or a related investment vehicle. Whether an investment in
securities will cause a trust's assets to be treated as plan assets depends on
whether the securities are debt or equity investments for purposes of ERISA. The
United States Department of Labor has issued regulations, commonly known as the
plan asset regulations, which define debt and equity investments. The plan
asset regulations appear at 29 C.F.R. ss.2510.3-101.
Under the plan asset regulations, a trust's assets will not be plan
assets of an ERISA plan, Keogh plan, IRA or related investment vehicle that
purchases securities if the securities are considered debt. For this purpose,
the securities will be debt only if they are treated as indebtedness under
applicable local law and do not have any substantial equity features. The term
substantial equity features has no definition under the plan asset regulations.
In the absence of such a definition, we cannot assure you that the securities,
either when they are issued or at any later date, will have no substantial
equity features. The prospectus supplement for a particular offering of
securities may tell you whether we believe the securities are debt for ERISA
purposes.
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To the extent that the securities do not constitute debt for purposes of
ERISA, they will constitute equity investments. In this case, an ERISA plan,
Keogh plan, IRA or related investment vehicle that acquires securities would
also acquire an undivided interest in each asset of the trust unless (1) the
trust is an operating company or a venture capital operating company as defined
in the plan asset regulations, (2) the securities are publicly offered
securities as defined in the plan asset regulations, or (3) benefit plan
investors as defined in the plan asset regulations do not own 25% or more of
the securities or any other class of equity security issued by the trust. If the
securities may be treated as an equity investment under the plan asset
regulations, the prospectus supplement may tell you whether we believe any of
these exceptions will apply.
POSSIBLE EXEMPTIVE RELIEF
The United States Department of Labor has issued prohibited transaction
exemptions, which conditionally waive excise taxes and civil money penalties
that might otherwise apply to a type of transactions.
CLASS EXEMPTIONS. The United States Department of Labor has issued
Prohibited Transaction Class Exemptions, or PTCEs, which provide exemptive
relief is available to any party to any transaction which satisfies the
conditions of the exemption. A partial listing of the PTCEs which may be
available for investments in securities follows. Each of these exemptions is
available only if specified conditions are satisfied and may provide relief for
some, but not all, of the prohibited transactions that a particular transaction
may cause. The prospectus supplement for a particular offering of securities may
tell you whether the securities themselves satisfy the conditions of these
exemptions. You should consult with your advisors regarding the specific scope,
terms and conditions of an exemption as it applies to you, as an investor,
before relying on that exemption's availability.
CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES. The following
exemptions may apply to a purchase or sale of securities between an ERISA plan,
a Keogh plan, an IRA or related investment vehicle, on the one hand, and a party
in interest or disqualified person, on the other hand:
o PTCE 84-14, which exempts certain transactions approved on behalf of
the plan by a qualified professional asset manager, or QPAM.
o PTCE 86-128, which exempts certain transactions between a plans and
certain broker-dealers.
o PTCE 90-1, which exempts certain transactions entered into by insurance
company pooled separate accounts in which plans have made investments.
o PTCE 91-38, which exempts certain transactions entered into by bank
collective investment funds in which plans have made investments.
o PTCE 96-23, which exempts certain transaction approved on behalf of a
plan by an in-house investment manager, or INHAM.
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These exemptions do not expressly address prohibited transactions that might
result from transactions incidental to the operation of a trust. We cannot
assure you that a purchase or sale of securities in reliance on one of these
exemptions will not give rise to indirect, non-exempt prohibited transactions.
CLASS EXEMPTIONS FOR PURCHASES AND SALES OF SECURITIES AND TRANSACTIONS
INCIDENTAL TO THE OPERATION OF THE TRUST. The following exemptions may apply to
a purchase or sale of securities between an ERISA plan, a Keogh plan, an IRA or
related investment vehicle, on the one hand, and a party in interest or
disqualified person, on the other hand, and may also apply to prohibited
transactions that may result from transactions incident to the operation of the
trust
o PTCE 95-60, which exempts certain transactions involving insurance
company general accounts.
o PTCE 83-1, which exempts certain transactions involving the purchase of
pass-through certificates in mortgage pool investment trusts from, and
the sale of such certificates to, the pool sponsor, as well as
transactions in connection with the servicing and operation of the
pool.
