<PAGE>
As filed with the Securities and Exchange Commission on December 17, 1999
Registration No. 333-87431
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
PRE-EFFECTIVE AMENDMENT
NO. 1 TO
REGISTRATION STATEMENT
ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
________________
NATIONAL MORTGAGE SECURITIES CORPORATION
(Registrant)
(Exact name of registrant as specified in its charter)
Virginia Applied For
(State of Incorporation) (I.R.S. Employee I.D. No.)
909 East Main Street
Richmond, Virginia 23219
(804) 649-3952
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
____________________________
JOHN WRIGHT Copy to:
909 East Main Street EDWARD L. DOUMA
Richmond, Virginia 23219 Hunton & Williams
(804) 649-3952 Riverfront Plaza, East Tower
(804) 649-0990 (telecopy) 951 East Byrd Street
(Name, address, including zip Richmond, Virginia 23219-4074
code and telephone number, (804) 788-8200
including area code, of (804) 788-8218 (telecopy)
agent for service)
_______________________
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
_______________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
Proposed Proposed
Maximum Maximum
Title of Securities Amount to be Offering Price Aggregate Amount of
Being Registered Registered* Per Unit* Offering Price* Registration Fee
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pass-Through Certificates and $300,000,000 100% $300,000,000 $79,214**
Asset-Backed Notes
======================================================================================================================
</TABLE>
* Estimated solely for calculating the registration fee pursuant to Rule
457(a).
** $278 of which previously has been paid with the original filing on
September 20, 1999.
__________________________________
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<PAGE>
Prospectus Supplement to Prospectus dated ______ __, 1999
$________________
Asset Backed Notes, Series 1999-___
NMSC Owner Trust 1999-___
Issuer
National Mortgage Securities Corporation
Depositor
[Asset Seller]
Seller and Servicer
_________________________
. Interest Rate [One Month LIBOR] plus _____%
. Interest Paid [Monthly]
. First Interest Payment Date [Date]
. Principal Due [Date]
. Price to Public [ ]%
. Underwriting Discount [ ]%
. Proceeds to Issuer $________
The trust initially will consist of one- to four-family residential first
and junior lien mortgage loans, multifamily residential mortgage loans,
cooperative apartment loans and manufactured housing installment sales
contracts with an aggregate principal balance of $___________. The underlying
assets are not insured or guaranteed by any governmental agency.
Investing in the notes involves risks. See "Risk Factors" on page S-__ of this
prospectus supplement and page 1 of the prospectus.
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus supplement or the
prospectus to which it relates is truthful or complete. Any representation to
the contrary is a criminal offense.
Delivery of your notes will be made through The Depository Trust Company
on or about ______ __, 1999, against payment in immediately available funds.
[Underwriters]
Prospectus Supplement dated _______ __, 1999.
<PAGE>
Important notice about the information we present in this
prospectus supplement and in the accompanying prospectus.
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
We provide information to you about the notes in two separate documents
that progressively provide more detail: the accompanying prospectus, which
provides general information, some of which may not apply to your notes and this
prospectus supplement, which describes the specific terms of your notes.
Your notes will not be listed on any securities exchange.
Although the underwriters intend to make a secondary market in your notes,
it is not required to do so. A secondary market for your notes may not develop.
If one does develop, it may not continue or provide sufficient liquidity.
[We have filed preliminary information regarding the trust's assets and the
notes with the SEC. The information contained in this document supersedes all of
that preliminary information, which was prepared by the underwriters for
prospective investors.]
Until ____________ all dealers that sell the offered notes, whether or not
participating in this offering, may be required to deliver a prospectus and
prospectus supplement. This requirement is in addition to the dealer's
obligation to deliver a prospectus and prospectus supplement when acting as
underwriters with respect to their unsold allotments or subscriptions.
This prospectus supplement and the accompanying prospectus include cross-
references to captions in these materials where you can find further related
discussions. The following table of contents and the table of contents included
in the accompanying prospectus provide the pages on which these captions are
located.
<PAGE>
Table of Contents
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of Terms................................................................ S-1
Risk Factors.................................................................... S-5
Description of the Offered Notes................................................ S-6
General...................................................................... S-6
Book-Entry Notes............................................................. S-7
Collection of Payments on Assets............................................. S-8
Realized Losses on Liquidated Loans.......................................... S-9
Distributions................................................................ S-9
Overcollateralization........................................................ S-12
Reserve Fund................................................................. S-13
Financial Guaranty Insurance Policy.......................................... S-13
The Asset Pool.................................................................. S-13
General...................................................................... S-13
Fixed Rate Assets............................................................ S-14
Adjustable Rate Assets....................................................... S-15
Selected Data................................................................ S-17
Underwriting Guidelines...................................................... S-25
Conveyance of Assets......................................................... S-25
Conveyance of Subsequent Assets and
Pre-Funding Account........................................................ S-28
Maturity and Prepayment Considerations.......................................... S-29
Weighted Average Lives of the Offered
Notes...................................................................... S-29
Modeling Assumptions and Prepayment
Model Tables............................................................... S-30
Pre-Funding................................................................... S-34
Factors Affecting Prepayments................................................. S-35
Yield on the Offered Notes.................................................... S-35
The Trust....................................................................... S-37
General....................................................................... S-37
The Trustee................................................................... S-38
Optional Termination.......................................................... S-39
Auction Sale.................................................................. S-40
Termination of the Agreement.................................................. S-40
Voting Rights................................................................. S-41
Reports to Noteholders........................................................ S-41
Servicing of the Assets......................................................... S-43
The Servicer.................................................................. S-43
Servicing Portfolio........................................................... S-43
Delinquency and Loan
Loss/Repossession Experience............................................... S-43
Collection and Other Servicing
Procedures................................................................. S-45
Servicing Compensation and Payment of
Expenses................................................................... S-46
Advances...................................................................... S-47
Successors to Servicer, Delegation of
Duties..................................................................... S-47
Use of Proceeds................................................................. S-48
Underwriting.................................................................... S-48
Legal Matters................................................................... S-49
ERISA Considerations............................................................ S-49
Ratings......................................................................... S-52
Legal Investment Considerations................................................. S-52
Prospectus
Risk Factors....................................................................
Description of the Securities...................................................
General......................................................................
Book-Entry Procedures........................................................
Allocation of Collections from the Assets....................................
Valuation of Mortgage Assets.................................................
Optional Redemption or Termination...........................................
Maturity and Prepayment Considerations..........................................
Yield Considerations............................................................
The Trusts......................................................................
General......................................................................
Assignment of Trust Assets...................................................
The Trust Assets.............................................................
Pre-Funding..................................................................
Asset Proceeds Account.......................................................
Distribution Account.........................................................
Reserve Funds or Accounts....................................................
Mortgage Insurance on the Mortgage Assets....................................
Hazard Insurance on the Mortgage Loans.......................................
Mortgage Bankruptcy Insurance on the.........................................
MortgageAssets...............................................................
Other Insurance..............................................................
Delivery of Additional Assets................................................
Investment of Funds..........................................................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Sale and Servicing of the Mortgage Assets.......................................
General.......................................................................
Representations and Warranties................................................
Origination of the Mortgage Assets............................................
Payment on Mortgage Assets....................................................
Advances......................................................................
Collection and Other Servicing Procedures.....................................
Maintenance of Insurance Policies; Insurance..................................
Claims and Other Realization upon............................................
Defaulted Mortgage Assets....................................................
Evidence as to Servicing Compliance...........................................
The Agreements..................................................................
Master Servicer or Securities Administrator...................................
The Trustee...................................................................
Rights upon Event of Default..................................................
Events of Default.............................................................
Reports to Securityholders....................................................
Termination...................................................................
Certain Legal Aspects of Mortgage Loans.........................................
General.......................................................................
The Manufactured Housing Installment Sales....................................
Contracts....................................................................
Cooperative Loans.............................................................
Repossesion with Respect to Contracts.........................................
Realizing upon Cooperative Loan Security......................................
Junior Mortgages..............................................................
Consumer Protection Laws with respect to......................................
Contracts.....................................................................
Rights of Reinstatement and Redemption........................................
Leases and Rents..............................................................
Anti-Deficiency Legislation and Other.........................................
Limitations on Lenders........................................................
Environmental Considerations..................................................
"Due-on Sale" Clauses.........................................................
Enforceability of Prepayment and Late Payment.................................
Fees.......................................................................
Equitable Limitations on Remedies.............................................
Secondary Financing: Due-on-Encumberance......................................
Provisions....................................................................
The Depositor...................................................................
Use of Proceeds.................................................................
Federal Income Tax Consequences.................................................
General.......................................................................
REMIC Certificates............................................................
Tax Treatment of Residual Certificates........................................
Taxation of Certain Foreign Holders of REMIC..................................
Certificates..................................................................
Reporting and Tax Administration..............................................
Non-REMIC Certificates........................................................
State Tax Considerations........................................................
ERISA Considerations............................................................
Legal Investment................................................................
Plan of Distribution............................................................
Rating.......................................................................
Reports to Securityholders......................................................
Additional Information..........................................................
Financial Information...........................................................
Incorporation of Certain Documents by Reference.................................
Index of Terms..................................................................
</TABLE>
<PAGE>
Summary of Terms
. This summary highlights selected information from this document and does not
contain all of the information that you need to consider in making your
investment decision. To understand more completely all of the terms of an
offering of the notes, read carefully this entire document and the prospectus.
. This summary provides an overview of calculations, cash flows and other
information to aid your understanding and is qualified by the full description
of this information in this prospectus supplement and the prospectus.
Information about Your Trust
Your notes are being offered by NMSC Trust 1999-___, which will be established
by National Mortgage Securities Corporation, a Virginia corporation. National
Mortgage maintains its principal office at 909 Main Street, Richmond, Virginia
23219. Its telephone number is (804) ___-____. These assets will secure payment
of your notes.
The indenture trustee is ________________. The indenture trustee's corporate
trust office's address is ____________________. Its telephone number is
_____________.
The owner trustee is ________________. The owner trustee's corporate trust
office's address is ____________________. Its telephone number is
_____________.
Neither your notes nor the underlying assets will be guaranteed or insured by
any government agency [or any other insurer].
Issuance of your notes is scheduled for ________ __, 1999.
Credit Enhancement and Subordination
[For any payment date, the overcollateralization amount will be the amount by
which the aggregate principal balance of the assets exceeds the unpaid principal
balances of the notes. On the closing date, the overcollateralization amount
will be _____% of the initial principal balance of the notes. This amount is
expected to increase as any interest received on the assets that exceeds
interest due on the notes will be applied to the principal balance of the notes.
The overcollateralization amount will be capped at _____% of the principal
balance of the notes.]
[Your notes will be secured in part by a reserve fund, which will provide monies
in the event that principal and interest received on the assets is less than the
payment due on the notes. The fund will not be an asset of the trust. On the
closing date, the reserve fund will be $______.]
[In addition, a financial guaranty insurance policy from __________ will
irrevocably and unconditionally guaranty to the indenture trustee timely payment
of interest and ultimate payment of principal due on your notes. This policy may
not be canceled for any reason. The financial guaranty insurance policy does not
guaranty any particular rate of prepayments, nor does it provide funds to redeem
your notes.]
S-1
<PAGE>
See "Description of the Offered Notes" in this prospectus supplement.
Distributions of Interest and Principal
In the ordinary course, monies received on the assets will be applied first to
distributions of interest on the notes and then to principal.
See "Description of the Offered Notes" in this prospectus supplement.
Servicing of The Assets of Your Trust
_____________ will act as servicer for the assets. It will make advances in
respect of delinquent payments on the assets and in respect of liquidation
expenses and taxes and insurance premiums not paid by an obligor on a timely
basis, if recoverable.
The servicer will be entitled to a monthly fee for servicing the assets equal to
[____]% per annum of the scheduled principal balance of the assets.
See "Servicing of the Assets" in this prospectus supplement.
The Assets Contained in Your Trust
The primary assets of your trust are
. one- to four-family residential first and junior lien mortgage loans,
. multifamily residential mortgage loans,
. cooperative apartment loans, and
. manufactured housing installment sales contracts.
The total number of assets is ______. Their total principal balance is
approximately $______. Of the total number of assets, ______ are fixed-rate
assets and ______ are variable-rate assets.
See "The Asset Pool" in this prospectus supplement.
[Your Trust Contains A Pre-Funding Account
A portion of your trust's initial assets will consist of cash in a pre-funding
account. The pre-funded amount initially will equal the difference between the
principal balance of the notes and the principal balance of the initial assets.
Funds in the pre-funding account may be used to purchase additional assets
during the [first 3 months] following the closing date. These additional assets
will have characteristics very similar to the existing assets. If all of the
pre-funded amount is not used to acquire pre-funded assets, then amounts left in
the pre-funding account after the [3-month] period will be distributed to you as
a principal prepayment. Interest income earned on the pre-funded amount during
the pre-funding period will not be allocated to you, but will belong to National
Mortgage.
See "The Asset Pool - Conveyance of Assets" and " - Conveyance of Subsequent
Assets and Pre-Funding" in this prospectus supplement.]
The Final Scheduled Distribution Date
The final scheduled distribution date for the offered notes is the distribution
date occurring in ________. Because the rate of principal distributions on the
notes will depend upon the rate of principal payments, including prepayments, on
the assets, the actual final
S-2
<PAGE>
distribution on the notes could occur significantly earlier than this date.
Optional Termination of Your Trust by The Servicer
The servicer may terminate the trust by buying all of the assets at any time
when the current aggregate principal balance of the notes is less than [10]% of
their original amount. The termination price paid for your trust's assets during
an optional termination may, in some circumstances, be less than the outstanding
principal balance and unpaid interest of the notes.
See "The Trust--Optional Termination" in this prospectus supplement.
Auction Sale of Your Trust's Assets
If the servicer does not exercise its optional termination rights when it is
initially permitted to do so, the indenture trustee will solicit bids on the
assets remaining in the trust. The termination price paid for your trust's
assets during an auction sale may, in some circumstances, be less than the
outstanding principal balance and unpaid interest of the notes.
See "The Trust -- Auction Sale" in this prospectus supplement.
Federal Income Tax Consequences to You
The notes will be debt for federal income tax purposes. Therefore, interest paid
or accrued will be taxable to you. By acceptance of your notes, you will be
deemed to have agreed to treat your certificate as a debt instrument for
purposes of federal and state income tax, franchise tax, and any other tax
measured by income.
See "Federal Income Tax Consequences" in the prospectus.
ERISA Considerations for Plans and Plan Investors
Your notes are eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts. Your should carefully review
with your legal advisor whether the purchase or holding of the notes could give
rise to a prohibited transaction.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
Your Notes May Be Legal Investments for Regulated Organizations
The notes will be mortgage related securities for purposes of SMMEA as long as
they are rated in one of the two highest rating categories by one or more
nationally recognized statistical rating organizations.
[If pre-funding account is used, the notes will become mortgage related
securities for SMMEA after pre-funded amount is reduced to zero.] [The notes
will not be SMMEA if junior lien assets are included in the trust.]
See "Legal Investment Considerations" in this prospectus supplement and in the
prospectus.
The Ratings Assigned to Your Notes
It is a condition to the issuance of the notes that the notes be rated ____
by_________ and ____ by ______________.
See "Ratings" in this prospectus supplement.
S-3
<PAGE>
By Purchasing Your Notes You Have Made Important Covenants
By accepting your notes, you agree not to institute or join in any bankruptcy,
reorganization or other insolvency or similar proceeding against the [Asset
Seller], the servicer, the trust or National Mortgage. [You also agree to allow
the securities insurer to exercise all of your voting rights with respect to
your notes.]
S-4
<PAGE>
Risk Factors
In addition to the risk factors in the prospectus, you should note the
following:
You May Experience A Over time, the market values of certain assets could
Loss on Your Investment be less than the loans they secure. This may cause
If Losses and delinquencies and may increase the amount of loss
Delinquencies On Assets On following default. In this event, your trust may
in The Trust Are High be able to recover the full amount owed, which may
not result in a loss on your notes. We can provide
you with no assurance that the performance of your
trust's assets will be similar to the statistical
information provided, in part because the values of
certain assets can be sharply affected by downturns
in regional or economic conditions. The statistical
information related to the loss experience of the
servicer is available under "Servicing of the Assets"
in this prospectus supplement.
Prepayments May Cause Obligors are not required to pay interest on their
Cash Shortfalls assets after the date of a full prepayment of
principal. As a result, a full prepayment may reduce
the amount of interest received from obligors during
that collection period to less than one month's
interest on the assets. If a sufficient number of
assets are prepaid in full, then interest payable on
the assets during that collection period may be less
than the interest due on the notes.
[The Notes Have An [The notes bear interest based on one-month LIBOR,
Uncertain Yield] which is variable and which changes differently than
do other indices. In addition, regardless of the
level of one-month LIBOR, the interest rate of the
notes may not exceed the weighted average net asset
rate.]
[Year 2000 Information [The servicer has analyzed the potential effects of
Systems Procedures] year 2000 issues on the computer systems that support
its business. This review included issues associated
with the servicer's internally developed software and
software licensed from others. The servicer also is
in the process of reviewing year 2000 issues faced by
significant third parties with whom it conducts
business.
The servicer has begun remediation of internally
developed software to resolve year 2000 compliance
issues. The costs incurred by the servicer to date
have not been material, and the servicer does not
anticipate that the expected remaining costs will be
material. Based upon its assessment of internally
S-5
<PAGE>
developed and licensed software and the status of
remediation undertaken to date, the servicer believes
that all of its significant computer systems will be
year 2000 compliant before January 1, 2000. The
servicer continues to test and monitor year 2000
compliance issues, and this testing may or may not be
successful. You may experience losses or delays in
payment if the servicer does not achieve year 2000
compliance.]
[Recent Federal In July 1999 the President signed into law the Year
Legislation May Cause 2000 Act, which generally limits the legal liability
Delays in Payments to for losses caused by year 2000 computer-related
You] errors. Among other things, the legislation provides
a grace period from foreclosure for delinquent
obligors whose mortgage and other payments are not
processed in an accurate or timely manner because of
an actual year 2000 failure.
The Year 2000 Act does not extinguish an obligor's
payment obligations, but merely delays their
enforcement.
The Year 2000 Act could delay the servicer's ability
to foreclose upon the assets of your trust during the
first quarter of the year 2000. These delays,
consequently, could affect the timing of payments to
you.
Capitalized terms used in this prospectus supplement but not defined will
have the definitions given to them in the accompanying prospectus. See "Index
of Terms" in the prospectus.
Description of the Offered Notes
General
The Asset Backed Notes, Series 1999-___ will be issued in book-entry form
only, in denominations of $1,000 and integral multiples of $1 in excess of this
amount. Definitive notes, if issued, will be transferable and exchangeable at
the corporate trust office of indenture trustee. No service charge will be made
for any registration of exchange or transfer, but the indenture trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge incurred in connection with the exchange or transfer.
Distributions of principal and interest on the offered notes will be made
on the 15th day of each month, or, if this day is not a business day, on the
next succeeding business day, beginning in ____ __, 1999, to the persons in
whose names the notes are registered on the record date, which is the close of
business on the last business day of the month preceding the month in
S-6
<PAGE>
which the distribution date occurs. Each distribution with respect to a book-
entry certificate will be paid to the Depository, which will credit the amount
of this distribution to the accounts of its Participants in accordance with its
normal procedures. Each Participant will be responsible for disbursing this
distribution to the Beneficial Owners that it represents and to each indirect
participating brokerage firm (a "brokerage firm" or "indirect participating
firm") for which it acts as agent. Each brokerage firm will be responsible for
disbursing funds to the Beneficial Owners that it represents. All credits and
disbursements with respect to book-entry notes are to be made by the Depository
and the Participants in accordance with the Depository's rules.
[Book-Entry Notes
The offered notes will be book-entry notes as described in the prospectus
under "Description of the Securities -- Book-Entry Procedures." The offered
notes will initially be registered in the name of Cede & Co., the nominee of the
Depository Trust Company.
Unless and until the offered notes are issued in certificated, fully-
registered form, it is anticipated that the only noteholder of the offered notes
will be Cede & Co., as nOMIInee of DTC. Beneficial Owners will not be
noteholders as that term is used in the indenture. Beneficial Owners are only
permitted to exercise the rights of noteholders indirectly through Depository
Participants and DTC.