ADMINISTRATIVE EXEMPTION FOR OFFERINGS MANAGED BY CERTAIN UNDERWRITERS. The
DOL has also issued exemptions to several underwriters of securities, for
specific offerings in which that underwriter or any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with that underwriter is an underwriter, placement agent or
a manager or co-manager of the underwriting syndicate or selling group where the
trust and the offered certificates meet specified conditions. This is called the
Underwriters' Exemption. An amendment to the Underwriters' Exemptions may be
found at 62 Fed. Reg. 39021 (July 21, 1997). The Underwriters' Exemptions, as
amended, provides a partial exemption for transactions involving certificates
representing a beneficial interest in a trust and entitling the holder to
pass-through payments of principal, interest and/or other payments with respect
to the trust's assets. When applicable, the Underwriters' Exemptions applies to
the initial purchase, holding and subsequent resale of certificates, and certain
transactions incidental to the servicing and operation of the assets of such a
trust.
In order for the Underwriters' Exemptions to be available to a purchase of
securities, the trust's assets must consist solely of certain types of assets,
including obligations that bear interest or are purchased at a discount and
which are secured by single-family residential, multi-family residential and
commercial property (including certain obligations secured by leasehold
interests on commercial property); fractional undivided interests in any of
these obligations; property which had secured any of these obligations;
undistributed cash; rights under any insurance policies, third-party guarantees,
contracts of suretyship or other credit support arrangements with respect to any
of the these obligations; and a pre-funding account.
CONDITIONS FOR PRE-FUNDING ACCOUNTS. If the trust includes a pre-funding
account, the following conditions also apply:
o The ratio of the amount allocated to the pre-funding account to the
total principal amount of the securities being offered must be less
than or equal to 25%.
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o All additional obligations transferred to the trust after the closing
date of the offering of securities must meet the same terms and
conditions of eligibility for inclusion in the trust as the obligations
placed in the trust at or prior to the closing date, and these terms
and conditions must have been approved by Standard & Poor's Structured
Rating Group, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch IBCA, Inc., called the Exemption Rating Agencies.
These terms and conditions may be changed if the changes receive prior
approval of either an Exemption Rating Agency or a majority vote of
outstanding certificateholders.
o After the transfer of additional obligations to the trust, the
securities must have a credit rating from one of the Exemption Rating
Agencies at least a high as the rating assigned at the time of the
initial issuance of the securities.
o The use of pre-funding does not, in and of itself, cause a reduction of
100 basis points or more in the weighted average annual percentage
interest rate of all of the obligations included in the trust between
the time of initial issuance of the securities and the end of the
pre-funding period.
o Either the characteristics of the obligations added to the trust during
the pre-funding period must be monitored by an independent insurer or
other independent credit support provider, or an independent accountant
must furnish a letter, prepared using the same type of procedures as
were applicable to the obligations which were transferred to the trust
as of the closing date of the initial offering of securities, stating
whether or not the characteristics of the additional obligations
conform to the characteristics described in the prospectus or
prospectus supplement.
o The pre-funding period must end no later than three months, or 90 days
if later, after the closing date of the initial issuance of securities,
or earlier in certain circumstances if the unused balance in the
pre-funding account falls below a specified minimum level or an event
of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in investments which are described in the pooling and
servicing agreement, are permitted by the Exemption Rating Agencies
rating the securities and have been rated, or the obligor has been
rated, in one of the three highest generic rating categories by one of
the Exemption Rating Agencies or else are either direct obligations of,
or obligations fully guaranteed as to timely payment of principal and
interest by, the United States or any agency or instrumentality
thereof, provided that such obligations are backed by the full faith
and credit of the United States.
o The prospectus or prospectus supplement must describe the duration of
the pre-funding period.
o The trustee, or any agent with which the trustee contracts to provide
trust services, must be a substantial financial institution or trust
company experienced in trust activities and familiar with its duties,
responsibilities and liabilities with ERISA and the trustee, as
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legal owner of the assets of the trust, must enforce all the rights
created in favor of Securityholders of the trust, including ERISA
plans.
ADDITIONAL CONDITIONS FOR THE UNDERWRITERS' EXEMPTION. If the requirements
applicable to the trust and pre-funding account are met, the Underwriters'
Exemption will apply to a particular transaction only if the transaction meets
the following additional conditions:
o The acquisition of securities by an ERISA Plan, a Keogh Plan, an IRA or
a related investment vehicle is on terms, including price, that are at
least as favorable to the buyer as they would be in an arm's-length
transaction with an unrelated party.
o The rights and interests evidenced by the securities acquired by the
ERISA Plan, Keogh Plan, IRA or related investment vehicle are not
subordinated to the rights and interests evidenced by other securities
of the same trust.