DTC management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including dates
before, on, and after January 1, 2000, may encounter Year 2000 problems. DTC has
informed its Participants and other members of the financial community that it
has developed and is implementing a program so that its systems, as the same
relate to the timely payment of distributions, including principal and income
payments, to noteholders, book-entry deliveries, and settlement of trades within
DTC continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the industry that it is contacting, and will
continue to contact, third party vendors from whom DTC acquires services to
. impress upon them the importance of these services being Year 2000
compliant, and
. determine the extent of their efforts for Year 2000 remediation --- and,
as appropriate, testing --- of their services.
In addition, DTC is in the process of developing contingency plans as it deems
appropriate.
S-7
<PAGE>
According to DTC, the foregoing information with respect to DTC has been
provided for informational purposes only and is not intended to serve as a
representation, warranty, or contract modification of any kind.]
Collection of Payments on Assets
The serivicer will establish and maintain the certificate account for the
benefit of the indenture trustee. The certificate account must be an Eligible
Account. The certificate account is to be held in trust for the benefit of the
indenture trustee on behalf of the noteholders, and shall be either in the
indenture trustee's name or designated in a manner that reflects the custodial
nature of the account and that all funds in this account are held for the
benefit of the indenture trustee. A single certificate account may be maintained
for more than one series of notes provided that in this event, the servicer
shall cause separate accounting and records to be maintained within the
certificate account with respect to each separate series. Funds in the
certificate account will be invested in Eligible Investments that will mature or
be redeemed not later than the business day preceding the applicable monthly
distribution date. Earnings on amounts deposited into the certificate account
shall be credited to the account of the servicer as servicing compensation in
addition to the Servicing Fee and may be used to offset P&I Advances due from
the servicer in respect of the distribution date next succeeding the date on
which these earnings were made or, at the servicer's option, may be released to
the servicer on the related distribution date. The amount of any losses incurred
in respect of any of these investments shall be deposited into the certificate
account by the servicer out of its own funds promptly after any of these losses
are incurred.
All payments in respect of principal and interest on the assets received by
the servicer on or after the Cut-off Date, exclusive of collections relating to
scheduled payments due on or prior to the Cut-off Date, including principal
prepayments and net liquidation proceeds, will be deposited into the certificate
account no later than the second business day following the servicer's receipt.
Amounts collected as late payment fees, extension fees, assumption fees or
similar fees will be retained by the servicer as part of its servicing
compensation. In addition, amounts paid by [Asset Seller] for assets repurchased
as a result of breach of a representation or warranty under the indenture and
amounts required to be deposited upon substitution of a qualified substitute
asset because of a breach of a representation or warranty, as described under
"The Asset Pool -- Conveyance of Assets" in this prospectus supplement, will be
paid into the certificate account.
On or prior to the business day before each distribution date, the servicer
will remit all scheduled payments of principal and interest due on the assets
during the Collection Period and collected by the servicer and all unscheduled
collections in respect of principal and interest on the assets received during
the related Prepayment Period, in each case to the extent these collections
comprise part of the Available Distribution Amount for the upcoming distribution
date, together with the amount of any required Advances to the indenture trustee
for deposit into the distribution account. If, however, the certificate account
is maintained by the indenture trustee, the indenture trustee may withdraw this
amount, and any portion of the P&I Advance to be covered by investment earnings
on the certificate account, from the certificate account on the applicable
distribution date and deposit it into the distribution account. In such event,
the
S-8
<PAGE>
servicer will remit the portion, if any, of the required P&I Advance that is not
to be covered by investment earnings on the certificate account to the indenture
trustee on business day preceding the distribution date for deposit into the
distribution account. The distribution account shall be an Eligible Account
established and maintained by the indenture trustee.
The indenture trustee or its Paying Agent will withdraw funds from the
Distribution Account, but only to the extent of the Available Distribution
Amount, to make distributions to noteholders as specified under "
- -- Distributions -- Priority of Distributions" in this prospectus supplement.
From time to time, as provided in the indenture, the servicer will also
withdraw funds from the certificate account for other purposes as permitted by
the indenture.
Realized Losses on Liquidated Loans
The Principal Distribution Amount for any distribution date is intended to
include the Scheduled Principal Balance of each asset that became a liquidated
asset during the related Prepayment Period. A Realized Loss will be incurred on
a liquidated loan in the amount, if any, by which the net liquidation proceeds
from the liquidated loan are less than the unpaid principal balance of the
liquidated loan, plus accrued and unpaid interest thereon, plus amounts
reimbursable to the servicer for previously unreimbursed Servicing Advances.
Distributions
Available Distribution Amount
The Available Distribution Amount for a distribution date will include
. monthly payments of principal and interest due on the assets during the
related Collection Period, regardless of whether these payments were
actually collected from the obligors or advanced by the servicer and
unscheduled payments received with respect to the assets during the
related Prepayment Period, including principal prepayments, proceeds of
repurchases, net liquidation proceeds and net insurance proceeds, less
. if [Asset Seller] is not the servicer, Servicing Fees for the related
Collection Period, amounts required to reimburse the servicer for
previously unreimbursed Advances in accordance with the master servicing
agreement, amounts required to reimburse National Mortgage or the
servicer for reimbursable expenses in accordance with the master
servicing agreement and amounts required to reimburse any party for an
overpayment of a Repurchase Price for an asset.
Distributions
Distributions will be made on each distribution date to holders of record
on the preceding record date.
S-9
<PAGE>
Interest
On each distribution date, holders of the notes will be entitled to
receive, to the extent of the Available Distribution Amount:
. interest accrued on the notes during the related Interest Accrual Period
at the then-applicable pass-through rate on the principal balance
immediately prior to the distribution date (the "Interest Distribution
Amount"), plus
. any interest amounts remaining unpaid from a previous distribution date,
plus interest accrued on this amount during the related Interest Accrual
Period, at the then applicable pass-through rate.
Interest Accrual Period shall mean, with respect to each distribution date,
the calendar month preceding the month in which the distribution date occurs.
Interest on the notes will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
[Floating Rate Determination
Generally, the Floating Rate Determination Date for any Interest Accrual
Period is the second London banking day prior to the Interest Accrual Period.
For the initial Interest Accrual Period the Floating Rate Determination Date is
the closing date. On each Floating Rate Determination Date, the servicer will
determine the arithmetic mean of the LIBOR quotations for one-month Eurodollar
deposits ("One-Month LIBOR") for the succeeding Interest Accrual Period on the
basis of the Reference Banks' offered LIBOR quotations provided to the servicer
as of 11:00 a.m., London time, on the Floating Rate Determination Date. With
respect to a Floating Rate Determination Date, Reference Banks means leading
banks engaged in transactions in Eurodollar deposits in the international
Eurocurrency market with an established place of business in London, whose
quotations appear on the Bloomberg Screen US0001M Index page on the Floating
Rate Determination Date in question and which have been designated as such by
the servicer and are able and willing to provide these quotations to the
servicer on each Floating Rate Determination Date; and Bloomberg Screen US0001M
Index Page means the display designated as page US0001M on the Bloomberg
Financial Markets Commodities News, or another page as may replace this page on
that service for the purpose of displaying LIBOR quotations of major banks. If
any Reference Bank should be removed from the Bloomberg Screen US0001M Index
Page or in any other way fails to meet the qualifications of a Reference Bank,
the servicer may, in its sole discretion, designate an alternative Reference
Bank.
On each Floating Rate Determination Date, One-Month LIBOR for the next
succeeding Interest Accrual Period will be established by the servicer as
follows
. if, on any Floating Rate Determination Date, two or more of the
Reference Banks provide offered One-Month LIBOR quotations on the
Bloomberg Screen US0001M Index Page, One-Month LIBOR for the next
applicable Interest Accrual Period will be the arithmetic mean of the
offered quotations, rounding the arithmetic mean, if necessary, to the
nearest five decimal places.
S-10
<PAGE>
. if, on any Floating Rate Determination Date, only one or none of the
Reference Banks provides offered quotations, One-Month LIBOR for the
next applicable Interest Accrual Period will be the higher of
. One-Month LIBOR as determined on the previous Floating Rate
Determination date, and
. the Reserve Interest Rate.
The Reserve Interest Rate will be the rate per annum that the servicer
determines to be either
. the arithmetic mean, rounding the arithmetic mean upwards if necessary
to the nearest five decimal places, of the one-month Eurodollar lending
rate that New York City banks selected by the servicer are quoting, on
the relevant Floating Rate Determination Date, to the principal London
offices of at least two leading banks in the London interbank market, or
. in the event that the servicer can determine no arithmetic mean, the
lowest one-month Eurodollar lending rate that the New York City banks
selected by the servicer are quoting on the Floating Rate Determination
Date to leading European banks.
If, on any Floating Rate Determination Date, the servicer is required but is
unable to determine the Reserve Interest Rate in the manner provided, One-Month
LIBOR for the next applicable Interest Accrual Period will be One-Month LIBOR as
determined on the previous Floating Rate Determination Date.
One-Month LIBOR for an Interest Accrual Period shall not be based on One-
Month LIBOR for the previous Interest Accrual Period for two consecutive
Floating Rate Determination Dates. If One-Month LIBOR for an Interest Accrual
Period would be based on One-Month LIBOR for the previous Floating Rate
Determination Date for the second consecutive Floating Rate Determination Date,
the servicer shall select an alternative index over which the servicer has no
control used for determining one-month Eurodollar lending rates that is
calculated and published or otherwise made available by an independent third
party.
The establishment of One-Month LIBOR, or an alternative index, by the
servicer and the servicer's subsequent calculation of the pass-through rate on
the notes for the relevant Interest Accrual Period, in the absence of manifest
error, will be final and binding.
This table provides you with monthly One-Month LIBOR rates on the last day
of the related calendar month beginning in 1995, as published by Bloomberg. The
following does not purport to be a prediction of the performance of One-Month
LIBOR in the future.
S-11
<PAGE>
<TABLE>
<CAPTION>
MONTH 1999 1998 1997 1996 1995
- ----- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
January.................. 4.94% 5.60% 5.44% 5.44% 6.09%
February................. 4.96 5.69 5.44 5.31 6.13
March.................... 4.94 5.69 5.69 5.44 6.13
April.................... 4.90 5.66 5.69 5.44 6.06
May...................... 5.66 5.69 5.43 6.06
June..................... 5.66 5.69 5.47 6.13
July..................... 5.66 5.63 5.46 5.88
August................... 5.63 5.66 5.44 5.88
September................ 5.38 5.66 5.43 5.88
October.................. 5.25 5.65 5.38 5.83
November................. 5.62 5.97 5.56 5.98
December................. 5.06 5.72 5.50 5.69]
</TABLE>
Principal
The Principal Distribution Amount for any distribution date will equal the
sum of the following amounts
. the sum of the principal components of all monthly payments scheduled
to be made on the Due Date occurring during the related Collection
Period on the assets that were outstanding at the opening of business
on this Due Date, regardless of whether such monthly payments were
received by the servicer from the obligors, not including any monthly
payments due on liquidated loans or repurchased assets,
. the sum of the amounts of all principal prepayments received by the
servicer on the assets during the related Prepayment Period,
. the Scheduled Principal Balance of any asset that became a liquidated
loan during the related Prepayment Period, and
. the Scheduled Principal Balance of any asset that was purchased or
repurchased by the servicer, [Asset Seller] or National Mortgage during
the related Prepayment Period.
Priority of Distributions
On each distribution date the Available Distribution Amount will be
distributed in the following amounts and in the following order of priority:
(1) first, to the notes, their Interest Distribution Amount for that
distribution date and then any Interest Distribution Amounts remaining unpaid
from any previous distribution date, plus interest on this carryover amount, if
any, for that distribution date;
(2) second, to the notes, the Principal Distribution Amount;
S-12
<PAGE>
(3) third, to reduce the principal of the notes, subject the
overcollateralization maximum cap;
(4) fourth, if [Asset Seller] is the servicer, to the servicer in the
following sequential order:
(i) the Servicing Fee with respect to the related distribution date;
and
(ii) any Servicing Fees from previous distribution dates remaining
unpaid;
Overcollateralization
On the closing date and for any payment date, the overcollateralization
amount will be the amount by which the aggregate principal balance of the assets
exceeds the unpaid principal balance of the notes. On the closing date, the
overcollateralization amount will be ___% of the initial principal balance of
the notes. This amount is expected to increase as the principal balance of the
notes is reduced by the application of any Available Distribution Amount
remaining after payment of principal and interest on the notes. The
overcollateralizaton amount will be capped at ___% of the principal balance on
the notes
[Reserve Fund
On the closing date, the indenture trustee will deposit $__________
establish into a reserve fund for the benefit of the bondholders. The reserve
fund will belong to [Asset Seller] and will not be an asset of the trust. The
indenture trustee, will invest amounts on deposit in the reserve fund in
eligible investments. Investment earnings from eligible investment will be
credited to the reserve fund.
If, for any payment date, the Available Distribution Amount is insufficient
to pay interest and principal on the notes, the indenture trustee will withdraw
amounts for deposit into the Distribution Account from the reserve funds equal
to the amount by which the Available Distribution Amount is deficient.]
Financial Guaranty Insurance Policy
[Disclosure regarding financial guaranty insurance policy, if any.]
The Asset Pool
General
NMSC Owner Trust 1999-__ is a business trust to be formed under the laws of
the State of Delaware pursuant to an owner trust agreement among the owner
trustee, National Mortgage and [Asset Seller]. On the closing date, National
Mortgage will sell the assets to the owner trust.
S-13
<PAGE>
After its formation, the owner trust will not engage in any activity other than
the activities related to your notes.
On the closing date, National Mortgage will acquire the assets from [Asset
Seller]. [Asset Seller] will have funded the origination of each asset. Each
asset not originated directly in [Asset Seller]'s name will have been assigned
to [Asset Seller] immediately after its origination. You will find a description
of [Asset Seller]'s general practices with respect to the origination of certain
assets in this prospectus supplement under "Underwriting Guidelines."
The master servicing agreement requires the servicer to maintain or cause
to be maintained standard hazard insurance policies with respect to each
mortgaged property. Generally, no other insurance will be maintained with
respect to the mortgaged properties or the assets. See "The Trusts -- Hazard
Insurance on the Mortgage Loans -- Standard Hazard Insurance Policies" in the
prospectus.
The owner trust will convey to the indenture trustee the assets and all
rights to receive payments due after _____ 1, 1999 (the "Cut-off Date"),
including scheduled payments due after the Cut-off Date but received prior to
this date, and prepayments and other unscheduled collections on the assets
received on or after the Cut-off Date. The right to payments that were due on or
prior to the Cut-off Date but which are received later will not be conveyed to
National Mortgage by [Asset Seller], and these payments will be the property of
[Asset Seller] when collected. The servicer will retain physical possession of
the contract documents. Except to the extent required to service a mortgage
loan, the indenture trustee will maintain physical possession of the mortgage
loan documents. See " -- Conveyance of Assets" in this prospectus supplement.
Fixed Rate Assets
The assets will consist of ________ Fixed Rate Assets having an aggregate
Scheduled Principal Balance as of the Cut-off Date of approximately
$______________. A total of _______ Fixed Rate Assets, representing
approximately ____% of the Fixed Rate Assets, are step-up rate loans. The
remainder of the Fixed Rate Assets are Level Payment Loans. [Step-up rate loans
are assets that provide for periodic increases of [0.50%, 0.75%, 1.00%, 1.25% or
1.50]% in the applicable asset rates at the end of intervals of twelve months
during the first five years following origination (the "Step-up Periods"), after
which the asset rates are fixed. The total amount and the principal portion of
each monthly payment on any step-up rate loan during any period is determined on
a basis that would cause the asset to be fully amortized over its term if the
asset were to bear interest during its entire term at the asset rate applicable
during this period and as if the asset were to provide for level payments over
its entire term based on the asset rate. In addition to interest rate
adjustments during their Step-up Periods, some step-up rate loans will
experience a one-time increase in their asset rates with respect to their final
monthly payments. The statistical information concerning the Fixed Rate Assets
sets forth only the asset rates borne by these assets as of the Cut-off Date.]
See "The Trust -- The Assets" in the prospectus.
S-14
<PAGE>
[Except in the case of the step-up rate loans during their Step-up
Periods,] each Fixed Rate Asset bears interest at a fixed annual percentage rate
and provides for level payments over the term of the asset that fully amortize
the principal balance of the asset. All of the Fixed Rate Assets are actuarial
obligations. The portion of each monthly payment for any Fixed Rate Asset
allocable to principal is equal to the total amount of the monthly payment less
the portion allocable to interest. The portion of each monthly payment due in a
particular month that is allocable to interest is a precomputed amount equal to
one month's interest on the principal balance of the Fixed Rate Asset, which
principal balance is determined by reducing the initial principal balance by the
principal portion of all monthly payments that were due in prior months,
regardless of whether the monthly payments were made in a timely fashion, and
all prior partial principal prepayments. Thus, each scheduled monthly payment on
an asset will be applied to interest and to principal in accordance with the
precomputed allocation regardless of whether the monthly payment was received in
advance of or subsequent to its Due Date. See "Servicing of the Assets --
Collection and Other Servicing Procedures" in this prospectus supplement.
As of the Cut-off Date, approximately _____% of the Fixed Rate Assets were
_____________. As of the Cut-off Date, approximately _____% of the Fixed Rate
Assets were mortgage loans.
As of the Cut-off Date, each Fixed-Rate Asset had an asset rate of at least
________% per annum and not more than _____% per annum. The weighted average
asset rate of the Fixed-Rate Assets was approximately ____% per annum[, without
giving effect to any subsequent increase in the asset rates of the step-up rate
loans.] The Fixed Rate Assets had remaining terms to stated maturity as of the
Cut-off Date of at least ___ months but not more than 360 months and original
terms to stated maturity of at least ___ months but not more than 360 months.
Each Fixed Rate Asset was originated on or after ___________. As of the Cut-off
Date, the Fixed Rate Assets had a weighted average original term to stated
maturity of approximately ____ months, and a weighted average remaining term to
stated maturity of approximately ____ months. The remaining term to stated
maturity of an asset is calculated as the number of monthly payments scheduled
to be made on the asset over its term less the number of monthly payments made
or scheduled to have been made on or before the Cut-off Date. The average
Scheduled Principal Balance of the Fixed Rate Assets as of the Cut-off Date was
approximately $_________ and the Scheduled Principal Balance of the Fixed Rate
Assets as of the Cut-off Date ranged from $______ to $_______.
Approximately ________% of the Fixed Rate Assets have Loan-to-Value Ratios
greater than 95%. [Asset Seller] computes each Loan-to-Value Ratio by
determining the ratio of the principal amount of the mortgage or contract to the
purchase price of the home, including taxes, insurance and any land
improvements, and the amount of any prepaid finance charges or closing costs
that are financed. [Asset Seller] computes each Loan-to-Value Ratio by
determining the ratio of the principal amount of the mortgage loan to either
. the sum of the appraised value of the land and improvements, and the
amount of any prepaid finance charges or closing costs that are
financed, or
S-15
<PAGE>
. the sum of the purchase price of the home, including taxes, insurance
and any land improvements, the appraised value of the land and the
amount of any prepaid finance charges or closing costs that are
financed.
The Fixed Rate Assets are secured by mortgaged properties, located in ___
states. Approximately [>10]% and [>10]% of the Fixed Rate Assets were secured
- -
as of the Cut-off Date by mortgaged properties located in ______ and _______,
respectively. As of the Cut-off Date, no more than approximately ____%, ____%
and ____% of the Fixed Rate Assets were secured by mortgaged properties which
were used, repossessed or transferred to an assignee of the original obligor,
respectively, at the time the related assets were originated.
Adjustable Rate Assets
The asset pool will consist of ___ adjustable rate assets having an
aggregate Scheduled Principal Balance as of the Cut-off Date of approximately
$________.
Each adjustable rate asset has an asset rate that adjusts annually based on
__________, and provides for [level] payments over the term of the asset that
fully amortize the principal balance of the asset. All of the adjustable rate
assets are actuarial obligations.
Each adjustable rate asset has an annual cap of ___% per annum. The
weighted average lifetime cap of the adjustable rate assets as of the Cut-off
Date was approximately ___% per annum. The adjustable rate assets had Gross
Margins as of the Cut-off Date of at least ___% per annum but not more than ___%
per annum, with a weighted average Gross Margin of approximately ___% per annum.