o The securities acquired by the ERISA Plan, Keogh Plan, IRA or related
investment vehicle have received a rating that is in one of three
highest generic rating categories from the Exemption Rating Agencies.
o The trustee of the trust is not an affiliate of the trust sponsor, any
servicer, any underwriter, any insurer or any obligor with respect to
obligations or receivables constituting more than 5% of the aggregate
unamortized principal balance of the assets in the trust, determined on
the date of initial issuance of securities, or any affiliate of any of
these entities.
o The sum of all payments made to and retained by the underwriter(s) or
selling agents must represent not more than reasonable compensation for
underwriting the securities; the sum of all payments made to and
retained by the sponsor pursuant to the assignment of the assets to the
trust must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by all
servicers must represent not more than reasonable compensation for such
persons' services and reimbursement of such person's reasonable
expenses in connection with such services.
o The investing ERISA plan, Keogh plan, IRA or related investment vehicle
must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act of 1933, as
amended.
LIMITS ON SCOPE OF THE UNDERWRITERS' EXEMPTIONS. The Underwriters'
Exemptions will not provide complete exemptive relief even where a trust
satisfies all of the conditions applicable to the trust and all of the general
conditions are met. It does not provide relief for the purchase of securities
from, or the sale of securities to, a party in interest or disqualified person
where the party in interest or disqualified person is a fiduciary of the
purchaser or seller in which the fiduciary receives consideration for its
personal account from any party other than the purchaser or the seller.
The Underwriters' Exemptions also will not provide exemptive relief for the
purchase and holding of securities by a fiduciary on behalf of a plan sponsored
by the trust's sponsor, the trustee, any insurer, any servicer, any obligor with
respect to obligations or receivables included in the trust
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constituting more than 5% of the aggregate unamortized principal balance of the
assets in the trust, determined on the date of initial issuance of the
securities, and any affiliate of any of these entities. The Underwriters'
Exemptions generally provides exemptive relief in other cases for the purchase
of securities from, or the sale of securities to, a party in interest or
disqualified person where the party in interest or disqualified person is a
fiduciary of the purchaser or seller and is also an obligor with respect to 5%
or less of the fair market value of obligations or receivables contained in the
trust or an affiliate only when the following additional conditions are met:
o The purchaser or seller is not an ERISA plan, an IRA or a Keogh plan
that is sponsored by an underwriter or selling agent, a trust's
sponsor, the trustee, any insurer, any servicer or any obligor with
respect to obligations or receivables included in the trust
constituting more than 5% of the aggregate unamortized principal
balance of the assets in the trust, determined on the date of initial
issuance of the securities, or any affiliate of any of these entities.
o Solely in the case of initial issuance of securities, at least 50% of
each class of securities issued by the trust is acquired by persons
independent of the underwriters or selling agents, the trust's sponsor,
the trustee, any insurer, any servicer, any obligor with respect to
obligations or receivables included in the trust constituting more than
5% of the aggregate unamortized principal balance of the assets in the
trust, determined on the date of initial issuance of the securities,
and any affiliate of any of these entities.
o The purchaser's investment in each class of securities issued by the
trust does not exceed 25% of all of the securities in such class
outstanding at the time of the issuance.
o Immediately after the acquisition, no more than 25% of the purchaser's
assets are invested in securities issued by trusts containing assets
sold or serviced by an entity that has discretionary authority or over
the purchaser or renders investment advice to the purchaser for a fee.
The Underwriters' Exemptions provide relief for transactions in connection with
the servicing, operation and management of a trust only if:
o The transactions are carried out in accordance with the terms of a
binding pooling and servicing agreement.
o The pooling and servicing agreement is provided to, or fully described
in the prospectus or offering memorandum provided to, investing ERISA
plans, Keogh plans, IRAs and related investment vehicles before they
purchase securities issued by the trust.
STATUTORY EXEMPTION FOR INSURANCE COMPANY GENERAL ACCOUNTS. In addition to
the PTCEs and the Underwriters' Exemptions, a temporary statutory exemption may
be available if you are investing on behalf of an insurance company general
account that includes plan assets. This exemption appears in section 401(c) of
ERISA. Section 401(c) of ERISA requires the United States Department of Labor to
issue regulations defining when an insurance company general account will be
deemed to include plan assets and, hence, be subject to the ERISA prohibited
transaction rules. Generally, until 18 months after the issuance of such
regulations, no person will be subject to
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liability for prohibited transactions that result from the inclusion of plan
assets in an insurance company general account. If you are investing on behalf
of an insurance company general account, section 401(c) generally provides an
exemption for your purchases and sales of securities, as well as prohibited
transactions resulting from transactions incident to the operation of the trust,
until 18 months after the issuance of regulations. This will be the case as long
as you have not acted to avoid the regulations or committed a breach of
fiduciary responsibilities which would also constitute a violation of federal or
state criminal law. If you are investing on behalf of an insurance company
general account, we cannot assure that the purchase or sale of securities, the
continued holding of securities previously purchased, or transactions incidental
to the operation of the trust, more than 18 months after the issuance of final
regulations would qualify for further statutory exemptive relief.