The portion of each monthly payment for any adjustable rate asset allocable to
principal is equal to the total amount of the monthly payment less the portion
allocable to interest. The portion of each monthly payment due in a particular
month that is allocable to interest is a precomputed amount equal to one month's
interest on the principal balance of the adjustable rate asset, which principal
balance is determined by reducing the initial principal balance by the principal
portion of all monthly payments that were due in prior months, regardless of
whether the Monthly Payments were made in a timely fashion, and all prior
partial principal prepayments. Thus, each scheduled monthly payment on an asset
will be applied to interest and to principal in accordance with the precomputed
allocation regardless of whether the monthly payment was received in advance of
or subsequent to its Due Date. As of the Cut-off Date all of the adjustable rate
assets were mortgage loans. See "Servicing of the Assets -- Collection and Other
Servicing Procedures" in this prospectus supplement.
As of the Cut-off Date, each adjustable rate asset had an asset rate of at
least ____% per annum and not more than ____% per annum. The weighted average
asset rate of the adjustable rate assets was approximately ____% per annum,
without giving effect to any subsequent adjustment in the asset rates of the
adjustable rate assets. The adjustable rate assets had remaining terms to stated
maturity as of the Cut-off Date of at least ____ months but not more than ____
months and original terms to stated maturity of ____ months. Each adjustable
rate asset was originated on or after ____________. As of the Cut-off Date, the
adjustable rate assets had a weighted average original term to stated maturity
of approximately ______ months, and a
S-16
<PAGE>
weighted average remaining term to stated maturity of approximately _______
months. The remaining term to stated maturity of an asset is calculated as the
number of monthly payments scheduled to be made on the asset over its term less
the number of monthly payments made or scheduled to have been made on or before
the Cut-off Date. The average Scheduled Principal Balance of the adjustable rate
assets as of the Cut-off Date was approximately $________ and the Scheduled
Principal Balance of the adjustable rate assets as of the Cut-off Date ranged
from $________ to $________. Approximately ____% of the adjustable rate assets
have Loan-to-Value Ratios greater than 95%.
The adjustable rate assets are secured by mortgaged properties located in
____ states. Approximately [ >10 ]%, [ >10 ]%, [ >10 ]%, [ >10 ]% and [ >10 ]%
- - - - -
of the adjustable rate assets were secured as of the Cut-off Date by mortgaged
properties located in __________, __________, __________, __________ and
__________, respectively.
Selected Data
It is possible that some of the assets may be repaid in full or in part, or
otherwise removed from the asset pool. In this event, other assets may be
transferred to the trust. Consequently, the actual asset pool may vary slightly
from the presentation in this prospectus supplement.
Whenever reference is made to a percentage of the assets, or to a
percentage of the Scheduled Principal Balance of the assets, the percentage is
calculated based on the Scheduled Principal Balances of the assets as of the
Cut-off Date. In addition, numbers in any columns in these tables may not sum
exactly to the total number at the bottom of the column due to rounding.
Fixed Rate Assets
Geographic Distribution of Mortgage Assets -- Fixed Rate Assets
<TABLE>
<CAPTION>
Percentage of
Number of Aggregate Fixed Rate
Fixed Rate Scheduled Asset Pool
Geographic Location Assets Principal Balance By SPB
- ------------------- ------ ----------------- ------
<S> <C> <C> <C>
Alabama.............................. ______ _________ ____
Arizona.............................. ______ _________ ____
Arkansas............................. ______ _________ ____
California........................... ______ _________ ____
Colorado............................. ______ _________ ____
Delaware............................. ______ _________ ____
Florida.............................. ______ _________ ____
Georgia.............................. ______ _________ ____
Idaho................................ ______ _________ ____
Illinois............................. ______ _________ ____
Indiana.............................. ______ _________ ____
Kansas............................... ______ _________ ____
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C> <C> <C>
Kentucky........................ _____ _________ ____
Louisiana....................... _____ _________ ____
Maine........................... _____ _________ ____
Maryland........................ _____ _________ ____
Michigan........................ _____ _________ ____
Minnesota....................... _____ _________ ____
Mississippi..................... _____ _________ ____
Missouri........................ _____ _________ ____
Montana......................... _____ _________ ____
Nevada.......................... _____ _________ ____
New Jersey...................... _____ _________ ____
New Mexico...................... _____ _________ ____
New York........................ _____ _________ ____
North Carolina.................. _____ _________ ____
Ohio............................ _____ _________ ____
Oklahoma........................ _____ _________ ____
Oregon.......................... _____ _________ ____
Pennsylvania.................... _____ _________ ____
South Carolina.................. _____ _________ ____
Tennessee....................... _____ _________ ____
Texas........................... _____ _________ ____
Utah............................ _____ _________ ____
Virginia........................ _____ _________ ____
Washington...................... _____ _________ ____
West Virginia................... _____ _________ ____
Wisconsin....................... _____ _________ ____
WyOMIng......................... _____ _________ ____
Total...................... $ %
===== ========= ====
</TABLE>
- ------------
Based on the mailing address of the obligor on the related Fixed Rate Asset as
of the Cut-off Date.
Distribution of Original Fixed Rate Asset Amounts
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Original Fixed Rate Asset Amount Assets Principal Balance Pool By SPB
- -------------------------------- ------ ------------------ -----------
<S> <C> <C> <C>
$4,999 or less.................. _____ _________ ____
$5,000 - $ 9,999............... _____ _________ ____
$10,000 - $14,999............... _____ _________ ____
$15,000 - $19,999............... _____ _________ ____
$20,000 - $24,999............... _____ _________ ____
$25,000 - $29,999............... _____ _________ ____
</TABLE>
S-18
<PAGE>
<TABLE>
<S> <C> <C> <C>
$30,000 - $34,999.................. _____ _________ ____
$35,000 - $39,999.................. _____ _________ ____
$40,000 - $44,999.................. _____ _________ ____
$45,000 - $49,999.................. _____ _________ ____
$50,000 - $54,999.................. _____ _________ ____
$55,000 - $59,999.................. _____ _________ ____
$60,000 - $64,999.................. _____ _________ ____
$65,000 - $69,999.................. _____ _________ ____
$70,000 - $74,999.................. _____ _________ ____
$75,000 - $79,999.................. _____ _________ ____
$80,000 - $84,999.................. _____ _________ ____
$85,000 - $89,999.................. _____ _________ ____
$90,000 - $94,999.................. _____ _________ ____
$95,000 - $99,999.................. _____ _________ ____
$100,000 or more.................. _____ _________ ____
Total............................. $ %
===== ========= ====
</TABLE>
The highest original Fixed Rate Asset amount was $_________, which
represents approximately _____% of the aggregate principal balance of the Fixed
Rate Assets at origination. The average original principal amount of the Fixed
Rate Assets was approximately $______ as of the Cut-off Date.
Distribution of Original Loan-to-Value Ratios of Fixed Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Loan-to-Value Ratio Assets Principal Balance Pool By SPB
- ------------------- ------ ----------------- -----------
<S> <C> <C> <C>
50% or less........................... _____ _________ ____
51% - 55%............................ _____ _________ ____
56% - 60%............................ _____ _________ ____
61% - 65%............................ _____ _________ ____
66% - 70%............................ _____ _________ ____
71% - 75%............................ _____ _________ ____
76% - 80%............................ _____ _________ ____
81% - 85%............................ _____ _________ ____
86% - 90%............................ _____ _________ ____
91% - 95%............................ _____ _________ ____
96% - 100%............................ _____ _________ ____
101%- 110%............................ _____ _________ ____
Total........................... $ %
===== ========= ====
</TABLE>
The weighted average original Loan-to-Value Ratio of the Fixed Rate Assets
was approximately ____% as of the Cut-off Date. Rounded to nearest 1%.
S-19
<PAGE>
Fixed Rate Asset Rates
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Asset Rate Assets Principal Balance Pool By SPB
- ---------- ------ ----------------- -----------
<S> <C> <C> <C>
6.000 - 6.999%............ _____ _________ ____
7.000 - 7.999%............ _____ _________ ____
8.000 - 8.999%............ _____ _________ ____
9.000 - 9.999%............ _____ _________ ____
10.000 - 10.999%............ _____ _________ ____
11.000 - 11.999%............ _____ _________ ____
12.000 - 12.999%............ _____ _________ ____
13.000 - 13.999%............ _____ _________ ____
14.000 - 14.999%............ _____ _________ ____
Total....................... $ %
===== ========= ====
</TABLE>
The weighted average Fixed Rate Asset Rate was approximately _____1% per
annum as of the Cut-off Date. This table reflects the Fixed Rate Asset Rates of
the step-up rate loans as of the Cut-off Date and does not reflect any
subsequent increases in the Rates of the step-up rate loans.
Year of Origination of Fixed Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Year of Origination Assets Principal Balance Pool By SPB
- ------------------- ------ ----------------- -----------
<S> <C> <C> <C>
1996.......................... _____ _________ ____
1997.......................... _____ _________ ____
1998.......................... _____ _________ ____
1999.......................... _____ _________ ____
Total......................... $ %
===== ========= ====
</TABLE>
The weighted average seasoning of the Fixed Rate Assets was approximately
___ months as of the Cut-off Date.
Remaining Terms to Maturity, in months, of Fixed Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Remaining Term to Maturity Assets Principal Balance Pool By SPB
- -------------------------- ------ ----------------- -----------
<S> <C> <C> <C>
1 - 60 months.............. _____ _________ ____
61 - 96 months.............. _____ _________ ____
</TABLE>
S-20
<PAGE>
<TABLE>
<S> <C> <C> <C>
97 - 120 months.............. _____ _________ ____
121 - 156 months.............. _____ _________ ____
157 - 180 months.............. _____ _________ ____
181 - 216 months.............. _____ _________ ____
217 - 240 months.............. _____ _________ ____
241 - 300 months.............. _____ _________ ____
301 - 360 months.............. _____ _________ ____
Total......................... $ %
===== ========= ====
</TABLE>
The weighted average remaining term to maturity of the Fixed Rate Assets
was approximately ____ months as of the Cut-off Date.
Original Terms to Maturity, in months, of Fixed Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Original Term to Maturity Assets Principal Balance Pool By SPB
- ------------------------- ------ ----------------- -----------
<S> <C> <C> <C>
1 - 60 months............... ______ _________ ____
61 - 96 months............... ______ _________ ____
97 - 120 months.............. ______ _________ ____
121 - 156 months.............. ______ _________ ____
157 - 180 months.............. ______ _________ ____
181 - 216 months.............. ______ _________ ____
217 - 240 months.............. ______ _________ ____
241 - 300 months.............. ______ _________ ____
301 - 360 months.............. ______ _________ ____
Total......................... $ %
====== ========= ====
</TABLE>
The weighted average original term to maturity of the Fixed Rate Assets was
approximately ___ months as of the Cut-off Date.
Adjustable Rate Assets
Geographic Distribution of Assets - Adjusted Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Geographic Location Assets Principal Balance Pool By SPB
- ------------------- ------ ----------------- -----------
<S> <C> <C> <C>
Arizona............................... _____ _________ ____
California............................ _____ _________ ____
Colorado.............................. _____ _________ ____
Florida............................... _____ _________ ____
Georgia............................... _____ _________ ____
Idaho................................. _____ _________ ____
</TABLE>
S-21
<PAGE>
<TABLE>
<S> <C> <C> <C>
Kentucky.......................... _____ _________ ____
New Mexico........................ _____ _________ ____
North Carolina.................... _____ _________ ____
Oregon............................ _____ _________ ____
South Carolina.................... _____ _________ ____
Tennessee......................... _____ _________ ____
Virginia.......................... _____ _________ ____
Washington........................ _____ _________ ____
Total............................. $ %
===== ========= ====
</TABLE>
Based on the mailing address of the obligor on the related adjustable rate
asset as of the Cut-off Date.
Distribution of Original Adjustable Rate Asset Amounts
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Original Adjustable Rate Asset Amount Assets Principal Balance Pool By SPB
- ------------------------------------- ------ ----------------- -----------
<S> <C> <C> <C>
$45,000 - $49,999................... ______ _________ ____
$55,000 - $59,999................... ______ _________ ____
$60,000 - $64,999................... ______ _________ ____
$65,000 - $69,999................... ______ _________ ____
$70,000 - $74,999................... ______ _________ ____
$75,000 - $79,999................... ______ _________ ____
$80,000 - $84,999................... ______ _________ ____
$85,000 - $89,999................... ______ _________ ____
$90,000 - $94,999................... ______ _________ ____
$95,000 - $99,999................... ______ _________ ____
$100,000 or more.................... ______ _________ ____
Total............................... $ %
====== ========= ====
</TABLE>
The highest original adjustable rate asset amount was $__________, which
represents approximately _____% of the aggregate principal balance of the
adjustable rate assets at origination. The average original principal amount of
the adjustable rate assets was approximately $_______ as of the Cut-off Date.
Distribution of Original Loan-to-Value Ratios of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Loan-to-Value Ratio Assets Principal Balance Pool By SPB
- ------------------- ------ ----------------- -----------
<S> <C> <C> <C>
51% -- 55%......................... ______ _________ ____
</TABLE>
S-22
<PAGE>
<TABLE>
<S> <C> <C> <C>
66% -- 70%................... _____ _________ ____
71% -- 75%................... _____ _________ ____
76% -- 80%................... _____ _________ ____
81% -- 85%................... _____ _________ ____
86% -- 90%................... _____ _________ ____
91% -- 95%................... _____ _________ ____
96% -- 100%.................. _____ _________ ____
101% -- 105%.................. _____ _________ ____
Total......................... $ %
===== ========= ====
</TABLE>
The weighted average original Loan-to-Value Ratio of the Adjustable Assets
was approximately _____% as of the Cut-off Date. Rounded to nearest 1%.
Current Asset Rates of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Asset Rate Assets Principal Balance Pool By SPB
- ---------- ------ ----------------- -----------
<S> <C> <C> <C>
7.000% - 7.999%............... _____ _________ ____
8.000% - 8.999%............... _____ _________ ____
9.000% - 9.999%............... _____ _________ ____
Total..................... $ %
===== ========= ====
</TABLE>
The weighted average adjustable rate asset Rate was approximately _____%
per annum as of the Cut-off Date. This table reflects the Asset Rates of the
adjustable rate assets as of the Cut-off Date and does not reflect any
subsequent adjustments in the Asset Rates of the adjustable rate assets.
Distribution of Gross Margins of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Gross Margin Assets Principal Balance Pool By SPB
- ------------ ------ ----------------- -----------
<S> <C> <C> <C>
3.250% - 3.500%............... _____ _________ ____
4.500% - 4.750%............... _____ _________ ____
Total....................... $ %
===== ========= ====
</TABLE>
The weighted average Gross Margin of the adjustable rate assets was
approximately ____% per annum as of the Cut-off Date.
Maximum Asset Rates of Adjustable Rate Assets
Number of Aggregate Percentage of
S-23
<PAGE>
<TABLE>
<CAPTION>
Fixed Rate Scheduled Fixed Rate Asset
Maximum Asset Rates Assets Principal Balance Pool By SPB
- ------------------- ------ ----------------- -----------
<S> <C> <C> <C>
13.000% to 13.625%............ _____ _________ ____
14.000% to 14.625%............ _____ _________ ____
Total........................ $ %
===== ========= ====
</TABLE>
The weighted average maximum Asset Rate of the adjustable rate assets was
approximately ______% per annum as of the Cut-Off Date.
S-24
<PAGE>
Year of Origination of Adjustable Rate Assets
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Year of Origination Assets Principal Balance Pool By SPB
- ------------------- ------ ----------------- -----------
1997.................. _____ _________ ____
1998.................. _____ _________ ____
Total.............. $ %
===== ========= ====
The weighted average seasoning of the adjustable rate assets was
approximately ___ months as of the Cut-off Date.
Remaining Terms to Maturity, in months, of Adjustable Rate Assets
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Remaining Term to Maturity Assets Principal Balance Pool By SPB
- -------------------------- ------ ----------------- -----------
348 - 360 months.......... _____ _________ _____
Total.................. $ %
===== ========= =====
The weighted average remaining term to maturity of the adjustable rate
assets was approximately ____ months as of the Cut-off Date.
Original Terms to Maturity, in months, of Adjustable Rate Assets
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Original Terms to Maturity Assets Principal Balance Pool By SPB
- -------------------------- ------ ----------------- -----------
360 months................... _____ _________ ____
Total....................... $ %
===== ========= ====
The weighted average original term to maturity of the adjustable rate
assets was approximately ___ months as of the Cut-off Date.
S-25
<PAGE>
Date of Next Asset Rate Adjustment of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Date of Next Asset Rate Adjustment Assets Principal Balance Pool By SPB
- ---------------------------------- ------ ----------------- -----------
<S> <C> <C> <C>
August 1, 1999................... _____ _________ ____
August 15, 1999.................. _____ _________ ____
October 1, 1999.................. _____ _________ ____
November 1, 1999................. _____ _________ ____
December 1, 1999................. _____ _________ ____
January 1, 2000.................. _____ _________ ____
Total $ %
===== ========= ====
</TABLE>
Underwriting Guidelines
The mortgage assets were underwritten by [Asset Seller] and were
underwritten and originated substantially in accordance with its guidelines
[Description of Underwriting Policies from Asset Seller].
Conveyance of Assets
On the date of issuance of the notes [or on each Subsequent Transfer Date],
National Mortgage will transfer to the indenture trustee, without recourse, all
of its right, title and interest in and to the assets, including all principal
and interest received on or with respect to the assets, not including principal
and interest due on the assets on or before the Cut-off Date and any other
amounts collected on the assets before the Cut-off Date other than early
collections of Monthly Payments that were due after the Cut-off Date, and all
rights under the standard hazard insurance policies maintained with respect to
the mortgaged properties. [The indenture permits the trust to purchase
Subsequent Assets on one or more dates through the close of business on ________
(each, a "Subsequent Transfer Date").] The asset schedule will identify the
Scheduled Principal Balance of each asset, the amount of each monthly payment
due on each asset, and the asset rate on each asset, in each case as of the Cut-
off Date. Prior to the conveyance of the assets to the indenture trustee, [Asset
Seller]'s operations department will complete a review of all of the mortgage
asset files, including the certificates of title to, or other evidence of a
perfected security interest in, the mortgaged properties to check the accuracy
of the asset schedule delivered to the indenture trustee. The indenture trustee
will complete a review of the mortgage asset files to check the accuracy of the
mortgage asset schedule.
National Mortgage will represent and warrant only that:
. the information set forth in the asset schedule was true and correct
as of the date or dates on which the information was furnished;
. National Mortgage is the owner of, or holder of a first-priority
security interest in, each asset;
S-26
<PAGE>
. National Mortgage acquired its ownership of, or security interest in,
each asset in good faith without notice of any adverse claim;
. except for the sale of the assets to the indenture trustee, National
Mortgage has not assigned any interest or participation in any asset
that has not been released; and
. National Mortgage has the full right to sell the trust estate to the
indenture trustee.
The servicer, on behalf of the noteholders, will hold the original and
copies of documents and instruments relating to each asset and the security
interest in the asset and any asset property relating to each asset. In order to
provide notice of the assignment of the assets to the indenture trustee, UCC-1
financing statements identifying the indenture trustee as the secured party or
purchaser and identifying all the assets as collateral will be filed in the
appropriate offices in the _________________. Despite these filings, if a
subsequent purchaser were able to take physical possession of the asset without
notice of the assignment of the asset to the indenture trustee, the indenture
trustee's interest in the contracts could be defeated. To provide some
protection against this possibility, in addition to filing UCC-1 financing
statements, within one week after the initial delivery of the notes or after
each Subsequent Transfer Date, as applicable, the assets will be stamped or
otherwise marked to reflect their assignment to the indenture trustee. The
indenture trustee, on behalf of the noteholders, will hold the original mortgage
notes and mortgages, and copies of documents and instruments relating to each
mortgage loan. See "Legal Aspects of the Mortgage Loans" in the prospectus.
[Asset Seller] will make representations and warranties regarding the
assets in the sales agreement. These representations and warranties are
detailed in the prospectus under the heading "Sale and Servicing of the Mortgage
Assets --- Representations and Warranties."
Under the terms of the indenture and the sales agreement, and subject to
[Asset Seller]'s option to effect a substitution as described in the next
paragraph, [Asset Seller] will be obligated to repurchase any asset for its
Repurchase Price within 90 days after [Asset Seller]'s discovery, or receipt of
written notice from the indenture trustee or the servicer, of a breach of any
representation or warranty made by [Asset Seller] in the sales agreement that
materially and adversely affects the indenture trustee's interest in any asset,
if the breach has not been cured by the 90th day. The Repurchase Price for any
asset will be the unpaid principal balance of the asset at the close of business
on the date of repurchase, plus accrued and unpaid interest thereon to the next
Due Date for the asset following the repurchase. Prior to being distributed to
noteholders, this Repurchase Price will be used to reimburse the servicer for
any previously unreimbursed Advances made by the servicer in respect of the
repurchased asset and, if the repurchaser is the servicer, the Repurchase Price
may be remitted net of reimbursement amounts.
In lieu of repurchasing an asset as specified in the preceding paragraph,
during the two-year period following the date of the initial issuance of the
notes, [Asset Seller] may, at its option, substitute a qualified substitute
asset for any asset to be replaced. A qualified substitute asset is any asset
that, on the date of substitution,
S-27
<PAGE>
. has an unpaid principal balance not greater than, and not more than
$10,000 less than, the unpaid principal balance of the replaced asset,
. has an asset rate not less than, and not more than one percentage
point in excess of, the asset rate of the replaced asset,
. has a net rate at least equal to the net rate of the replaced asset,
. has a remaining term to maturity not greater than, and not more than
one year less than, that of the replaced asset,
. has a Loan-to-Value Ratio as of the first day of the month in which
the substitution occurs equal to or less than the Loan-to-Value Ratio
of the replaced asset as of such date, in each case, using the
appraised value at origination, and after taking into account the
monthly payment due on this date, and
. complies with each representation and warranty in Section _____ of the
indenture and in the sales agreement.
In the event that more than one asset is substituted for a replaced asset,
the unpaid principal balances may be determined on an aggregate basis, and the
asset rate, net rate and term on a weighted average basis, provided that no
qualified substitute asset may have an original term to maturity beyond the
latest original term to maturity of any asset assigned to the trust on the
closing date.
In addition, any replaced asset that is a mortgage loan may only be
replaced by another mortgage loan.
[Asset Seller] will deposit cash into the certificate account in the
amount, if any, by which the aggregate of the unpaid principal balances of any
replaced assets exceeds the aggregate of the unpaid principal balances of the
assets being substituted for the replaced assets. Also, if it is discovered that
the actual Scheduled Principal Balance of an asset is less than the Scheduled
Principal Balance identified for the asset on the asset schedule, [Asset Seller]
may, at its option, deposit the amount of the discrepancy into the certificate
account instead of repurchasing the asset. Any deposit will be treated as a
partial principal prepayment.
In addition, [Asset Seller] is required to indemnify National Mortgage and
its assignees, including the trust, against losses and damages they incur as a
result of breaches of [Asset Seller]'s representations and warranties. [Asset
Seller]'s obligation to repurchase or substitute for an asset affected by a
breach of a representation or warranty and to indemnify National Mortgage and
its assignees for losses and damages caused by a breach constitute the sole
remedies available to the indenture trustee and the noteholders for a breach of
a representation or warranty under the indenture or the sales agreement with
respect to the assets.
S-28
<PAGE>
[Conveyance of Subsequent Assets and Pre-Funding Account
A Pre-Funding Account will be established by the indenture trustee and
funded by National Mortgage on the closing date to provide the trust with funds
to purchase Subsequent Assets. The Subsequent Assets will be purchased by the
trust during the Pre-Funding Period, which will begin on the closing date and
end on ______ __, _____. The Pre-Funded Amount will initially equal the
difference between the aggregate certificate principal balance of the offered
notes on the closing date and the aggregate Scheduled Principal Balance of the
initial assets as of the Cut-Off Date. In the event that the trust is unable to
acquire sufficient qualifying assets by _______, any amounts remaining in the
Pre-Funding Account will be applied as a partial principal prepayment to
noteholders entitled to the payment on the first date distributions are made.
Any investment income earned on amounts on deposit in the Pre-Funding Account
will be paid to National Mortgage and will not be available for distribution to
noteholders.
Under the indenture, the trust will be obligated to purchase Subsequent
Assets from National Mortgage during the Pre-Funding Period, if available.
Subsequent Assets will be transferred to the trust pursuant to subsequent
transfer instruments between National Mortgage and the trust. Each Subsequent
Asset, if it is a mortgage asset, will have been underwritten in accordance with
National Mortgage's standard underwriting criteria. In connection with the
purchase of Subsequent Assets on each Subsequent Transfer Date, the trust will
be required to pay to National Mortgage from amounts on deposit in the Pre-
Funding Account a cash purchase price of 100% of the Scheduled Principal Balance
of the Subsequent Assets as of the related Cut-Off Date. Any conveyance of
Subsequent Assets on a Subsequent Transfer Date must satisfy conditions
including, but not limited to
. each Subsequent Asset must satisfy the representations and warranties
specified in the related subsequent transfer instrument and the
indenture,
. National Mortgage will not select Subsequent Assets in a manner that
it believes is adverse to the interests of the noteholders,
. each Subsequent Asset must not be more than 30 days delinquent as of
its Cut-off Date,
. as a result of the purchase of the Subsequent Assets, the notes will
not receive from _______ or ________ a lower credit rating than the
rating assigned at the initial issuance of the notes, and
. an independent accountant will provide a letter stating whether or not
the characteristics of the Subsequent Assets conform to the
characteristics described in this prospectus supplement.
Following the end of the Pre-Funding Period, the asset pool must satisfy the
following criteria
. the weighted average asset rate must not be less than ____% or more
than ____%,.
S-29
<PAGE>
. the weighted average remaining term to stated maturity must not be
less than ____ months or more than ____ months,
. the weighted average Loan-to-Value Ratio must not be greater than
____%,
. not less than ____% of the asset pool, by Scheduled Principal Balance,
must be attributable to loans to purchase new assets, and
. not more than ____%, ____% and ____% of the assets located in
_______________, ______________, or any other individual state,
respectively.
Information regarding Subsequent Assets comparable to the disclosure
regarding the initial assets provided in this prospectus supplement will be
filed on a report on Form 8-K with the SEC within 15 days following the end of
the Pre-Funding Period.]
Maturity and Prepayment Considerations
The assets had terms to maturity at origination ranging from ___ months to
360 months, but may be prepaid in full or in part at any time. The prepayment
experience of the assets, including prepayments due to liquidations of defaulted
assets, will affect the weighted average life of the notes. Based on the
servicer's experience with the portfolio of assets it services, the serivicer
anticipates that a number of assets will be liquidated or prepaid in full prior
to their respective maturities. A number of factors, including homeowner
mobility, general and regional economic conditions and prevailing interest rates
may influence prepayments. In addition, any repurchases of assets on account of
breaches of representations and warranties will have the same effect as
prepayments of the assets and accordingly will affect the life of the notes.
Natural disasters may also influence prepayments. Most of the Assets contain
provisions that prohibit the obligors from selling an underlying mortgaged
property without the prior consent of the holder of the asset. These provisions
may not be enforceable in some states. The servicer's policy is to permit most
sales of mortgaged properties without accelerating the assets where the proposed
buyer meets the servicer's then-current underwriting standards and either enters
into an assumption agreement or executes a new note, contract or other form of
indebtedness for the unpaid balance of the existing asset. The execution of a
new contract or mortgage note and mortgage would have the same effect as a
prepayment of the existing asset in full. See "Certain Legal Aspects of Mortgage
Loans" in the prospectus.
Weighted Average Lives of the Notes
The following information is given solely to illustrate the effect of
prepayments of the assets on the weighted average life of the notes under the
stated assumptions and is not a prediction of the prepayment rate that might
actually be experienced with respect to the assets.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security until each dollar of principal of the
security will be repaid to the investor. The weighted average lives of the
offered notes will be affected by the rate at which
S-30
<PAGE>
principal on the assets is paid. Principal payments on assets may be in the form
of scheduled amortization or prepayments --- for this purpose, the term
prepayment includes any voluntary prepayment by an obligor, the receipt of
Liquidation Proceeds upon disposition of the property securing any defaulted
asset and the receipt of the Repurchase Price for any asset upon its repurchase
by [Asset Seller] as a result of any breaches of its representations and
warranties. Prepayments on contracts and mortgage loans may be measured relative
to a prepayment standard or model. The [prepayment model] (the "[prepayment
model]") is based on an assumed rate of prepayment each month of the then unpaid
principal balance of a pool of new assets. A prepayment assumption of 100%
[prepayment model] assumes constant prepayment rates of ___% per annum of the
then unpaid principal balance of the assets in the first month of the life of
the contracts and mortgage loans and an additional ____% per annum in each month
thereafter until the 24th month. Beginning in the 24th month and in each month
thereafter during the life of all of the contracts and mortgage loans, 100%
[prepayment model] assumes a constant prepayment rate of ____% per annum each
month.
As used in the following tables "0% [prepayment model]" assumes no
prepayments on the assets; "100% [prepayment model]" assumes the assets will
prepay at rates equal to 100% of the [prepayment model] assumed prepayment
rates; "200% [prepayment model]" assumes the assets will prepay at rates equal
to 200% of the [prepayment model] assumed prepayment rates; and so on.
There is no assurance, however, that the rate of prepayments of the assets
will conform to any level of the [prepayment model], and no representation is
made that the assets will prepay at the prepayment rates shown or any other
prepayment rate. National Mortgage makes no representations as to the
appropriateness of the [prepayment model].
Modeling Assumptions and [prepayment model] Tables
The asset prepayment tables (the "[prepayment model] Tables") were prepared
based upon the assumptions that there are no delinquencies on the assets and
that there will be a sufficient Available Distribution Amount to distribute all
accrued interest and the Principal Distribution Amount due (collectively, the
"Modeling Assumptions").
The percentages and weighted average lives in the following tables were
determined assuming that
. scheduled interest and principal payments on the assets will be
received each month on their Due Dates and full prepayments on and
liquidations of the assets will be received on the last day of each
month, commencing in ________ 1999, and will include 30 days of
interest,
. the servicer exercises the right of optional termination at the
earliest possible date,
. the assets have the characteristics set forth in the two tables
provided,
S-31
<PAGE>
. the initial certificate principal balance and pass-through rate of the
notes are as described in this prospectus supplement,
. no Due Date Interest Shortfalls will arise in connection with
prepayments in full or liquidations of the assets,
. no losses will be experienced on any assets included in the asset
pool,
. the closing date for the issuance of the notes will be
_________________,
. cash distributions will be received by the holders of the notes on
____________ and on the 15th day of each month thereafter until
retirement of the notes,
. year CMT is assumed to be ____% per annum, and One-Month LIBOR is
assumed to be ____% per annum, and
. the assets will prepay monthly at the percentages of [prepayment model]
indicated in the [prepayment model] Tables.
No representation is made that the assets will experience delinquencies or
losses at the respective rates assumed or at any other rates.
Assumed Fixed Rate Asset Characteristics
<TABLE>
<CAPTION>
Scheduled Remaining
Principal Balance Term to
As of the Maturity Seasoning
Cut-off-Date Asset Rate (Months) (Months)
------------ ----------- -------- ---------
<S> <C> <C> <C> <C>
Level Pay Assets
1................................ ____________ --------- ______ ______
2................................ ____________ _________ ______ ______
3................................ ____________ _________ ______ ______
4................................ ____________ _________ ______ ______
5................................ ____________ _________ ------ ______
</TABLE>
<TABLE>
<CAPTION>
Step-Up Rate Assets
Scheduled Remaining
Principal Balance Term to Months to Months to Months to
As of the Asset Maturity Seasoning First Second Third
Cut-off Date Rate (Months) (Months) Step Step Step
------------ ----- ------ ------- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1................ __________ ______ ____ ___ ___ ___ ___
2................ __________ ______ ____ ___ ___ ___ ___
3................ __________ ______ ____ ___ ___ ___ ___
<CAPTION>
First Step Second Step Third Step
Rate Rate Rate
Step Step Step
----- ---- ----
<S> <C> <C>
____ _____ ____
____ _____ ____
____ _____ ____
</TABLE>
* Not applicable.
S-32
<PAGE>
<TABLE>
<CAPTION>
Assumed Adjustable Rate Asset Characteristics
Scheduled
Principal Remaining
Balance Term to Months to Lifetime Periodic Reset
As of the Asset Maturity Seasoning Gross Next Rate Rate Frequency
Cut-off Date Rate (Months) (Months) Margin Change Cap Cap Index Months
------------ ---- ------ ------ ------ ------ --- --- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1......... $--------- ------% ------ --- ---% ----- -----% ----- ------% 1 year CMT
</TABLE>
There will be discrepancies between the assets actually included in the
trust and the assumptions made as to the characteristics of the assets in
preparing the [prepayment model] Tables. There is no assurance that prepayment
of the assets will conform to any of the constant percentages of [prepayment
model] described in the [prepayment model] Tables or any other constant rate.
Among other things, the [prepayment model] Tables assume that the assets prepay
at the indicated constant percentages of [prepayment model], even though the
assets may vary substantially as to asset rates and original terms to maturity.
Variations in actual prepayment experience for the assets will increase or
decrease the percentages of initial principal balances and weighted average
lives shown in the [prepayment model] Tables. Assuming no prepayments, the step-
up rate loans and the Adjustable Rate Loans will cause the Weighted Average Net
Asset Rate for the assets to rise from approximately _____% per annum at the
Cut-off Date to a maximum of approximately _____% per annum, as the asset rates
on the step-up rate loans and the Adjustable Rate Loans increase. Weighted
Average Net Asset Rate means for any distribution date, a rate equal to
. the weighted average of the asset rates applicable to the scheduled
monthly payments that were due in the related Collection Period on
outstanding assets, less
. the Servicing Fee Rate.
The [prepayment model] Tables indicate the weighted average life of the
notes and set forth the percentage of the initial principal balance of the notes
that would be outstanding after each of the dates shown assuming prepayments of
the assets occur at various percentages of [prepayment model]. The weighted
average life of the notes set forth in the [prepayment model] Tables has been
determined by multiplying the amount of each principal payment on the notes by
the number of years from the date of delivery of the notes to the related
distribution date, summing the results and dividing the sum by the total
principal to be paid on the notes. See "Maturity and Prepayment Considerations"
in the prospectus.
Please make your investment decisions on a basis that includes your
determination as to anticipated prepayment rates based on your own assumptions
as to the matters discussed in this prospectus supplement.
S-33
<PAGE>
Percentage of Initial Certificate Principal Balances Outstanding
<TABLE>
<CAPTION>
Notes at the following
Percentages of [prepayment model]
-------------------------------------
0% 100% 150% 200% 250% 300%
<S> <C> <C> <C> <C> <C> <C>
Initial Percent............ ___ ___ ___ ___ ___ __
_____ 15, 2000......... ___ ___ ___ ___ ___ __
_____ 15, 2001......... ___ ___ ___ ___ ___ __
_____ 15, 2002......... ___ ___ ___ ___ ___ __
_____ 15, 2003......... ___ ___ ___ ___ ___ __
_____ 15, 2004......... ___ ___ ___ ___ ___ __
_____ 15, 2005......... ___ ___ ___ ___ ___ __
_____ 15, 2006......... ___ ___ ___ ___ ___ __
_____ 15, 2007......... ___ ___ ___ ___ ___ __
_____ 15, 2008......... ___ ___ ___ ___ ___ __
_____ 15, 2009......... ___ ___ ___ ___ ___ __
_____ 15, 2010......... ___ ___ ___ ___ ___ __
_____ 15, 2011......... ___ ___ ___ ___ ___ __
_____ 15, 2012......... ___ ___ ___ ___ ___ __
_____ 15, 2013......... ___ ___ ___ ___ ___ __
_____ 15, 2014......... ___ ___ ___ ___ ___ __
_____ 15, 2015......... ___ ___ ___ ___ ___ __
_____ 15, 2016......... ___ ___ ___ ___ ___ __
_____ 15, 2017......... ___ ___ ___ ___ ___ __
_____ 15, 2018......... ___ ___ ___ ___ ___ __
_____ 15, 2019......... ___ ___ ___ ___ ___ __
_____ 15, 2020......... ___ ___ ___ ___ ___ __
_____ 15, 2021......... ___ ___ ___ ___ ___ __
_____ 15, 2022......... ___ ___ ___ ___ ___ __
_____ 15, 2023......... ___ ___ ___ ___ ___ __
_____ 15, 2024......... ___ ___ ___ ___ ___ __
_____ 15, 2025......... ___ ___ ___ ___ ___ __
_____ 15, 2026......... ___ ___ ___ ___ ___ __
_____ 15, 2027......... ___ ___ ___ ___ ___ __
_____ 15, 2028......... ___ ___ ___ ___ ___ __
_____ 15, 2029......... ___ ___ ___ ___ ___ __
Avg Life In Years:......... ___ ___ ___ ___ ___ __
</TABLE>
This [prepayment model] Table has been prepared based on the Modeling
Assumptions, including the assumptions regarding the characteristics and
performance of the assets, which will differ from their actual characteristics
and performance, and should be read in conjunction with these assumptions.
[Pre-Funding
The notes will be prepaid in part on the first distribution date after the
Pre-Funding Period if any Pre-Funding Amount remains in the Pre-Funding
Account on this distribution date. These amounts will be treated as a partial
principal prepayment. It is expected that substantially all of the Pre-Funded
Amount will be used to acquire Subsequent Assets. It is unlikely, however,
that the aggregate Scheduled Principal Balance of the Subsequent Assets
purchased by the trust will be identical to the Pre-Funded Amount, and
consequently, noteholders will likely receive some prepayment of principal.]
S-34
<PAGE>
Factors Affecting Prepayments
The rate of principal payments on pools of assets is influenced by a
variety of economic, geographic, social and other factors, including the
prevailing level of interest rates from time to time and the rate at which
owners of assets sell their assets or default on their loans. Other factors
affecting prepayment of assets include changes in obligors' housing needs, job
transfers, unemployment and obligors' net equity in the mortgaged properties.
In general, if prevailing interest rates fall significantly below the
interest rates on the assets in your pool, these assets are likely to experience
higher prepayment rates than if prevailing interest rates remained at or above
the rates borne by these assets, because the obligors may refinance and obtain
new loans with lower interest rates and lower monthly payments. Conversely, if
prevailing interest rates rise above the interest rates on these assets, the
rate of prepayment would be expected to decrease because new loans would bear
higher interest rates and require higher monthly payments.
The assets may be prepaid by the obligors at any time without imposition of
any prepayment fee or penalty. In addition, defaults on assets leading to
repossession, and foreclosure in the mortgage loans, and the ultimate
liquidation of the related mortgaged properties, may occur with greater
frequency during their early years. Prepayments, liquidations and repurchases
of the assets will result in distributions of principal to noteholders of
amounts that would otherwise have been distributed over the remaining terms of
the assets. See "Yield on the Offered Notes" in this prospectus supplement.
[Asset Seller], as seller under the sales agreement, may be required to
repurchase assets if it breaches its representations and warranties contained in
the sales agreement. Any repurchase of an asset will have the same effect as a
prepayment in full of the asset and will affect your yield to maturity. See "The
Asset Pool -- Conveyance of Contracts" in this prospectus supplement.
The servicer has the option to terminate the trust, thereby causing the
retirement of all outstanding notes, on any distribution date on or after the
distribution date on which the sum of the certificate principal balance of the
notes is less than [10]% of the sum of their original certificate principal
balance. If the servicer does not exercise its optional termination rights
within 90 days after becoming eligible to do so, the indenture trustee shall
solicit bids for the purchase of all assets, REO properties and repo properties
remaining in the trust. This purchase, if consummated, would likewise cause the
retirement of all outstanding notes. See "The Trust" in this prospectus
supplement.
Yield on the Notes
Distributions of interest on the notes on any distribution date will
include interest accrued thereon through the last day of the month preceding the
month in which this distribution date occurs. Because interest will not be
distributed on the notes until the 15th day, or, if this day is not a business
day, then on the next succeeding business day, of the month following the month
in which this interest accrues, the effective yield to the holders of the notes
will be lower than the yield otherwise produced by the pass-through rate and
purchase price.