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the securities or, even if all the conditions
specified therein were satisfied, that any such exemption would apply to
transactions involving the trust fund. Prospective Plan investors should consult
with their legal counsel concerning the impact of ERISA and the Code and the
potential consequences to their specific circumstances prior to making an
investment in the securities. Neither the Depositor, the Trustee, the Servicer
nor any of their respective affiliates will make any representation to the
effect that the securities satisfy all legal requirements with respect to the
investment therein by Plans generally or any particular Plan or to the effect
that the securities are an appropriate investment for Plans generally or any
particular Plan.
GOVERNMENT PLANS
Government plans are generally not subject to the fiduciary standards
of ERISA or the prohibited transaction rules of ERISA or the Code. However, many
states have enacted laws which established standards of fiduciary conduct, legal
investment rules, or other requirements for investment transactions involving
the assets of government plans. If you are considering investing in securities
on behalf of a government plan, you should consult with your advisors regarding
the requirements of applicable state law.
REQUIRED DEEMED REPRESENTATIONS OF INVESTORS
Any purchaser of the Certificates will be deemed to have represented that
either (a) it is not an ERISA Plan, an IRA or a Keogh Plan and is not purchasing
such securities by or on behalf of or with plan assets of an ERISA Plan, an IRA
or a Keogh Plan or (b) the purchase of any such securities by or on behalf of or
with plan assets of an ERISA Plan, an IRA or a Keogh Plan is permissible under
applicable law, will not result in any non-exempt prohibited transaction under
ERISA or Section 4975 of the Code and will not subject the Servicer, the
Depositor or the Trustee to any obligation in addition to those undertaken in
the related Agreement. A fiduciary of a Plan or any person investing plan assets
to purchase securities must make its own determination that the conditions for
purchase will be satisfied with respect to such securities.
THIS DISCUSSION IS A GENERAL DISCUSSION OF SOME OF THE RULES WHICH APPLY TO
ERISA PLANS, KEOGH PLANS, IRAS, GOVERNMENT PLANS AND THEIR RELATED INVESTMENT
VEHICLES. PRIOR TO MAKING AN INVESTMENT IN SECURITIES, PROSPECTIVE PLAN
INVESTORS SHOULD CONSULT WITH THEIR LEGAL AND OTHER
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ADVISORS CONCERNING THE IMPACT OF ERISA AND THE CODE AND, PARTICULARLY IN THE
CASE OF GOVERNMENT PLANS AND RELATED INVESTMENT VEHICLES, ANY ADDITIONAL STATE
LAW CONSIDERATIONS, AND THE POTENTIAL CONSEQUENCES IN THEIR SPECIFIC
CIRCUMSTANCES.
LEGAL INVESTMENT
The prospectus supplement for each series of securities will specify which
classes of securities of the series, if any, will constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984. Any class of securities that is not rated in one of the two highest rating
categories by one or more nationally recognized statistical rating agencies or
that represents an interest in a trust fund that includes junior mortgage loans
will not constitute mortgage related securities for purposes of SMMEA Mortgage
related securities are legal investments 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 persons, trusts, corporations, partnerships, associations,
business trusts and business entities, including depository institutions,
insurance companies and pension funds created pursuant to or existing under the
laws of the United States or of any state, the authorized investments of which
are subject to state regulation. Under SMMEA, if a state enacted legislation
prior to October 3, 1991 specifically limiting the legal investment authority of
any entities with respect to mortgage related securities, the securities would
constitute legal investments for entities subject to that legislation only to
the extent provided in that legislation. SMMEA provides, however, that in no
event will the enactment of any legislation of this kind 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 that contractual commitment was made or the securities were acquired prior to
the enactment of that 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 those securities, and
national banks may purchase those 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 regulations as the
applicable federal regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination Council
issued a revised supervisory policy statement applicable to all depository
institutions, setting forth guidelines for investments in high-risk mortgage
securities. The 1998 policy statement has been adopted by the Federal Reserve
Board, the Office of the Comptroller of the Currency, the FDIC, the National
Credit Union Administration and the Office of Thrift Supervision with an
effective date of May 26, 1998. The 1998 policy statement rescinds a 1992 policy
statement that had required, prior to purchase, a depository institution 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. The 1998 policy statement eliminates
former constraints on investing in certain high-risk mortgage derivative
products and substitutes broader guidelines for evaluating and monitoring
investment risk.