S-35
<PAGE>
The yield to maturity of, and the amount of distributions on, each the
notes will be related to the rate and timing of principal payments on the
assets. The rate of principal payments on the assets will be affected by the
amortization schedules of the assets and by the rate of principal prepayments,
including for this purpose payments resulting from refinancings, liquidations of
the assets due to defaults, casualties, condemnations and repurchases by or on
behalf of National Mortgage or [Asset Seller], as the case may be. No assurance
can be given as to the rate of principal payments or on the prepayments on the
assets.
Delinquencies on assets could produce payment delays and could lead to
repossessions of assets and foreclosures in the case of mortgage loans.
Repossession of assets or foreclosure on a real property or mortgaged property
and the subsequent resale of the home securing assets or a property securing a
mortgage loan may produce net liquidation proceeds that are less than the
Scheduled Principal Balance of the related asset plus interest accrued and the
expenses of sale. This shortfall upon repossession and disposition of an asset
or foreclosure on a real property or mortgaged property would result in a
Realized Loss on the asset.
The timing of changes in the rate of prepayments and defaults on the assets
may affect an investor's actual yield to maturity significantly, even if the
average rate of principal payments and defaults experienced over time is
consistent with an investor's expectations. In general, the earlier a
prepayment of principal of or a default on an asset, the greater will be the
effect on the investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments or defaults occurring at a rate
higher --- or lower --- than the rate anticipated by the investor during the
period immediately following the issuance of the notes would not be fully offset
by a subsequent like reduction --- or increase --- in the rate of principal
payments or defaults.
If a purchaser of notes calculates its anticipated yield based on an
assumed rate of default and an assumed amount of Realized Losses that are lower
than the default rate and amount of Realized Losses actually incurred and the
amount of Realized Losses actually incurred is not entirely covered by Excess
Interest, the purchaser's actual yield to maturity will be lower than that so
calculated. The timing of Realized Losses on liquidated loans will also affect
an investor's actual yield to maturity, even if the rate of defaults and
severity of losses are consistent with an investor's expectations. There can be
no assurance that the delinquency or repossession experience set forth in this
prospectus supplement under the heading "Servicing of the Assets -- Delinquency
and Loan Loss/Repossession Experience" will be representative of the results
that may be experienced with respect to the assets. There can be no assurance
as to the delinquency, repossession, foreclosure or loss experience with respect
to the assets.
If the purchaser of a note offered at a discount from its Parity Price
calculates its anticipated yield to maturity based on an assumed rate of payment
of principal that is faster than that actually experienced on the assets, the
actual yield to maturity will be lower than that so calculated. Similarly, if
the purchaser of a note offered at a premium above its Parity Price calculates
its anticipated yield to maturity based on an assumed rate of payment of
principal that is slower than that actually experienced on the assets, the
actual pre-tax yield to maturity will be lower than that so calculated. Parity
Price is the price at which a security will yield its coupon.
S-36
<PAGE>
While partial prepayments of principal on the assets are applied on Due
Dates for the assets, obligors are not required to pay interest on the assets
after the date of a full prepayment of principal. As a result, full prepayments
of assets in advance of their Due Dates during the Collection Period will reduce
the amount of interest received from obligors during that Collection Period to
less than one month's interest on all the assets. If a sufficient number of
assets are prepaid in full during the Prepayment Period in advance of their
respective Due Dates, then interest payable on all of the assets during the
related Collection Period may be less than the interest payable on all of the
notes with respect to the Collection Period. See "Description of the Offered
Notes" in this prospectus supplement.
[Investors in the notes should understand that the timing of changes in the
level of One-Month LIBOR may affect the actual yields to investors even if the
average level is consistent with the investor's expectations. Each investor
must make an independent decision as to the appropriate One-Month LIBOR
assumption to be used in deciding whether to purchase a note.]
The aggregate amount of distributions and the yield to maturity of the
notes will also be affected by early payments of principal on the assets
resulting from any purchases of assets not conforming to representations and
warranties of [Asset Seller] and by the exercise by the servicer of its option
to purchase the assets and other assets of the trust, thereby effecting early
retirement of any outstanding notes. If the servicer does not exercise its
optional termination right within 90 days after it first becomes eligible to do
so, the indenture trustee shall solicit bids for the purchase of all assets, REO
Properties and Repo Properties remaining in the trust. The indenture trustee
shall sell these assets, REO Properties and Repo Properties only if the net
proceeds to the trust from the sale would at least equal the Termination Price
The net proceeds from the sale will be distributed first to the servicer to
reimburse it for all previously unreimbursed Liquidation Expenses paid and
Advances made by, and not previously reimbursed to, it with respect to the
assets and second to the Holders of the notes and the servicer. Accordingly, it
is possible that your notes could be redeemed at a price less than their
outstanding principal amount plus accrued and unpaid interest.
If the net proceeds from the sale would not at least equal the Termination
Price, the indenture trustee shall decline to sell the assets, REO Properties
and Repo Properties and shall not be under any obligation to solicit any further
bids or otherwise negotiate any further sale of the assets, REO Properties and
Repo Properties.
The Trust
General
The notes will be issued pursuant to an indenture. This summary of the
provisions of the indenture does not purport to be complete. Reference is made
to the prospectus for important information in addition to that set forth in
this prospectus supplement regarding the terms and conditions of the offered
notes. A copy of the indenture relating to the notes, in the form in which it
was executed by National Mortgage, the servicer and the indenture trustee,
without exhibits, will be filed with the SEC in a Current Report on Form 8-K
within 15 days after the closing date.
S-37
<PAGE>
The trust created pursuant to the indenture will consist of the assets,
including all rights to receive payments due on the assets after the Cut-off
Date; assets as from time to time are identified as deposited in any account
held for the benefit of noteholders, including the note account and the
distribution account; any asset, real property or mortgaged property acquired on
behalf of noteholders by repossession, foreclosure or by deed in lieu of
foreclosure; the rights of the indenture trustee to receive the proceeds of any
standard hazard insurance policies maintained with respect to the mortgaged
properties in accordance with the indenture and of any FHA insurance maintained
with respect to the assets; and certain rights of National Mortgage relating to
the enforcement of representations and warranties made by [Asset Seller]
relating to the assets.
The Indenture Trustee
The indenture trustee is _____________. Any notices to the indenture
trustee relating to the notes or the indenture should be sent to
_________________________________________.
Investors may contact the indenture trustee's corporate trust office by
telephone to ascertain the note principal balance of the notes and the then
current pass-through rate applicable to the notes. The telephone number
currently maintained by the indenture trustee for the purpose of reporting this
information is (___) ___________. National Mortgage will file a Current Report
on Form 8-K with the SEC within 15 days following the closing date. This
Current Report on Form 8-K will specify the initial principal amount of the
notes.
The indenture trustee may resign at any time, in which event National
Mortgage will be obligated to appoint a successor indenture trustee. National
Mortgage may also remove the indenture trustee if the indenture trustee ceases
to be eligible to continue as such under the indenture or if the indenture
trustee becomes insolvent. In these circumstances, National Mortgage will also
be obligated to appoint a successor indenture trustee. Any resignation or
removal of the indenture trustee and appointment of a successor indenture
trustee will not become effective until acceptance of the appointment by the
successor indenture trustee.
The indenture requires the indenture trustee to maintain, at its own
expense, an office or agency where notes may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the indenture
trustee and the Note Registrar in respect of the notes pursuant to the indenture
may be served.
The Owner Trustee
[Wilmington Trust Company, a Delaware banking corporation,] will act as
owner trustee under the owner trust agreement. [Wilmington Trust Company's]
principal offices are located at [Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001.] Certain functions of the owner trustee under
the owner trust agreement will be performed by the indenture trustee.
S-38
<PAGE>
Optional Termination
The servicer may terminate the trust by purchasing all assets, REO
Properties and Repo Properties remaining in the trust on any distribution date
(the "Call Option Date") occurring on or after the distribution date on which
the sum of the Note Balance of the notes is less than [10]% of the sum of the
original note principal balance of the notes. See "Description of the Securities
- -- Optional Redemption or Termination" in the prospectus.
The Termination Price will equal the greater of
. the sum of
. any Liquidation Expenses incurred by the servicer in respect of any
asset that has not yet been liquidated,
. all amounts required to be reimbursed or paid to the servicer in
respect of previously unreimbursed Advances, and
. the sum of
. the aggregate unpaid principal balance of the assets, plus
accrued and unpaid interest thereon at the asset rates borne
by your assets through the end of the Interest Accrual Period
in respect of the date of the terminating purchase, plus
. the lesser of
. the aggregate unpaid principal balance of each asset that
had been secured by any REO Property or Repo Property
remaining in the trust, plus accrued interest thereon at
the asset rates borne by assets through the end of the
month preceding the month of the terminating purchase,
and
. the current appraised value of any REO Property or Repo
Property, net of Liquidation Expenses to be incurred in
connection with the disposition of this property
estimated in good faith by the servicer, the appraisal to
be conducted by an appraiser mutually agreed upon by the
servicer and the indenture trustee, plus all previously
unreimbursed P&I Advances made in respect of the REO
Property or Repo Property, and
. the aggregate fair market value of the assets of the trust, as
determined by the servicer, plus all previously unreimbursed P&I
Advances made with respect to the assets.
S-39
<PAGE>
The fair market value of the assets of the trust as determined for purposes of a
terminating purchase shall be deemed to include accrued interest at the
applicable asset rate on the unpaid principal balance of each asset, including
any asset that has become a REO Property or a Repo Property, which REO Property
or Repo Property has not yet been disposed of by the servicer, through the end
of the month preceding the month of the terminating purchase. Accordingly, it is
possible that your notes could be redeemed by an optional termination at a price
less than their outstanding principal amount plus accrued and unpaid interest.
The basis for a valuation shall be furnished by the servicer to the noteholders
upon request. See "Description of the Securities -- Optional Redemption or
Termination" in the prospectus.
On the date of any termination of the trust, the Termination Price shall be
distributed first to the servicer to reimburse it for all previously
unreimbursed Liquidation Expenses paid and Advances made by and not previously
reimbursed to the servicer with respect to the assets and second to the
noteholders in accordance with the distribution priorities set forth under
" -- Distributions -- Priority of Distributions" in this prospectus supplement.
The Termination Price shall be deemed to be a principal prepayment in full,
together with related interest, received during the related Prepayment Period
for purposes of determining the allocation of the distributions. Upon the
termination of the trust and payment of all amounts due on the notes and all
administrative expenses associated with the trust, any remaining assets of the
trust shall be sold and the proceeds distributed pro rata to the [Asset Seller].
See "Description of the Securities -- Optional Redemption or Termination" in
the prospectus.
Auction Sale
If the servicer does not exercise its optional termination right within 90
days after it first becomes eligible to do so, the indenture trustee shall
solicit bids for the purchase of all assets, REO Properties and Repo Properties
remaining in the trust. The indenture trustee shall sell the assets, REO
Properties and Repo Properties only if the net proceeds to the trust from the
sale would at least equal the Termination Price, and the net proceeds from the
sale will be distributed first to the servicer to reimburse it for all
previously unreimbursed Liquidation Expenses paid and Advances made by, and not
previously reimbursed to, it with respect to the assets and second to the
noteholders and the servicer in accordance with the distribution priorities set
forth under "Description of the Offered Noteholders -- Distributions -- Priority
of Distributions" in this prospectus supplement. Accordingly, it is possible
that your notes could be redeemed by reason of an auction sale at a price less
than their outstanding principal amount plus accrued and unpaid interest. If
the net proceeds from the sale would not at least equal the Termination Price,
the indenture trustee shall decline to sell the assets, REO Properties and Repo
Properties and shall not be under any obligation to solicit any further bids or
otherwise negotiate any further sale of the assets, REO Properties and Repo
Properties.
Termination of the Agreement
The indenture will terminate upon the last action required to be taken by
the indenture trustee on the final distribution date following the later of the
purchase by the servicer of all assets and all property acquired in respect of
any asset remaining in the trust estate, as described
S-40
<PAGE>
under " -- Optional Termination" and "Auction Sale" in this prospectus
supplement and the final payment or other liquidation, or any related advance,
of the last asset remaining in the trust estate or the disposition of all
property acquired upon repossession or foreclosure on any mortgaged property.
Upon presentation and surrender of the notes, the indenture trustee shall
cause to be distributed, to the extent of available funds, to the noteholders on
the final distribution date the amounts due them in accordance with the
indenture. The amount remaining on deposit in the note account, other than
amounts retained to meet claims, after all required distributions have been made
to the holders of the notes, or to the Termination Account, will be paid to the
[Asset Seller], in accordance with the provisions of the indenture.
Voting Rights
The voting rights of the trust will be allocated to the notes in proportion
to their respective note principal balances. For a description of the limited
matters on which the noteholders may vote, see "The Agreements" in the
prospectus.
Reports to Noteholders
The indenture trustee will furnish the noteholders with monthly statements
prepared by the servicer (each, a "Remittance Report") containing information
with respect to principal and interest distributions on the notes and Realized
Losses on the assets. Any financial information contained in these reports will
not have been examined or reported upon by an independent public accountant.
Copies of the monthly statements and any annual reports prepared by the servicer
evidencing the status of its compliance with the provisions of a indenture will
be furnished to related noteholders upon request addressed to the indenture
trustee.
A Remittance Report for a distribution date will identify the following
items
. the Available Distribution Amount for the related distribution date,
. the Interest Distribution Amount and the carryover amounts for the notes
for the related distribution date, and the amount of interest of each
category to be distributed based upon the Available Distribution Amount
for the related distribution date,
. the amount to be distributed on the related distribution date on the
notes to be applied to reduce the note principal balance, separately
identifying any portion of the amount attributable to prepayments, and
the aggregate of any Principal Distribution Amounts remaining unpaid
from previous distribution dates for the notes for the related
distribution date, and the amount to be distributed to reduce any
Principal Distribution Amounts remaining unpaid from previous
distribution dates based upon the Available Distribution Amount for the
related distribution date,
. the aggregate amount of P&I Advances required to be made by the servicer
with respect to the related distribution date,
S-41
<PAGE>
. the amount of any Realized Losses incurred on the assets during the
related Prepayment Period and in the aggregate since the Cut-off Date,
. the note principal balance of the notes after giving effect to the
distributions to be made on the related distribution date,
. the aggregate Interest Distribution Amount remaining unpaid, if any, and
the aggregate carryover amount remaining unpaid, if any, for the notes,
after giving effect to the distributions to be made on the related
distribution date,
. the aggregate of any Principal Distribution Amounts remaining unpaid
from previous distribution dates, if any, for the notes, after giving
effect to the distributions to be made on the related distribution date,
. the amount of the aggregate Servicing Fee in respect of the related
distribution date,
. the aggregate number and the aggregate of the unpaid principal balances
of outstanding assets that are delinquent one month --- 30 to 59 days
---as of the end of the related Prepayment Period, delinquent two
months ---60 to 89 days --- as of the end of the related Prepayment
Period, delinquent three months--- 90 days or longer --- as of the end
of the related Prepayment Period and as to which repossession,
foreclosure or other comparable proceedings have been commenced as of
the end of the related Prepayment Period,
. the aggregate number and the aggregate unpaid principal balance of
outstanding contracts and outstanding mortgage loans, stated separately,
for which the obligor is also a debtor, whether voluntary or
involuntary, in a proceeding under the Bankruptcy Code; and the
aggregate number and the aggregate Unpaid Principle Balance of
outstanding contracts and outstanding mortgage loans for which the
obligor is also a debtor, whether voluntary or involuntary, in a
proceeding under the Bankruptcy Code, stated separately, that are
delinquent one month --- 30 to 59 days --- as of the end of the related
Prepayment Period, delinquent two months --- 60 to 89 days --- as of the
end of the related Prepayment Period, and delinquent three months --- 90
days or longer --- as of the end of the related Prepayment Period, and
. [the Pre-Funded Amount, if any, in the Pre-Funding Account on the
related distribution date, the amount of funds, if any, used to purchase
Subsequent Assets during the Pre-Funding Period and the amount of funds,
if any allocated as a prepayment of principal at the end of the Pre-
Funding Period.]
In the case of information furnished pursuant to the second and third
bullet points, the amounts shall be expressed, with respect to any note, as a
dollar amount per $1,000 denomination.
S-42
<PAGE>
Servicing of the Assets
The Servicer
__________________ is incorporated in the state of ____________. The servicer
is primarily engaged in the business of underwriting, originating, pooling,
selling and servicing [Asset Type]. The servicer's principal offices are
located at ______________________________, telephone (___) ___-____.
Servicing Portfolio
The servicer services all of the assets it originates or purchases
--- except for some asset portfolios which it sells on a servicing-released
basis --- collecting loan payments, insurance premiums and other payments from
borrowers and remitting principal and interest payments to the holders of the
notes. The following table shows the composition of the servicer's servicing
portfolio on the dates indicated.
Asset Servicing Portfolio
<TABLE>
<CAPTION>
At ______ 30, At ____ 31,
------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- -------- -------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Number of Serviced
Assets
[Asset Seller] Originated......................
Acquired Portfolios............................
Aggregate Outstanding Principal Balance
of Serviced Assets
[Asset Seller] Originated......................
Acquired Portfolios............................
Average Outstanding Principal Balance
per Serviced Asset
[Asset Seller] Originated......................
Acquired Portfolios............................
Weighted Average Interest Rate of Serviced
Assets
[Asset Seller] Originated......................
Acquired Portfolios............................
</TABLE>
Delinquency and Loan Loss/Repossession Experience
The following tables set forth information concerning the delinquency
experience and the loan loss and repossession experience of the portfolio of
assets, serviced by [Asset Seller], in each case for each of the servicer's
fiscal years from ____ through ____. Because delinquencies, losses and
repossessions are affected by a variety of economic, geographic and other
factors, there can be no assurance that the delinquency and loss experience of
the assets will be comparable to that set forth.
Delinquency Experience
At _________ 30, At _______- 31,
---------------------------------- --------------------
S-43
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Number of Serviced Assets
[Loan Seller] Originated..................
Acquired Portfolios.......................
Number of Delinquent Assets
[Loan Seller] Originated:
30 to 59 days past due....................
60 to 89 days past due....................
90 days or more past due..................
Total Number of Assets Delinquent.........
Acquired Portfolios:
30-59 days past due.......................
60-89 days past due.......................
90 days or more past due..................
Total Number of Assets Delinquent.........
Total Delinquencies as a Percentage of Serviced
Assets, by Number of Assets
[Loan Seller] Originated..................
Acquired Portfolios.......................
</TABLE>
______________
Assets that are already the subject of repossession or foreclosure procedures
are not included in "delinquent assets" for purposes of this table. The period
of delinquency is based on the number of days payments are contractually past
due, assuming 30-day months. Consequently, a payment due on the first day of a
month is not 30 days delinquent until the first day of the following month.
Loan Loss/Repossession Experience
<TABLE>
<CAPTION>
At or for the
Six Months
At ________ 30, ended ______ 31,
________________________________________________________________________
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Number of Serviced Assets at Period End............
Average Number of Serviced Assets During Period..........
Number of Serviced Assets Repossessed....................
Serviced Assets Repossessed as a Percentage of Total
Serviced Assets (1)................................
Serviced Assets Repossessed as a Percentage of Average
Number of
Serviced Assets....................................
Average Outstanding Principal Balance of Assets
[Loan Seller] Originated...........................
Acquired Portfolios................................
Net Losses from Asset Liquidations (2):
Total Dollars
[Loan Seller] Originated...........................
Acquired Portfolios................................
As a Percentage of Average Outstanding Principal
Balance of Assets(3)
[Loan Seller] Originated...........................
Acquired Portfolios................................
</TABLE>
Percentages expressed in the six month tables are annualized.
(1) Total number of serviced assets repossessed during the applicable period
expressed as a percentage of the total number of serviced assets at the end
of the applicable period.
(2) Net losses represent all losses incurred on [Loan Seller]-serviced
portfolios. Such amounts include estimates of net losses with respect to
certain defaulted assets. The length of the accrual period for the amount
of accrued and unpaid interest included in the calculation of the net loss
varies depending upon the period in which the loss was charged and whether
the asset was owned by an entity other than [Loan Seller].
(3) Total net losses incurred on assets liquidated during the applicable period
expressed as a percentage of the average outstanding principal balance of
all assets.