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On December 1, 1998, the Office of Thrift Supervision issued Thrift
Bulletin 13a, entitled, "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities", which is applicable to thrift
institutions regulated by the OTS. Thrift Bulletin 13a has an effective date of
December 1, 1998. One of the primary purposes of Thrift Bulletin 13a is to
require thrift institutions, prior to taking any investment position, to (1)
conduct a pre-purchase portfolio sensitivity analysis for any significant
transaction involving securities or financial derivatives and (2) conduct a
pre-purchase price sensitivity analysis of any complex security or financial
derivative. For the purposes of Thrift Bulletin 13a, complex security includes
among other things any collateralized mortgage obligation or REMIC security,
other than any plain vanilla mortgage pass-through security, that is, securities
that are part of a single class of securities in the related pool, that are
non-callable and do not have any special features. Accordingly, the offered
securities may be viewed as complex securities. The OTS recommends that while a
thrift institution should conduct its own in-house pre-acquisition analysis, it
may rely on an analysis conducted by an independent third-party as long as
management understands the analysis and its key assumptions. Further, Thrift
Bulletin 13a recommends that the use of complex securities with high price
sensitivity be limited to transactions and strategies that lower a thrift
institution's portfolio interest rate risk. Thrift Bulletin 13a warns that an
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by the
OTS examiners as an unsafe and unsound practice.
Prospective investors in the securities, including in particular the
classes of securities that do not constitute mortgage related securities for
purposes of SMMEA should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets. INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN DETERMINING WHETHER
AND TO WHAT EXTENT THE SECURITIES CONSTITUTE LEGAL INVESTMENTS FOR THOSE
INVESTORS OR ARE SUBJECT TO INVESTMENT, CAPITAL OR OTHER RESTRICTIONS, AND, IF
APPLICABLE, WHETHER SMMEA HAS BEEN OVERRIDDEN IN ANY JURISDICTION RELEVANT TO
THAT INVESTOR.
METHODS OF DISTRIBUTION
The securities offered hereby and by the related prospectus supplements
will be offered in series through one or more of the methods described in the
paragraph below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the depositor from the sale.
The depositor intends that securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of the securities of a
particular series may be made through a combination of two or more of these
methods. These methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the depositor with institutional investors through
dealers; and
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3. By direct placements by the depositor with institutional investors.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, the securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at fixed
public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. The underwriters may be broker-dealers
affiliated with the depositor whose identities and relationships to the
depositor will be as set forth in the related prospectus supplement. The
managing underwriter or underwriters with respect to the offer and sale of the
securities of a particular series will be set forth on the cover of the
prospectus supplement relating to the series and the members of the underwriting
syndicate, if any, will be named in the prospectus supplement.
In connection with the sale of the securities offered, underwriters may
receive compensation from the depositor or from purchasers of such securities in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the securities may be deemed to be
underwriters in connection with the securities, and any discounts or commissions
received by them from the depositor and any profit on the resale of offered
securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale of
offered securities of any series will provide that the obligations of the
underwriters will be subject to conditions precedent, that the underwriters will
be obligated to purchase all the securities if any are purchased, other than in
connection with an underwriting on a best efforts basis, and that, in limited
circumstances, the depositor will indemnify the several underwriters and the
underwriters will indemnify the depositor against certain civil liabilities,
including liabilities under the Securities Act of 1933 or will contribute to
payments required to be made in respect thereof.
The prospectus supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of the offering
and any agreements to be entered into between the depositor and purchasers of
offered securities of the series.
The depositor anticipates that the securities offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of offered securities, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be underwriters
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of the offered securities. Holders of offered securities should
consult with their legal advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters in connection with the securities will be passed upon
for the depositor by Thacher Proffitt & Wood, New York, New York.
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FINANCIAL INFORMATION
The depositor has determined that its financial statements are not material
to the offering made hereby. Any prospective purchaser that desires to review
financial information concerning the depositor will be provided by the depositor
on request with a copy of the most recent financial statements of the depositor.
RATING
It is a condition to the issuance of any class of securities that they
shall have been rated not lower than investment grade, that is, in one of the
four highest rating categories, by at least one nationally
recognized statistical rating organization.