S-44
<PAGE>
The servicer owns few of the assets in the foregoing tables, and
accordingly does not maintain loan loss reserves or charge-off loans. The policy
with respect to the vast majority of loans reflected in these tables, which the
servicer services primarily for the accounts of securitization trusts, is to
reflect credit loss only when an REO Property or a Repo Property has been
finally disposed of and not before. In most cases, disposition occurs shortly
after the asset becomes 90 days delinquent; however it may occur before this
time and it may occur later. This policy exists because only at the final
disposition of the collateral does the servicer know with certainty the amount
of the loss, if any, for reporting purposes.
Macroeconomic and social conditions likely are responsible for the trend to
some extent as well, although it is difficult to say for certain. For example,
the U.S. economy has witnessed a general increase in consumer credit over the
past several years, and credit also has been made more generally available to
all economic classes than in the past. Finally, there seems to be an increased
willingness on the part of consumers to seek the protection of federal
bankruptcy laws.
The data in the foregoing tables are presented for illustrative purposes
only, and there is no assurance that the delinquency, loan loss and repossession
experience of the assets will be similar to that set forth. The delinquency,
loan loss and repossession experience of assets historically has been sharply
affected by downturns in regional or local economic conditions. For instance, a
downturn was experienced in areas dependent on the oil and gas industry in the
1980s, causing increased levels of delinquencies, repossessions and loan losses
on assets in the affected areas. The asset pool consists primarily of
contracts. Regional and local economic conditions are often volatile, and no
predictions can be made regarding their effects on future economic losses upon
repossessions or as to the levels of losses that will be incurred as a result of
any repossessions of or foreclosures on assets. See "Risk Factors -- You May
Experience A Loss On Your Investment If Losses And Delinquencies On Assets in
The Trust Are High" in this prospectus supplement.
Collection and Other Servicing Procedures
The servicer will administer, service and make collections on the assets,
exercising the degree of care that the servicer exercises with respect to
similar contracts serviced by the servicer.
[Except for the step-up rate loans during their Step-up Periods], each
Fixed Rate Asset bears interest at a fixed annual percentage rate and provides
for level payments over the term of the asset that fully amortize the principal
balance of the asset. All payments received on the assets --- other than
payments allocated to items other than principal and interest or payments
sufficient to pay the outstanding principal balance of and all accrued and
unpaid interest on the assets --- will be applied when received first to any
previously unpaid scheduled monthly payments, and then to the currently due
monthly payment, in the chronological order of occurrence of the Due Dates for
the monthly payments. Any payments on an asset that exceed the amount necessary
to bring the asset current are applied to the partial prepayment of principal of
the asset if the servicer determines, based on specific directions from the
obligor as to the payment or on a course of dealing with the obligor, that the
obligor intended the payment as a
S-45
<PAGE>
partial principal prepayment. If the servicer cannot determine the obligor's
intent with respect to any excess payment, the servicer will apply the excess
payment as an early payment of scheduled monthly payments for subsequent Due
Dates to the extent the excess payment is an integral multiple of the obligor's
scheduled monthly payment, and will apply the remainder of the excess payment as
a partial principal prepayment.
Servicing Compensation and Payment of Expenses
On each distribution date, the servicer will be entitled to receive a
monthly Servicing Fee equal to _____% per annum (the "Servicing Fee Rate")
multiplied by the aggregate Scheduled Principal Balance of the assets at the
beginning of the related Collection Period, without giving effect to any
principal prepayments, net liquidation proceeds and Repurchase Prices received
(or Realized Losses incurred, during the related Prepayment Period). If [Asset
Seller] is the servicer, the Servicing Fee in respect of a distribution date
will be paid pursuant to clause (12) under "Description of the Offered
Securities -- Distributions" in this prospectus supplement and only to the
extent of funds available pursuant to clause (12), except that it may retain its
Servicing Fee out of collections on the assets to the extent that the amount
already on deposit in the note account for the related distribution date will
allow the full distribution of all amounts required to be distributed pursuant
to clauses (1) through (11) under "Description of the Offered Securities --
Distributions -- Priority of Distributions" in this prospectus on the related
distribution date. If [Asset Seller] is not the servicer, the Servicing Fee in
respect of each asset may be retained by the servicer at the time of the related
collection on the asset or may be withdrawn from the note account at a later
time, in which case the amount will not be part of the Available Distribution
Amount.
The Servicing Fee provides compensation for customary third-party servicing
activities to be performed by the servicer for the trust and for additional
administrative services performed by the servicer on behalf of the trust.
Customary servicing activities include collecting and recording payments,
communicating with obligors, investigating payment delinquencies, providing
billing and tax records to obligors and maintaining internal records with
respect to each asset. Administrative services performed by the servicer on
behalf of the trust include calculating distributions to noteholders and
providing related data processing and reporting services for noteholders and on
behalf of the indenture trustee. Expenses incurred in connection with servicing
of the assets and paid by the servicer from its monthly Servicing Fee include,
without limitation, payment of fees and expenses of accountants, payment of all
fees and expenses incurred in connection with the enforcement of contracts or
mortgage loans, except Liquidation Expenses, and payment of expenses incurred in
connection with distributions and reports to noteholders. The servicer will be
reimbursed out of the Liquidation Proceeds of a defaulted asset for all
reasonable, out-of-pocket Liquidation Expenses incurred by it in repossessing,
foreclosing on and liquidating the related mortgaged property.
As part of its servicing fees, the servicer will also be entitled to
retain, as compensation for the additional services provided in connection with
the master servicing agreement, any late payment fees made by obligors,
extension fees paid by obligors for the extension of scheduled payments and
assumption fees paid in connection with permitted assumptions of assets by
S-46
<PAGE>
purchasers of the mortgaged properties, as well as investment earnings on funds
in the note account.
Advances
On or prior to the business day preceding each distribution date, the
servicer will either
. deposit from its own funds the related aggregate P&I Advance into the
note account,
. cause appropriate entries to be made in the records of the note account
that funds in the note account that are not part of the Available
Distribution Amount for the related distribution date have been used to
make the aggregate P&I Advance,
. if the note account is maintained by the indenture trustee, instruct the
indenture trustee to use investment earnings on the note account to
defray the servicer's P&I Advance obligation, or
. make or cause to be made the aggregate P&I Advance through any
combination of the methods described.
Any funds held for future distribution and used in accordance with the second
bullet point must be restored by the servicer from its own funds or from early
payments collected on the assets when they become part of a future Available
Distribution Amount. The aggregate required P&I Advance for a distribution date
is the sum of delinquent scheduled monthly payments due in the related
Collection Period, exclusive of all Non-Recoverable Advances.
P&I Advances are intended to maintain a regular flow of scheduled interest
and principal payments to noteholders rather than to guarantee or insure against
losses.
The servicer will also be obligated to make advances ("Servicing
Advances"), to the extent the servicer deems the Advances recoverable out of
Liquidation Proceeds of, or from collections on, the related contract or
mortgage loan, in respect of Liquidation Expenses and taxes and insurance
premiums not paid by an obligor on a timely basis.
The servicer may reimburse itself for Servicing Advances out of collections
of the late payments in respect of which the Advances were made and, upon the
determination that a Non-recoverable Advance has been made in respect of an
asset or upon an asset becoming a liquidated loan, out of Funds in the note
account for unreimbursed amounts advanced by it in respect of the asset. In
addition, the servicer may reimburse itself out of funds in the note account for
unreimbursed amounts advanced by it in respect of P&I Advances.
Successors to Servicer, Delegation of Duties
Any entity with which the servicer is merged or consolidated, or any entity
resulting from any merger, conversion or consolidation to which the servicer is
a party, or any entity succeeding to the business of the servicer, will be the
successor to the servicer under the master servicing
S-47
<PAGE>
agreement so long as each rating agency has delivered to the indenture trustee a
letter to the effect that the successorship will not result in a downgrading of
the rating then assigned by the rating agency to the notes. The servicer may
delegate computational, data processing, collection and foreclosure, including
repossession, duties under the master servicing agreement without any notice to
or consent from National Mortgage or the indenture trustee, provided that the
servicer will remain fully responsible for the performance of these duties.
Use of Proceeds
Substantially all of the net proceeds to be received from the sale of the
notes will be used to purchase the assets and to pay other expenses connected
with pooling the assets and issuing the notes.
Underwriting
National Mortgage [and Asset Seller] have entered into an underwriting
agreement dated ______________________ with _________________________________
and _______________________________________ (the "Underwriters"), for whom
__________________________________ is acting as representative (the
"Representative"). In the underwriting agreement, National Mortgage has agreed
to sell to the Underwriters, and the Underwriters have agreed to purchase, the
principal amount of the offered notes set forth opposite each of their names:
[Underwriter] $_________
[Underwriter] $_________
Total........... $_________
The underwriting agreement provides that there are conditions precedent to
the obligations of the several Underwriters and that the Underwriters will be
obligated to purchase all of the offered notes if any of the offered notes are
purchased. In the event of default by any Underwriter, the underwriting
agreement provides that, in some circumstances, the purchase commitments of the
nondefaulting Underwriter may be increased or the underwriting agreement may be
terminated.
National Mortgage has been advised by the Representative that the several
Underwriters propose to offer the offered notes to the public initially at the
respective public offering prices set forth on the cover page of this prospectus
supplement, and to dealers at such prices less a concession not in excess of the
amount set forth. The Underwriters and dealers may allow a discount not in
excess of the amount set forth to other dealers. After the initial public
offering of the offered notes, the public offering prices and concessions and
discounts to dealers may be changed by the Representative.
S-48
<PAGE>
Concession Discount
(Percent of (Percent of
Principal Principal
Amount) Amount)
------- -------
____%...................._____%
The Underwriters and any dealers that participate with the Underwriters in
the distribution of the offered notes may be deemed to be underwriters, and any
discounts, concessions or commissions received by them, and any profit on the
resale of the offered notes purchased by them, may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Act").
National Mortgage [and Asset Seller] have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Act, or contribute to payments which the Underwriters may be required to make.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the offered notes
in the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriters to reclaim a
selling concession from a syndicate member when the offered notes originally
sold by syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the offered notes to be
higher than it would otherwise be in the absence of these transactions. These
transactions, if commenced, may be discontinued at any time.
National Mortgage estimates that its expenses in connection with the
issuance and offering of the notes will be approximately $________. This
information concerning National Mortgage's fees and expenses is an approximation
and may be changed by future contingencies.
Legal Matters
Legal matters will be passed upon for National Mortgage by Hunton &
Williams, Richmond, Virginia, and for the Underwriters by _________________. The
material federal income tax consequences of the offered notes will be passed
upon for National Mortgage by Hunton & Williams.
ERISA Considerations
S-49
<PAGE>
General
Title I of the Employee Retirement Income Security Act of 1974, as amended,
and section 4975 of the Internal Revenue Code of 1986, as amended, impose
restrictions on retirement plans and other subject employee benefits plans or
arrangements and on persons who are parties in interest or disqualified persons
with respect to plans. Some employee benefit plans, such as governmental plans
and church plans are not subject to the restrictions of ERISA, and assets of
these plans may be invested in the notes without regard to ERISA considerations,
subject to other federal and state law. However, a governmental or church plan
that is qualified under section 401(a) of the Code and exempt from taxation
under section 501(a) of the Code is subject to the prohibited transaction rules
of section 503 of the Code. Any plan fiduciary that proposes to cause a plan to
acquire any of the notes should consult with its counsel with respect to the
potential consequences under ERISA and the Code of the plan's acquisition and
ownership of the Notes. See "ERISA Considerations" in the accompanying
prospectus.
Investments by plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a plan's investments be made in
accordance with the documents governing the plan.
Prohibited Transactions
Section 406 of ERISA prohibits parties in interest from engaging in
transactions involving a plan and its assets unless a statutory or
administrative exemption applies to the transaction. Section 4975 of the Code
imposes excise taxes, or, in some cases, a civil penalty may be assessed
pursuant to section 502(i) of ERISA, on parties in interest that engage in non-
exempt prohibited transactions.
The United States Department of Labor has issued regulations concerning the
definition of what constitutes the assets of a plan for purposes of ERISA and
the prohibited transaction provisions of the Code. The plan asset regulation
describes the circumstances under which the assets of an entity in which a plan
invests will be considered to be "plan assets" such that any person who
exercises control over such assets would be subject to ERISA's fiduciary
standards. Under the plan asset regulation, generally when a plan invests in
another entity, the plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity. However, the plan asset
regulation provides that, if a plan acquires an "equity interest" in an entity,
the assets of the entity will be treated as assets of the plan investor unless
exceptions not applicable here apply.
Under the plan asset regulation, the term "equity interest" is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the notes are not treated as equity interests in the owner trust
for purposes of the plan asset regulation, a plan's investment in the notes
would not cause the assets of the owner trust to be deemed plan assets.
However, National Mortgage, the servicer, the indenture trustee, and the owner
trustee may be the sponsor of or investment advisor with respect to one or more
plans. Because such parties may receive certain benefits in connection with the
sale of the notes, the purchase of notes using plan assets over which any such
S-50
<PAGE>
parties has investment authority might be deemed to be a violation of the
prohibited transaction rules of ERISA and the Code for which no exemption may be
available. Accordingly, the notes may not be purchased using the assets of any
plan if National Mortgage, the servicer, the indenture trustee, or the owner
trustee has investment authority with respect to such assets.
In addition, certain affiliates of the owner trustee might be considered or
might become parties in interest with respect to a plan. Also, any holder of
residual interest certificates, because of its activities or the activities of
its respective affiliates, may be deemed to be a party in interest with respect
to certain plans, including but not limited to plans sponsored by such holder.
In either case, the acquisition or holding of the notes by or on behalf of such
a plan could be considered to give rise to an indirect prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as prohibited transaction class exemption 84-14, which exempts
certain transactions effected on behalf of a plan by a "qualified professional
asset manager," PTCE 90-1, which exempts certain transactions involving
insurance company pooled separate accounts, PTCE 91-38, which exempts certain
transactions involving bank collective investment funds, PTCE 95-60, which
exempts certain transactions involving insurance company general accounts, or
PTCE 96-23, which exempts certain transactions effected on behalf of a plan by
certain "in-house asset managers." Each purchaser or transferee of a note that
is a plan or is investing assets of a plan shall be deemed to have represented
that the relevant conditions for exemptive relief under at least one of the
foregoing exemptions have been satisfied.
If the notes are deemed to be equity interests in the owner trust, the
owner trust could be considered to hold plan assets by reason of a plan's
investment in the notes. In such an event, the servicer and other persons
exercising management or discretionary control over the assets of the owner
trust may be deemed to be fiduciaries with respect to investing plans and thus
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of section 406 of ERISA, and
section 4975 of the Code with respect to transactions involving the owner
trust's assets. There can be no assurance that any statutory or administrative
exemption will apply to all prohibited transactions that might arise in
connection with the purchase or holding of an equity interest in the owner trust
by a plan.
Review by Plan Fiduciaries
Any plan fiduciary considering whether to purchase any notes on behalf of a
plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment and the availability of any prohibited transaction
exemptions. The sale of notes to a plan is in no respect a representation by
National Mortgage or the Underwriters that this investment meets all relevant
requirements with respect to investments by plans generally or any particular
plan or that this investment is appropriate for plans generally or any
particular plan.
S-51
<PAGE>
Ratings
It is a condition to the issuance of the notes that the notes obtain a
________ and ___________ ratings by _____ and ______, respectively:
The ratings on asset-backed notes address the likelihood of the receipt by
noteholders of all distributions on the underlying assets to which they are
entitled. Rating opinions address the structural, legal and issuer-related
aspects associated with the securities, including the nature of the underlying
assets. Ratings on asset-backed notes do not represent any assessment of the
likelihood that principal prepayments will be made by borrowers with respect to
the underlying assets or of the degree to which the rate of prepayments might
differ from that originally anticipated. As a result, the ratings do not
address the possibility that holders of the offered notes purchased at a premium
might suffer a lower than anticipated yield in the event of rapid prepayments of
the assets or in the event that the trust is terminated prior to the Final
Scheduled distribution date for the notes.
A security rating is not a recommendation to buy, sell or hold securities
and may be revised or withdrawn at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
National Mortgage will request _______ and _______ to rate the offered
notes. There can be no assurance as to whether any rating agency not requested
to rate the offered notes will nonetheless issue a rating and, if so, what the
rating would be. A rating assigned to the offered notes by a rating agency that
has not been requested by National Mortgage to do so may be lower than the
rating assigned by a rating agency pursuant to National Mortgage's request.
Legal Investment Considerations
[If pre-funding account is used the notes become mortgage related securities for
SMMEA after pre-funded amount is reduced to zero.] [The notes will not be SMMEA
if junior lien assets are included in the trust.] The notes will constitute
mortgage related securities for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 for so long as they are rated in one of the two highest
rating categories by one or more nationally recognized statistical rating
organizations. As mortgage related securities, the notes will be legal
investments for entities to the extent provided in SMMEA, unless there are state
laws overriding SMMEA. A number of states have enacted legislation overriding
the legal investment provisions of SMMEA. See "Legal Investment Considerations"
in the prospectus.
Any financial institution regulated by the Comptroller of the Currency, the
Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the National Credit Union
Administration, any state insurance commission or any other federal or state
agency with similar authority should review any applicable rules, guidelines and
regulations prior to purchasing any notes. Financial institutions should review
and consider the applicability of the Federal Financial Institutions Examination
Counsel Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment
S-52
<PAGE>
Practices, to the extent adopted by their respective federal regulators, which,
among other things, sets forth guidelines for investing in certain types of
mortgage related securities and prohibits investment in high-risk mortgage
securities.
National Mortgage makes no representations as to the proper
characterization of the offered notes for legal investment or other purposes, or
as to the legality of investment by particular investors in the notes under
applicable legal investment restrictions. Accordingly, all institutions that
must observe legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the offered notes
constitute legal investments under SMMEA or must follow investment, capital or
other restrictions. See "Legal Investment Considerations" in the prospectus.
S-53
<PAGE>
NMSC Trust 1999-____
Issuer
National Mortgage Securities Corporation
Depositor
$________________
Senior/Subordinated Pass-Through Certificates, Series 1999-____
[ Asset Seller ]
Seller and Servicer
_________________________
Your trust initially will consist of one- to four-family residential first
and junior lien mortgage loans, multifamily residential mortgage loans,
cooperative apartment loans and manufactured housing installment sales contracts
with an aggregate principal balance of $___________. An election will be made to
treat the assets as one or more REMICs under the Internal Revenue Code, and your
certificates will be regular interests in one of the REMICs. The underlying
assets are not insured or guaranteed by any governmental agency.
Investing in the certificates involves risks. See "Risk Factors" on page S-__
of this prospectus supplement and page 1 of the prospectus.
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus supplement or the
prospectus to which it relates is truthful or complete. Any representation to
the contrary is a criminal offense.
<TABLE>
<CAPTION>
Underwriting
Principal Class Monthly Price to Discounts and Proceeds to
Amount Interest Rate Public Commissions Issuer
------ ------------- ------ ----------- ------
<S> <C> <C> <C> <C> <C>
A-1 Certificates................. $__________ One Month Libor + __%(*) __________% ______% __________%
A-2 Certificates................. $__________ ______% __________% ______% __________%
A-3 Certificates................. $__________ ______% __________% ______% __________%
A-4 Certificates................. $__________ ______% __________% ______% __________%
A-5 Certificates................. $__________ ______% __________% ______% __________%
M-1 Certificates................. $__________ ______%(*) __________% ______% __________%
M-2 Certificates................. $__________ ______%(*) __________% ______% __________%
B-1 Certificates................. $__________ ______%(*) __________% ______% __________%
B-2 Certificates................. $__________ ______%(*) __________% ______% __________%
Total............................ $__________ $____________ $_________ $____________
</TABLE>
*Capped at the weighted average net asset rate.
The price to the public is per certificate, plus accrued interest from
_____ 1, 1999 in the case of the class A-2, A-3, A-4, A-5, M and B certificates
and from the date the certificates are issued, in the case of the class A-1
certificates. Proceeds to issuer has been calculated before deducting expenses
payable by National Mortgage, estimated to be approximately $__________.
The first distribution date will be __________ 15, 1999. The record date
for each distribution date will be the last business day of the month preceding
a distribution date.
Delivery of your certificates will be made through The Depository Trust
Company on or about _________ __, 1999, against payment in immediately available
funds.
[Underwriters]
Prospectus Supplement dated ____ __, 1999.
<PAGE>
Important notice about the information we present in this
prospectus supplement and in the accompanying prospectus.