Any ratings on the securities address the likelihood of receipt by the
holders thereof of all collections on the underlying mortgage assets to which
such holders are entitled. These ratings address the structural, legal and
issuer-related aspects associated with the securities, the nature of the
underlying mortgage assets and the credit quality of the guarantor, if any. The
ratings do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which prepayments might differ from
those originally anticipated. As a result, securityholders might suffer a lower
than anticipated yield, and, in addition, holders of Strip Securities in extreme
cases might fail to recoup their initial investments.
AVAILABLE INFORMATION
The depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission. Reports and other
information filed by the depositor can be inspected and copied at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional
Offices located as follows: Chicago Regional Office, 500 West Madison, 14th
Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of this material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's Web site (http:\\www.sec.gov). The depositor does not intend to
send any financial reports to securityholders.
This prospectus does not contain all of the information set forth in the
registration statement, of which this prospectus forms a part, and exhibits
thereto which the depositor has filed with the Commission under the securities
Act of 1933 and to which reference is hereby made.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated into this prospectus by reference all documents and
reports filed or caused to be filed by the depositor with respect to a trust
fund under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, prior to the termination of the offering of securities offered hereby
evidencing interest in a trust fund. 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 securities offered
hereby, a copy of any or all documents or reports incorporated herein by
reference, in each case to the extent those documents or reports relate to one
or more of the classes of those offered securities, other than the exhibits to
those documents (unless the exhibits are specifically incorporated by reference
in the documents). Requests to the depositor should be directed in writing to
its principal executive office at 18400 Von Karman, Suite 1000, Irvine,
California 92612, Attention: Secretary, or by telephone at 949-440-7030. The
depositor has determined that its financial statements are not material to the
offering of any securities offered hereby.
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GLOSSARY
ACCRUAL SECURITIES: A class of securities as to which accrued interest or a
portion thereof will not be distributed but rather will be added to the
principal balance of the security on each distribution date in the manner
described in the related prospectus supplement.
APPLICABLE FEDERAL RATE: A rate based on the average of current yields on
Treasury securities, which rate is computed and published monthly by the IRS.
ARM LOAN: A mortgage loan with an interest rate that adjusts periodically, with
a corresponding adjustment in the amount of the monthly payment, to equal the
sum of a fixed percentage amount and an index.
CALL CLASS: The holder of a non-offered class of securities that has the right,
at its discretion, to terminate the related trust fund on and effect early
retirement of the securities of such series in the manner described under
"Description of the Securities--Termination" in this prospectus.
CERCLA: The Comprehensive Environmental Response, Compensation and Liability
Act, as amended.
CLEAN-UP CALL: The right of the party entitled to effect a termination of a
trust fund upon the aggregate principal balance of the outstanding trust fund
assets for the series at that time being less than the percentage, as specified
in the related prospectus supplement, of the aggregate principal balance of the
trust fund assets at the cut-off date for that series and which percentage will
be between 25% and 0%.
CLOSING DATE: With respect to any series of securities, the date on which the
securities are issued.
CODE: The Internal Revenue Code of 1986, as amended.
COMMISSION: The Securities and Exchange Commission.
CPR: The Constant Prepayment Rate model, which assumes that the outstanding
principal balance of a pool of mortgage loans prepays at a specified constant
annual rate. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate.
CRIME CONTROL ACT: The Comprehensive Crime Control Act of 1984.
DIDMC: The Depository Institutions Deregulation and Monetary Control Act of
1980.
DOL: The U.S. Department of Labor.
DOL REGULATIONS: The regulations promulgated by the U.S. Department of Labor at
29 C.F.R. ss.2510. 3-101
DUE PERIOD: The second day of the month immediately preceding the month in which
the distribution date occurs, or the day after the cut-off date in the case of
the first Due Period, and
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ending on the first day of the month of the related distribution date, unless
the prospectus supplement specifies otherwise.
EQUITY CERTIFICATES: Where the issuer is an owner trust, the certificates
evidencing ownership of the trust fund.
ERISA PERMITTED INVESTMENTS: The types of investments permitted by the rating
agencies named in the Prohibited Transaction Exemption 91-23 issued by the DOL
in which funds in a pre-funding account may be invested.
FTC RULE: The "Holder in the Due Course" Rule of the Federal Trade Commission.
GARN-ST. GERMAIN ACT: The Garn-St. Germain Depositor Institutions Act of 1982.
GRANTOR TRUST CERTIFICATE: A certificate representing an interest in a Grantor
Trust Fund.