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
We provide information to you about the certificates in two separate
documents that progressively provide more detail: the accompanying prospectus,
which provides general information, some of which may not apply to your
certificates and this prospectus supplement, which describes the specific terms
of your certificates.
Your certificates will not be listed on any securities exchange.
Although the underwriters intend to make a secondary market in your
certificates, they are not required to do so. A secondary market for your
certificates may not develop. If one does develop, it may not continue or
provide sufficient liquidity.
[We have filed preliminary information regarding the trust's assets and the
certificates with the SEC. The information contained in this document
supersedes all of that preliminary information, which was prepared by the
underwriters for prospective investors.]
Until ____________ all dealers that sell your certificates, whether or not
participating in this offering, may be required to deliver a prospectus and
prospectus supplement. This requirement is in addition to the dealer's
obligation to deliver a prospectus and prospectus supplement when acting as
underwriters with respect to their unsold allotments or subscriptions.
This prospectus supplement and the accompanying prospectus include cross-
references to captions in these materials where you can find further related
discussions. The following table of contents and the table of contents included
in the accompanying prospectus provide the pages on which these captions are
located.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Prospectus Supplement
Page
----
<S> <C>
Summary of Terms..................................................... S-1
Risk Factors......................................................... S-5
Description of the Offered Certificates.............................. S-7
General........................................................... S-7
[Book-Entry Certificates.......................................... S-7
Collection of Payments on Assets.................................. S-8
Realized Losses on Liquidated Loans............................... S-9
Allocation of Writedown Amounts................................... S-10
Distributions..................................................... S-10
Subordination of the Subordinated Certificates.................... S-19
The Asset Pool....................................................... S-19
General........................................................... S-19
Fixed Rate Assets................................................. S-20
Adjustable Rate Assets............................................ S-22
Selected Data..................................................... S-23
Underwriting Guidelines........................................... S-32
Conveyance of Assets.............................................. S-32
[Conveyance of Subsequent Assets and Pre-Funding Account.......... S-35
Maturity and Prepayment Considerations............................... S-36
Weighted Average Lives of the Offered Certificates................ S-37
Modeling Assumptions and Prepayment Model Tables.................. S-38
[Pre-Funding...................................................... S-44
Factors Affecting Prepayments..................................... S-45
Yield on the Offered Certificates................................. S-45
The Trust............................................................ S-49
General........................................................... S-49
The Trustee....................................................... S-49
Optional Termination.............................................. S-50
Auction Sale...................................................... S-51
Termination of the Agreement...................................... S-52
Voting Rights..................................................... S-52
Reports to Certificateholders..................................... S-52
Servicing of the Assets.............................................. S-54
The Servicer...................................................... S-54
Servicing Portfolio............................................... S-54
Delinquency and Loan Loss/Repossession Experience................. S-55
Collection and Other Servicing Procedures......................... S-57
Servicing Compensation and Payment of Expenses.................... S-57
Advances.......................................................... S-58
Successors to Servicer, Delegation of Duties...................... S-59
Use of Proceeds...................................................... S-60
Underwriting......................................................... S-60
Legal Matters........................................................ S-62
ERISA Considerations................................................. S-62
Ratings.............................................................. S-65
Legal Investment Considerations...................................... S-66
<CAPTION>
Prospectus
Page
<S> ----
Risk Factors......................................................... <C>
Description of the Securities........................................
General...........................................................
Book-Entry Procedures.............................................
Allocation of Collections from the Assets.........................
Valuation of Mortgage assets......................................
Optional Redemption or Termination................................
Maturity and Prepayment Considerations...............................
Yield Considerations.................................................
The Trusts...........................................................
General...........................................................
Assignment of Trust Assets........................................
The Trust Assets..................................................
Pre-Funding.......................................................
Asset Proceeds Account............................................
Distribution Account..............................................
Reserve Funds or Accounts.........................................
Mortgage Insurance on the Mortgage assets.........................
Hazard Insurance on the Mortgage Loans............................
Mortgage Bankruptcy Insurance on the
Mortgage Assets...................................................
Other Insurance...................................................
Delivery of Additional Assets.....................................
Investment of Funds...............................................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Sale and Servicing of the Mortgage Assets..............................
General.............................................................
Representations and Warranties......................................
Origination of the Mortgage assets..................................
Payment on Mortgage assets..........................................
Advances............................................................
Collection and Other Servicing Procedures...........................
Maintenance of Insurance Policies; Insurance
Claims and Other Realization upon Defaulted Mortgage assets.......
Evidence as to Servicing Compliance.................................
The Agreements.........................................................
Master Servicer or Securities Administrator.........................
The Trustee.........................................................
Rights upon Event of Default........................................
Events of Default...................................................
Reports to Securityholders..........................................
Termination.........................................................
Certain Legal Aspects of Mortgage Loans................................
General.............................................................
The Manufactured Housing Installment Sales Contracts................
Cooperative Loans...................................................
Repossesion with Respect to Contracts...............................
Realizing upon Cooperative Loan Security............................
Junior Mortgages....................................................
Consumer Protection Laws with respect to Contracts..................
Rights of Reinstatement and Redemption..............................
Leases and Rents....................................................
Anti-Deficiency Legislation and Other Limitations on Lenders........
Environmental Considerations........................................
"Due-on Sale" Clauses...............................................
Enforceability of Prepayment and Late Payment Fees..................
Equitable Limitations on Remedies...................................
Secondary Financing: Due-on-Encumberance Provisions.................
The Depositor..........................................................
Use of Proceeds........................................................
Federal Income Tax Consequences........................................
General.............................................................
REMIC Certificates..................................................
Tax Treatment of Residual Certificates..............................
Taxation of Certain Foreign Holders of REMIC Certificates...........
Reporting and Tax Administration....................................
Non-REMIC Certificates..............................................
State Tax Considerations...............................................
ERISA Considerations...................................................
Legal Investment.......................................................
Plan of Distribution...................................................
Rating.................................................................
Reports to Securityholders.............................................
Additional Information.................................................
Financial Information..................................................
Incorporation of Certain Documents by Reference........................
Index of Terms.........................................................
</TABLE>
<PAGE>
Summary of Terms
. This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. To understand more completely all of the terms of an
offering of the certificates, read carefully this entire document and the
prospectus.
. This summary provides an overview of calculations, cash flows and other
information to aid your understanding and is qualified by the full
description of this information in this prospectus supplement and the
accompanying prospectus.
Information about Your Trust
Your certificates are being offered by NMSC Trust 1999-___, which will be
established by National Mortgage Securities Corporation, a Virginia corporation.
National Mortgage maintains its principal office at 909 East Main Street,
Richmond, Virginia 23219. Its telephone number is (804) ___-____. The assets
will secure the payment of your certificates.
Only the class A-1, class A-2, class A-3, class A-4, class A-5, class M-1, class
M-2, class B-1 and class B-2 certificates are being offered by this prospectus
supplement.
The trustee is _________________________. The trustee's corporate trust office's
address is ______________________________. Its telephone number is
_____________.
Neither your certificates nor the underlying assets will be guaranteed or
insured by any government agency [or any other insurer].
Issuance of your certificates is scheduled for ________ __, 1999.
Credit Enhancement and Subordination
The subordination of the class M-1, M-2, B-1, B-2, X and R certificates provides
credit support for the class A-1, A-2, A-3, A-4 and A-5 certificates. The
subordination of the class M-2, B-1, B-2, X and R certificates provides credit
support for the class M-1 certificates. The subordination of the class B-1, B-2,
X and R certificates provides credit support for the class M-2 certificates. The
subordination of the class B-2, X and R certificates provides credit support for
the class B-1 certificates. The subordination of the class X and R certificates
provide credit support for the class B-2 certificates.
See "Description of the Offered Certificates" in this prospectus supplement.
Distributions of Interest and Principal
In the ordinary course, monies received on the assets will be applied first to
distributions of interest on each class of certificates in the order of their
priority, and then to principal. Until the occurrence of events described in
this prospectus supplement, principal distributions will be applied first to the
class A certificates, and only thereafter to the other classes of certificates.
If performance criteria are met, a portion of principal may be
S-1
<PAGE>
distributed to subordinated classes simultaneously with principal distributions
on the class A certificates.
See "Description of the Offered Certificates" in this prospectus supplement.
Servicing of The Assets of Your Trust
___________ will act as servicer for the assets. It will make advances in
respect of delinquent payments on the assets and in respect of liquidation
expenses and taxes and insurance premiums not paid by an obligor on a timely
basis, if recoverable.
The servicer will be entitled to a monthly fee for servicing the assets equal to
[___]% per annum of the scheduled principal balance of the assets.
See "Servicing of the Assets" in this prospectus supplement.
The Assets Contained in Your Trust
. The primary assets of your trust are:
. one- to four-family residential first and junior lien mortgage loans,
. multifamily residential mortgage loans,
. cooperative apartment loans, and
. manufactured housing installment sales contracts.
The total number of assets is ______. Their total principal balance is
approximately $______. Of the total number of assets, ______ are fixed-rate
assets and ______ are variable-rate assets.
See "The Asset Pool" in this prospectus supplement.
[Your Trust Contains A Pre-Funding Account
A portion of your trust's initial assets will consist of cash in a pre-funding
account. The pre-funded amount initially will equal the difference between the
principal balance of the certificates and the principal balance of the initial
assets. Funds in the pre-funding account may be used to purchase additional
assets during the [first 3 months] following the closing date. These additional
assets will have characteristics very similar to the existing assets. If all of
the pre-funded amount is not used to acquire pre-funded assets, then amounts
left in the pre-funding account after the [3-month] period will be distributed
to you as a principal prepayment. Interest income earned on the pre-funded
amount during the pre-funding period will not be allocated to you, but will
belong to National Mortgage.
See "The Asset Pool - Conveyance of Assets" and " - Conveyance of Subsequent
Assets and Pre-Funding" in this prospectus supplement.]
The Final Scheduled Distaribution Date
The final scheduled distribution date for each class of offered certificates is
the distribution date occurring in ________. Because the rate of principal
distributions on the certificates will depend upon the rate of principal
payments, including prepayments, on the assets, the actual final distribution on
the classes of certificates could occur significantly earlier than this date.
Optional Termination of Your Trust by The Servicer
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The servicer may terminate the trust by buying all of the assets at any time
when the current aggregate principal balance of all certificates is less than
[10]% of their original amount. The termination price paid for your trust's
assets during an optional termination may, in some circumstances, be less than
the outstanding principal balance and unpaid interest of the certificates.
The servicer may also terminate the trust if it determines that there is a
substantial risk that either the pooling REMIC or the issuing REMIC will lose
its REMIC status.
See "The Trust--Optional Termination" in this prospectus supplement.
Auction Sale of Your Trust's Assets
If the servicer does not exercise its optional termination rights when it is
initially permitted to do so, the trustee will solicit bids on the assets
remaining in the trust. The termination price paid for your trust's assets
during an auction sale may, in some circumstances, be less than the outstanding
principal balance and unpaid interest of the certificates.
See "The Trust -- Auction Sale" in this prospectus supplement.
Federal Income Tax Consequences to You
The assets of the trust will be treated as a pooling REMIC for federal income
tax purposes. The regular interests of the pooling REMIC will be treated as a
different REMIC, an issuing REMIC, for federal income tax purposes. Class A-1,
A-2, A-3, A-4, A-5, M-1, M-2, B-1, B-2 and X certificates will be regular
interests in the issuing REMIC. Therefore, your certificates will evidence debt
obligations under the Internal Revenue Code of 1986, as amended, and interest
paid or accrued will be taxable to you. By acceptance of your certificates, you
will be deemed to have agreed to treat your certificate as a debt instrument for
purposes of federal and state income tax, franchise tax, and any other tax
measured by income. The class A-2, A-3, A-4 and A-5 certificates earn interest
at a fixed rate and will be issued with original issue discount only if their
stated principal amount exceeds their issue prices. The class A-1, M-1, M-2, B-1
and B-2 certificates are variable rate certificates that will be treated as
issued with original issue discount, regardless of their issue prices. We will
use ______% of the [prepayment model] as the prepayment assumption to calculate
the accrual rate of original issue discount, if any. However, there is no
assurance as to what the rate of prepayment will be.
See "Federal Income Tax Consequences" in the prospectus.
ERISA Considerations for Plans and Plan Investors
Fiduciaries of employee benefit plans and certain other retirement plans that
propose to cause a plan to acquire any of the offered certificates should
consult with their own counsel to determine whether the purchase or holding of
the offered certificates could give rise to a transaction that is prohibited
either under ERISA or the Internal Revenue Code. Certain prohibited transaction
exemptions may be applicable to the purchase and holding of the class A
certificates.
Because the class M-1, M-2, B-1 and B-2 certificates are subordinated to other
classes of certificates, the requirements of certain prohibited transaction
exemptions will not be satisfied. As a result, the purchase or holding
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of any of these certificates by a plan investor may constitute a non-exempt
prohibited transaction or result in the imposition of excise taxes or civil
penalties. Accordingly, the class M-1, M-2, B-1 and B-2 certificates are not
offered to or transferable to plan investors unless the plan investor meets
certain requirements.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
Your Certificates May Be Legal Investments for Regulated Organizations
The class A and M-1 certificates will be mortgage related securities for
purposes of SMMEA as long as they are rated in one of the two highest rating
categories by one or more nationally recognized statistical rating
organizations.
[If pre-funding account is used, classes become mortgage related securities for
SMMEA after pre-funded amount is reduced to zero.]
[Certificates will not be SMMEA if junior lien assets are in the trust.]
The class M-2, B-1 and B-2 certificates will not be mortgage related securities
for purposes of SMMEA because they are not rated in one of the two highest
rating categories.
See "Legal Investment Considerations" in this prospectus supplement and in the
prospectus.
The Ratings Assigned to Your Certificates
It is a condition to the issuance of the certificates that the classes of
certificates obtain the following ratings by ______________ and ______________:
Class A-1 __ __
Class A-2 __ __
Class A-3 __ __
Class A-4 __ __
Class A-5 __ __
Class M-1 __ __
Class M-2 __ __
Class B-1 __ __
Class B-2 __ __
See "Ratings" in this prospectus supplement.
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Risk Factors
In addition to the risk factors in the prospectus, you should note the
following
You May Experience A Over time the market values of the assets could
Loss on Your be less than the loans they secure. This may
Investment If Losses cause delinquencies and may increase the amount
and Delinquencies On of loss following default. In this event, your
Assets in Your Trust trust may not be able to recover the full amount
Are High owed, which may result in a loss on your
certificates. We can provide you with no assurance
that the performance of your trust's assets will be
similar to the statistical information provided, in
part because the values of certain assets can be
sharply affected by downturns in regional or
economic conditions. The statistical information
related to the loss experience of _______ as
servicer is available under "Servicing of the
Assets" in this prospectus supplement.
Losses Will Affect The class M-1, class M-2, class B-1 and class B-2
Subordinated Certificates certificates are subordinated to the class A-1,
before Affecting More A-2, A-3, A-4 and A-5 certificates. Losses in
Senior Certificates excess of the credit support provided by the
class X and R certificates will be experienced
first by the class B-2 certificates, next by the
class B-1 certificates, next by the class M-2
certificates, and next by the class M-1
certificates. Thereafter, losses on the assets
exceeding the amount of the subordinated
certificates could result in a loss being realized
by the class A-1, A-2, A-3, A-4 and A-5
certificates.
Prepayments May Cause Cash Obligors are not required to pay interest on their
Shortfalls assets after the date of a full prepayment of
principal. As a result, a full prepayment may
reduce the amount of interest received from
obligors during that collection period to less than
one month's interest on the assets. If a sufficient
number of assets are prepaid in full, then interest
payable on the assets during that collection period
may be less than the interest due on the
certificates.
[Class A-1 Certificates [Class A-1 certificates bear interest based on
Have An Uncertain Yield] one-month LIBOR, which is variable and which
changes differently than do other indices. In
addition, regardless of the level of one-month
LIBOR, the interest rate of the class A-1
certificates may not exceed the weighted average
net asset rate.]
[Year 2000 Information [The servicer has analyzed the potential effects
Systems Procedures] of year 2000 issues on the computer systems that
support its business. This
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review included issues associated with the
servicer's internally developed software and
software licensed from others. The servicer also is
in the process of reviewing year 2000 issues faced
by significant third parties with whom it conducts
business.
The servicer has begun remediation of internally
developed software to resolve year 2000 compliance
issues. The costs incurred by the servicer to date
have not been material, and the servicer does not
anticipate that the expected remaining costs will
be material. Based upon its assessment of
internally developed and licensed software and the
status of remediation undertaken to date, the
servicer believes that all of its significant
computer systems will be year 2000 compliant before
January 1, 2000. The servicer continues to test and
monitor year 2000 compliance issues, and this
testing may or may not be successful. You may
experience losses or delays in payment if the
servicer does not achieve year 2000 compliance.]
[Recent Federal Legislation In July 1999 the President signed into law the
May Cause Delays in Year 2000 Act, which generally limits the legal
Payments to You] liability for losses caused by year 2000 computer-
related errors. Among other things, the legislation
provides a grace period from foreclosure for
delinquent obligors whose mortgage and other
payments are not processed in an accurate or timely
manner because of an actual year 2000 failure.
The Year 2000 Act does not extinguish an obligor's
payment obligations, but merely delays their
enforcement.
The Year 2000 Act could delay the servicer's
ability to foreclose upon the assets of your trust
during the first quarter of the year 2000. These
delays, consequently, could affect the timing of
payments to you.
Capitalized terms used in this prospectus supplement but not defined will
have the definitions given to them in the accompanying prospectus. See "Index of
Terms" in the accompanying prospectus.
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Description of the Offered Certificates
General
The Senior/Subordinated Pass-Through Certificates, Series 1999-___, will
consist of the class A-1, class A-2, class A-3, class A-4, class A-5, class M-1,
class M-2, class B-1, class B-2, class X and class R certificates. Only the
class A-1, class A-2, class A-3, class A-4, class A-5, class M-1, class M-2,
class B-1 and class B-2 certificates are offered by this prospectus supplement.
The class M-1, class M-2, class B-1, class B-2, class X and class R certificates
will be subordinated to the class A certificates in respect of distributions of
principal and interest. The offered certificates will be issued in book-entry
form only, in denominations of $1,000 and integral multiples of $1 in excess of
this amount. Definitive certificates, if issued, will be transferable and
exchangeable at the corporate trust office of ______________ at its Corporate
Trust Department. No service charge will be made for any registration of
exchange or transfer, but the trustee may require payment of a sum sufficient to
cover any tax or other governmental charge incurred in connection with the
exchange or transfer.
Distributions of principal and interest on the offered certificates will be
made on the 15th day of each month, or, if this day is not a business day, on
the next succeeding business day, beginning in ____, 1999, to the persons in
whose names the certificates are registered on the record date, which is the
close of business on the last business day of the month preceding the month in
which the distribution date occurs. Each distribution with respect to a book-
entry certificate will be paid to the Depository, which will credit the amount
of this distribution to the accounts of its Participants in accordance with its
normal procedures. Each Participant will be responsible for disbursing this
distribution to the Beneficial Owners that it represents and to each indirect
participating brokerage firm (a "brokerage firm" or "indirect participating
firm") for which it acts as agent. Each brokerage firm will be responsible for
disbursing funds to the Beneficial Owners that it represents. All credits and
disbursements with respect to book-entry certificates are to be made by the
Depository and the Participants in accordance with the Depository's rules.
The class X certificates are interest-only securities that have no stated
certificate principal balance, but are entitled to receive a distribution on
each distribution date of certain interest amounts, as more fully set forth in
the pooling and master servicing agreement. The class R certificates will have
no stated certificate principal balance or pass-through rate, and will represent
the beneficial ownership of the residual interest in each of the REMICs.
[Book-Entry Certificates
The offered certificates will be book-entry certificates as described in
the prospectus under "Description of the Certificates -- Book-Entry Procedures."
The offered certificates will initially be registered in the name of Cede & Co.,
the nominee of the Depository Trust Company.
Unless and until the offered certificates are issued in certificated,
fully-registered form, it is anticipated that the only certificateholder of the
offered certificates will be Cede & Co., as
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nOMIInee of DTC. Beneficial Owners will not be certificateholders as that term
is used in the pooling and master servicing agreement. Beneficial Owners are
only permitted to exercise the rights of certificateholders indirectly through
Depository Participants and DTC.