GRANTOR TRUST FRACTIONAL CERTIFICATE: A Grantor Trust Certificate representing
an undivided equitable ownership interest in the principal of the mortgage loans
constituting the related Grantor Trust Fund, together with interest on the
Grantor Trust Certificates at a pass-through rate.
GRANTOR TRUST STRIP CERTIFICATE: A certificate representing ownership of all or
a portion of the difference between interest paid on the mortgage loans
constituting the related Grantor Trust Fund (net of normal administration fees
and any retained interest of the depositor) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to the
Grantor Trust Fund. A Grantor Trust Strip Certificate may also evidence a
nominal ownership interest in the principal of the mortgage loans constituting
the related Grantor Trust Fund.
GRANTOR TRUST FUND: A trust fund as to which no REMIC election will be made and
which qualifies as a grantor trust within the meaning of Subpart E, part I,
subchapter J of Chapter 1 of the Code.
HIGH COST LOAN: A mortgage loan subject to the Home Ownership and Equity
Protection Act of 1994.
HOMEOWNERSHIP ACT: The Home Ownership and Equity Protection Act of 1994.
INSURANCE PROCEEDS: Proceeds received with respect to a mortgage loan under any
hazard insurance policy, special insurance policy, primary insurance policy, FHA
insurance policy, VA guarantee, bankruptcy bond or mortgage pool insurance
policy, to the extent such proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with normal servicing
procedures.
LIQUIDATED LOAN: A defaulted mortgage loan that is finally liquidated, through
foreclosure sale or otherwise.
LIQUIDATION PROCEEDS: All amounts, other than Insurance Proceeds, received and
retained in connection with the liquidation of a defaulted mortgage loan, by
foreclosure or otherwise.
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LOCKOUT DATE: The date of expiration of the Lockout Period with respect to a
mortgage loan.
LOCKOUT PERIOD: The period specified in a mortgage note during which prepayment
of the mortgage loan is prohibited.
MORTGAGE: The mortgage, deed of trust or similar instrument securing a mortgage
loan.
NBRC: The National Bankruptcy Review Commission.
NCUA: The National Credit Union Administration.
NONRECOVERABLE ADVANCE: An advance made or to be made with respect to a mortgage
loan which the master servicer determines is not ultimately recoverable from
Related Proceeds.
OID REGULATIONS: The rules governing original issue discount that are set forth
in Sections 1271-1273 and 1275 of the Code and in the related Treasury
regulations.
PARTNERSHIP CERTIFICATE: A certificate representing an interest in a Partnership
Trust Fund.
PARTNERSHIP TRUST FUND: A trust fund as to which no REMIC election will be made
and which qualifies as a partnership within the meaning of subchapter K of
Chapter 1 of the Code.
PLANS: Employee pension and welfare benefit plans subject to ERISA and
tax-qualified retirement plans described in Section 401(a) of the Code or
Individual Retirement Accounts described in Section 408 of the Code.
PREPAYMENT ASSUMPTION: With respect to a REMIC Regular Certificate or a Grantor
Trust Certificate, the assumption as to the rate of prepayments of the principal
balances of mortgage loans held by the trust fund used in pricing the initial
offering of that security.
PREPAYMENT PERIOD: The calendar month immediately preceding the month in which
the distribution date occurs, unless the prospectus supplement specifies
otherwise.
PTCE: Prohibited Transaction Class Exemption
PURCHASE PRICE: As to any mortgage loan, an amount equal to the sum of (1) the
unpaid principal balance of the mortgage loan, (2) unpaid accrued interest on
the Stated Principal Balance at the rate at which interest accrues on the
mortgage loan, net of the servicing fee and any retained interest, from the date
as to which interest was last paid to the calendar month in which the relevant
purchase is to occur, (3) any unpaid servicing fees and unreimbursed servicing
expenses payable or reimbursable to the master servicer with respect to that
mortgage loan, (4) any unpaid retained interest with respect to that mortgage
loan, (5) any realized losses incurred with respect to that mortgage loan and
(6) if applicable, any expenses reasonably incurred or to be incurred by the
master servicer or the trustee in respect of the breach or defect giving rise to
a purchase obligation.
RECORD DATE: The last business day of the month preceding the month in which a
distribution date occurs, unless the prospectus supplement specifies otherwise.
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RELATED PROCEEDS: Recoveries on a mortgage loan related to amounts which the
master servicer has previously advanced to the related trust fund.
RELIEF ACT: The Soldiers' and Sailors' Civil Relief Act of 1940.
REMIC: A real estate mortgage investment conduit as defined in Sections 860A
through 860G of the Code.
REMIC CERTIFICATES: Certificates evidencing interests in a trust fund as to
which a REMIC election has been made.
REMIC PROVISIONS: Sections 860A through 860G of the Code.
REMIC REGULAR CERTIFICATE: A REMIC Certificate designated as a regular interest
in the related REMIC.
REMIC RESIDUAL CERTIFICATE: A REMIC Certificate designated as a residual
interest in the related REMIC.
REMIC REGULATIONS: The REMIC Provisions and the related Treasury regulations.
RETAINED INTEREST: A portion of the interest payments on a trust fund asset that
may be retained by the depositor or any previous owner of the asset.
RICO: The Racketeer Influenced and Corrupt Organizations statute.
SAIF: The Savings Association Insurance Fund.
SCHEDULED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, the unpaid principal balance thereof as of the date of determination,
reduced by the principal portion of all monthly payments due but unpaid as of
the date of determination.
SENIOR/SUBORDINATE SERIES: A series of securities of which one or more classes
is senior in right of payment to one or more other classes to the extent
described in the related prospectus supplement.
SINGLE FAMILY PROPERTIES: One- to four-family residential properties including
detached and attached dwellings, townhouses, rowhouses, individual condominium
units, individual units in planned-unit developments and individual units in de
minimus planned-unit developments.
SPECIAL HAZARD SUBORDINATION AMOUNT: The amount of any Special Hazard Realized
Loss that is allocated to the subordinate securities of a series.
STATED PRINCIPAL BALANCE: As to any mortgage loan or manufactured housing
contract, the principal balance of the mortgage loan or manufactured housing
contract as of the cut-off date, after application of all scheduled principal
payments due on or before the cut-off date, whether or not received, reduced by
all amounts, including advances by the master servicer, allocable to principal
that are distributed to securityholders on or before the date of determination,
and as further reduced
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to the extent that any realized loss thereon has been, or had it not been
covered by a form of credit support, would have been, allocated to one or more
classes of securities on or before the determination date.
STRIP SECURITIES: A class of securities which are entitled to (a) principal
distributions, with disproportionate, nominal or no interest distributions, or
(b) interest distributions, with disproportionate, nominal or no principal
distributions.
STRIPPED INTEREST: The distributions of interest on a Strip Security with no or
a nominal principal balance.
UNITED STATES PERSON: A citizen or resident of the United States; a corporation
or partnership, including an entity treated as a corporation or partnership for
federal income tax purposes, created or organized in, or under the laws of, the
United States or any state thereof or the District of Columbia, except, in the
case of a partnership, to the extent provided in Treasury regulations; 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. To the extent prescribed in regulations by the Secretary of the Treasury,
which have not yet been issued, a trust which was in existence on August 20,
1996, other than a trust treated as owned by the grantor under subpart E of part
I of subchapter J of chapter 1 of the Code, and which was treated as a United
States person on August 20, 1996 may elect to continue to be treated as a United
States person notwithstanding the previous sentence.
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NEW CENTURY HOME EQUITY LOAN TRUST, SERIES 1999-NCD
$217,580,000
ASSET BACKED PASS-THROUGH CERTIFICATES
NEW CENTURY MORTGAGE CORPORATION
ORIGINATOR AND MASTER SERVICER
----------------------
NC CAPITAL CORPORATION
SELLER
----------------------
NEW CENTURY MORTGAGE SECURITIES, INC.
DEPOSITOR
----------------------
PROSPECTUS SUPPLEMENT
--------------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the New Century Home Equity Loan Trust, Series
1999-NCD, Asset Backed Pass-Through Certificates in any state where the offer is
not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the New Century Home Equity Loan Trust, Series 1999-NCD, Asset
Backed Pass-Through Certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the New Century Home Equity Loan
Trust, Series 1999-NCD, Asset Backed Pass-Through Certificates will be required
to deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
December 17, 1999
<PAGE>
$415,715,000 (APPROXIMATE)
NEW CENTURY MORTGAGE SECURITIES, INC.
DEPOSITOR
NEW CENTURY HOME EQUITY LOAN TRUST, SERIES 2000-NC1
ASSET BACKED PASS-THROUGH CERTIFICATES
PROSPECTUS SUPPLEMENT
DATED MARCH 22, 2000
MASTER SERVICER
SALOMON SMITH BARNEY
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT IN
ANY STATE WHERE THE OFFER IS NOT PERMITTED.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered by this prospectus supplement
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the offered certificates, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
until June 20, 2000.