DTC management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including dates
before, on, and after January 1, 2000, may encounter Year 2000 problems. DTC has
informed its Participants and other members of the financial community that it
has developed and is implementing a program so that its systems, as the same
relate to the timely payment of distributions, including principal and income
payments, to certificateholders, book-entry deliveries, and settlement of trades
within DTC continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the industry that it is contacting, and will
continue to contact, third party vendors from whom DTC acquires services to:
. impress upon them the importance of these services being Year 2000
compliant; and
. determine the extent of their efforts for Year 2000 remediation ---
and, as appropriate, testing --- of their services.
In addition, DTC is in the process of developing contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided for informational purposes only and is not intended to serve as a
representation, warranty, or contract modification of any kind.]
Collection of Payments on Assets
The servicer will establish and maintain the certificate account for the
benefit of the trustee. The certificate account must be an Eligible Account. The
certificate account is to be held in trust for the benefit of the trustee on
behalf of the certificateholders, and shall be either in the trustee's name or
designated in a manner that reflects the custodial nature of the account and
that all funds in this account are held for the benefit of the trustee. A single
certificate account may be maintained for more than one series of certificates
provided that in this event, the servicer shall cause separate accounting and
records to be maintained within the certificate account with respect to each
separate series. Funds in the certificate account will be invested in Eligible
Investments that will mature or be redeemed not later than the business day
preceding the applicable monthly distribution date. Earnings on amounts
deposited into the certificate account shall be credited to the account of the
servicer as servicing compensation in addition to the Servicing Fee and may be
used to offset P&I Advances due from the servicer in respect of the
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distribution date next succeeding the date on which these earnings were made or,
at the servicer's option, may be released to the servicer on the related
distribution date. The amount of any losses incurred in respect of any of these
investments shall be deposited into the certificate account by the servicer out
of its own funds promptly after any of these losses are incurred.
All payments in respect of principal and interest on the assets received by
the servicer on or after the Cut-off Date, exclusive of collections relating to
scheduled payments due on or prior to the Cut-off Date, including principal
prepayments and net liquidation proceeds, will be deposited into the certificate
account no later than the second business day following the servicer's receipt.
Amounts collected as late payment fees, extension fees, assumption fees or
similar fees will be retained by the servicer as part of its servicing
compensation. In addition, amounts paid by [Asset Seller] for assets repurchased
as a result of breach of a representation or warranty under the pooling and
master servicing agreement and amounts required to be deposited upon
substitution of a qualified substitute asset because of a breach of a
representation or warranty, as described under "The Asset Pool -- Conveyance of
Assets" in this prospectus supplement, will be paid into the certificate
account.
On or prior to the business day before each distribution date, the servicer
will remit all scheduled payments of principal and interest due on the assets
during the Collection Period and collected by the servicer and all unscheduled
collections in respect of principal and interest on the assets received during
the related Prepayment Period, in each case to the extent these collections
comprise part of the Available Distribution Amount for the upcoming distribution
date, together with the amount of any required Advances to the trustee for
deposit into the distribution account. If, however, the certificate account is
maintained by the trustee, the trustee may withdraw this amount, and any portion
of the P&I Advance to be covered by investment earnings on the certificate
account, from the certificate account on the applicable distribution date and
deposit it into the distribution account. In such event, the servicer will remit
the portion, if any, of the required P&I Advance that is not to be covered by
investment earnings on the certificate account to the trustee on business day
preceding the distribution date for deposit into the distribution account. The
distribution account shall be an Eligible Account established and maintained by
the trustee.
The trustee or its Paying Agent will withdraw funds from the Distribution
Account, but only to the extent of the Available Distribution Amount, to make
distributions to certificateholders as specified under " -- Distributions --
Priority of Distributions" in this prospectus supplement.
From time to time, as provided in the pooling and master servicing
agreement, the Servicer will also withdraw funds from the certificate account
for other purposes as permitted by the pooling and master servicing agreement.
Realized Losses on Liquidated Loans
The Principal Distribution Amount for any distribution date is intended to
include the Scheduled Principal Balance of each asset that became a liquidated
loan during the related Prepayment Period. A Realized Loss will be incurred on a
liquidated loan in the amount, if any,
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by which the net liquidation proceeds from the liquidated loan are less than the
unpaid principal balance of the liquidated loan, plus accrued and unpaid
interest thereon, plus amounts reimbursable to the servicer for previously
unreimbursed Servicing Advances. To the extent that the amount of the Realized
Loss is in excess of interest collected on the nondefaulted assets in excess of
certain interest payments due to be distributed on the offered certificates and
any portion of this interest required to be paid to a servicer other than [Asset
Seller] as servicing compensation ("Excess Interest"), then the amount of this
shortfall will be allocated to the subordinated certificates as a Writedown
Amount. See " --Allocation of Writedown Amounts".
Allocation of Writedown Amounts
Any Writedown Amount on a distribution date will be allocated to reduce to
zero the certificate principal balance of a class, as adjusted for write-downs,
in the following order:
. first, to the class B-2 certificates;
. second, to the class B-1 certificates;
. third, to the class M-2 certificates; and
. fourth, to the class M-1 certificates.
Distributions
Available Distribution Amount
The Available Distribution Amount for a distribution date will include
. monthly payments of principal and interest due on the assets during
the related Collection Period, regardless of whether these payments
were actually collected from the obligors or advanced by the servicer
and unscheduled payments received with respect to the assets during
the related Prepayment Period, including principal prepayments,
proceeds of repurchases, net liquidation proceeds and net insurance
proceeds, less
. if [Asset Seller] is not the servicer, Servicing Fees for the related
Collection Period, amounts required to reimburse the servicer for
previously unreimbursed Advances in accordance with the pooling and
master servicing agreement, amounts required to reimburse National
Mortgage or the servicer for reimbursable expenses in accordance with
the pooling and master servicing agreement and amounts required to
reimburse any party for an overpayment of a Repurchase Price for an
asset.
Distributions
Distributions will be made on each distribution date to holders of record
on the preceding record date. Distributions on a class of certificates will be
allocated among the certificates of the class in proportion to their percentage
interests.
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Interest
On each distribution date, holders of the class A certificates will be
entitled to receive, to the extent of the Available Distribution Amount:
. interest accrued on their class during the related Interest Accrual
Period at the then-applicable pass-through rate on the certificate
principal balance of their class immediately prior to the distribution
date (the "Interest Distribution Amount"), plus
. any interest amounts remaining unpaid from a previous distribution
date, plus interest accrued on this amount during the related Interest
Accrual Period, at the then applicable pass-through rate.
On each distribution date, holders of the subordinated certificates will be
entitled to receive, to the extent of the Available Distribution Amount and on a
subordinated basis as described under " -- Priority of Distributions":
. interest accrued on their class during the related Interest Accrual
Period at the then-applicable pass-through rate on the certificate
principal balance immediately following the most recently preceding
distribution date, reduced by all Writedown Amounts allocated on that
distribution date, of their class immediately prior to the
distribution date (the "Interest Distribution Amount"), plus
. any interest amounts remaining unpaid from a previous distribution
date, plus interest accrued on this amount during the related Interest
Accrual Period, at the then applicable pass-through rate.
Interest Accrual Period shall mean, with respect to each distribution date:
. for the class A-1 certificates, the period commencing on the 15th day
of the preceding month through the 14th day of the month in which this
distribution date is deemed to occur, except that the first Interest
Accrual Period for the class A-1 certificates will be the period from
the closing date through _______ 14, 1999, and
. for the other classes of offered certificates, the calendar month
preceding the month in which the distribution date occurs.
Interest on the class A-1 certificates will be calculated on the basis of a 360-
day year and the actual number of days elapsed in the applicable Interest
Accrual Period. Interest on the other classes of offered certificates will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
The pass-through rate for the classes of offered certificates on any
distribution date will be the per annum rates set forth on the cover page of
this prospectus supplement.
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In addition, on each distribution date, to the extent of the Available
Distribution Amount and on a subordinated basis as described under " -- Priority
of Distributions" the holders of the subordinated certificates will be entitled
to receive
. interest accrued during the related Interest Accrual Period at the
applicable pass-through rate on any related Writedown Amount (the
class' "Writedown Interest Distribution Amount"), plus
. any interest amounts remaining unpaid from a previous distribution
date, plus interest accrued on this amount during the related Interest
Accrual Period at the then applicable pass-through rate (the class'
"Carryover Writedown Interest Distribution Amount"). See " -- Realized
Losses on Liquidated Loans."
[Floating Rate Determination
Generally, the Floating Rate Determination Date for any Interest Accrual
Period is the second London banking day prior to the Interest Accrual Period.
For the initial Interest Accrual Period the Floating Rate Determination Date is
the closing date. On each Floating Rate Determination Date, the servicer will
determine the arithmetic mean of the LIBOR quotations for one-month Eurodollar
deposits ("One-Month LIBOR") for the succeeding Interest Accrual Period on the
basis of the Reference Banks' offered LIBOR quotations provided to the servicer
as of 11:00 a.m., London time, on the Floating Rate Determination Date. With
respect to a Floating Rate Determination Date, Reference Banks means leading
banks engaged in transactions in Eurodollar deposits in the international
Eurocurrency market with an established place of business in London, whose
quotations appear on the Bloomberg Screen US0001M Index page on the Floating
Rate Determination Date in question and which have been designated as such by
the servicer and are able and willing to provide these quotations to the
servicer on each Floating Rate Determination Date; and Bloomberg Screen US0001M
Index Page means the display designated as page US0001M on the Bloomberg
Financial Markets Commodities News, or another page as may replace this page on
that service for the purpose of displaying LIBOR quotations of major banks. If
any Reference Bank should be removed from the Bloomberg Screen US0001M Index
Page or in any other way fails to meet the qualifications of a Reference Bank,
the servicer may, in its sole discretion, designate an alternative Reference
Bank.
. On each Floating Rate Determination Date, One-Month LIBOR for the next
succeeding Interest Accrual Period will be established by the servicer
as follows:
. if, on any Floating Rate Determination Date, two or more of the
Reference Banks provide offered One-Month LIBOR quotations on the
Bloomberg Screen US0001M Index Page, One-Month LIBOR for the next
applicable Interest Accrual Period will be the arithmetic mean of the
offered quotations, rounding the arithmetic mean, if necessary, to the
nearest five decimal places.
. if, on any Floating Rate Determination Date, only one or none of the
Reference Banks provides offered quotations, One-Month LIBOR for the
next applicable Interest Accrual Period will be the higher of:
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. One-Month LIBOR as determined on the previous Floating Rate
Determination date, and
. the Reserve Interest Rate.
The Reserve Interest Rate will be the rate per annum that the servicer
determines to be either
. the arithmetic mean, rounding the arithmetic mean upwards if necessary
to the nearest five decimal places, of the one-month Eurodollar
lending rate that New York City banks selected by the servicer are
quoting, on the relevant Floating Rate Determination Date, to the
principal London offices of at least two leading banks in the London
interbank market, or
. in the event that the servicer can determine no arithmetic mean, the
lowest one-month Eurodollar lending rate that the New York City banks
selected by the servicer are quoting on the Floating Rate
Determination Date to leading European banks.
If, on any Floating Rate Determination Date, the servicer is required but is
unable to determine the Reserve Interest Rate in the manner provided, One-Month
LIBOR for the next applicable Interest Accrual Period will be One-Month LIBOR as
determined on the previous Floating Rate Determination Date.
One-Month LIBOR for an Interest Accrual Period shall not be based on One-
Month LIBOR for the previous Interest Accrual Period for two consecutive
Floating Rate Determination Dates. If One-Month LIBOR for an Interest Accrual
Period would be based on One-Month LIBOR for the previous Floating Rate
Determination Date for the second consecutive Floating Rate Determination Date,
the servicer shall select an alternative index over which the servicer has no
control used for determining one-month Eurodollar lending rates that is
calculated and published or otherwise made available by an independent third
party.
The establishment of One-Month LIBOR, or an alternative index, by the
servicer and the servicer's subsequent calculation of the pass-through rate on
the class A-1 certificates for the relevant Interest Accrual Period, in the
absence of manifest error, will be final and binding.
This table provides you with monthly One-Month LIBOR rates on the last day
of the related calendar month beginning in 1995, as published by Bloomberg. The
following does not purport to be a prediction of the performance of One-Month
LIBOR in the future.
<TABLE>
<CAPTION>
MONTH 1999 1998 1997 1996 1995
- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January.................................. 4.94% 5.60% 5.44% 5.44% 6.09%
February................................. 4.96 5.69 5.44 5.31 6.13
March.................................... 4.94 5.69 5.69 5.44 6.13
April.................................... 4.90 5.66 5.69 5.44 6.06
May...................................... 5.66 5.69 5.43 6.06
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
June..................................... 5.66 5.69 5.47 6.13
July..................................... 5.66 5.63 5.46 5.88
August................................... 5.63 5.66 5.44 5.88
September................................ 5.38 5.66 5.43 5.88
October.................................. 5.25 5.65 5.38 5.83
November................................. 5.62 5.97 5.56 5.98
December................................. 5.06 5.72 5.50 5.69]
</TABLE>
Principal
The Principal Distribution Amount for any distribution date will equal the
sum of the following amounts:
. the sum of the principal components of all monthly payments scheduled
to be made on the Due Date occurring during the related Collection
Period on the assets that were outstanding at the opening of business
on this Due Date, regardless of whether such monthly payments were
received by the servicer from the obligors, not including any monthly
payments due on liquidated loans or repurchased assets;
. the sum of the amounts of all principal prepayments received by the
servicer on the assets during the related Prepayment Period;
. the Scheduled Principal Balance of any asset that became a liquidated
loan during the related Prepayment Period; and
. the Scheduled Principal Balance of any asset that was purchased or
repurchased by the servicer, [Asset Seller] or National Mortgage
during the related Prepayment Period.
The Class A Principal Distribution Amount for any distribution date will
equal
. prior to the Cross-over Date, the Principal Distribution Amount,
. on any distribution date as to which the Principal Distribution Tests
are not met, the Principal Distribution Amount, or
. on any other distribution date, the class A percentage of the
Principal Distribution Amount.
The Class M-1 Principal Distribution Amount for any distribution date will
equal
. as long as any class A certificates remain outstanding and prior to
the Cross-over Date, zero,
. on any distribution date as to which the Principal Distribution Tests
are not met and any class A certificates remain outstanding, zero,
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<PAGE>
. on any distribution date as to which the Principal Distribution Tests
are not met and the class A certificates have been retired, the
Principal Distribution Amount, or
. on any other distribution date, the class M-1 percentage of the
Principal Distribution Amount.
The Class M-2 Principal Distribution Amount for a distribution date will
equal
. as long as any class A certificates or any class M-1 certificates
remain outstanding and prior to the Cross-over Date, zero;
. on any distribution date as to which the Principal Distribution Tests
are not met and any class A certificates or any class M-1 certificates
remain outstanding, zero,
. on any distribution date as to which the Principal Distribution Tests
are not met and the class A certificates and the class M-1
certificates have been retired, the Principal Distribution Amount, or
. on any other distribution date, the class M-2 percentage of the
Principal Distribution Amount.
The Class B-1 Principal Distribution Amount for any distribution date will
equal
. as long as any class A certificates or any class M certificates remain
outstanding and prior to the Cross-over Date, zero,
. on any distribution date as to which the Principal Distribution Tests
are not met and any class A certificates or any class M certificates
remain outstanding, zero,
. on any distribution date as to which the Principal Distribution Tests
are not met and the class A certificates and the class M certificates
have been retired, the Principal Distribution Amount, or
. on any other distribution date, the class B-1 percentage of the
Principal Distribution Amount.
The Class B-2 Principal Distribution Amount for any distribution date will
equal
. as long as any class A certificate, any class M certificates or any
class B-1 certificates remain outstanding and prior to the Cross-over
Date, zero,
. on any distribution date as to which the Principal Distribution Tests
are not met and any class A certificates, any class M certificate or
any class B-1 certificates remain outstanding, zero,
S-15
<PAGE>
. on any distribution date as to which the Principal Distribution Tests
are not met and the class A certificates, the class M certificates and
the class B-1 certificates have been retired, the Principal
Distribution Amount, or
. on any other distribution date, the class B-2 percentage of the
Principal Distribution Amount.
For any distribution date, if the Principal Distribution Amount for a class
exceeds the certificate principal balance of that class, less any Principal
Distribution Amounts remaining unpaid from previous distribution dates, with
respect to this class and distribution date, then these amounts shall be
allocated to the Principal Distribution Amount of the relatively next junior
class of certificates. If the class A, class, class M and class B certificates
have not been reduced to zero on or before a distribution date, then amounts
then allocable to the Class B-2 Principal Distribution Amount shall be allocated
first to the Class B-1 Principal Distribution Amount, next to the Class M-2
Principal Distribution Amount, next to the Class M-1 Principal Distribution
Amount, next to the Class A Principal Distribution Amount, and finally to the
Class B-2 Principal Distribution Amount, to the extent that allocation of these
amounts to the Class B-2 Principal Distribution Amount would reduce the class B-
2 certificate principal balance below the Class B-2 Floor Amount.
The principal distribution percentage for any class is the percentage
derived from the fraction, which shall not be greater than 1, the numerator of
which is the certificate principal balance of the class, as adjusted for write-
downs, immediately prior to the related distribution date, and the denominator
is the sum of the aggregate certificate principal balances, as adjusted for
write-downs, of all other classes of certificate immediately prior this
distribution date.
Priority of Distributions
On each distribution date the Available Distribution Amount will be
distributed in the following amounts and in the following order of priority:
(1) first, concurrently, to each class of the class A certificates, their
Interest Distribution Amount for that distribution date pro rata among the class
A certificates based on their respective Interest Distribution Amounts and then
any Interest Distribution Amounts remaining unpaid from any previous
distribution date, plus interest on this carryover amount, if any, for that
distribution date, pro rata among the classes of class A certificates based on
their respective carryover amounts;
(2) second, to the class M-1 certificates, their Interest Distribution
Amount for that distribution date and then any Interest Distribution Amounts
remaining unpaid from any previous distribution date, plus interest on this
carryover amount, if any, for that distribution date;
(3) third, to the class M-2 certificates, their Interest Distribution
Amount for that distribution date and then any Interest Distribution Amounts
remaining unpaid from any previous distribution date, plus interest on this
carryover amount, if any, for that distribution date;
S-16
<PAGE>
(4) fourth, to the class B-1 certificates, their Interest Distribution
Amount for that distribution date and then any Interest Distribution Amounts
remaining unpaid from any previous distribution date, plus interest on this
carryover amount, if any, for that distribution date;
(5) fifth, to the class B-2 certificates, their Interest Distribution
Amount for that distribution date and then any Interest Distribution Amounts
remaining unpaid from any previous distribution date, plus interest on this
carryover amount, if any, for that distribution date;
(6) sixth, concurrently, to each class of the class A certificates, any
Principal Distribution Amounts remaining unpaid previous distribution dates, to
be allocated among the class A certificates pro rata based on their respective
unpaid Principal Distribution Amounts;
(7) seventh, to the class A certificates, the Class A Principal
Distribution Amount, allocated in the following sequential order:
. first, to the class A-1 certificates in reduction of its
certificate principal balance, until reduced to zero;
. second, to the class A-2 certificates in reduction of its
certificate principal balance, until reduced to zero;
. third, to the class A-3 certificates in reduction of its
certificate principal balance, until reduced to zero;
. fourth, to the class A-4 certificates in reduction of its
certificate principal balance, until reduced to zero; and
. fifth, to the class A-5 certificates in reduction of its
certificate principal balance, until reduced to zero;
provided, however, that on any distribution date on which the Pool Scheduled
Principal Balance is less than the aggregate certificate principal balance of
the class A certificates immediately prior to the related distribution date, the
Class A Principal Distribution Amount will be allocated among the class A
certificates pro rata based upon their respective certificate principal
balances.
(8) eighth, to the class M-1 certificates, any related Writedown Interest
Distribution Amount for the related distribution date, any related Carryover
Writedown Interest Distribution Amount for the related distribution date, any
related Principal Distribution Amounts remaining unpaid from previous
distribution dates, and any related Principal Distribution Amount until the
class M-1 certificate principal balance is reduced to zero;
(9) ninth, to the class M-2 certificates, any related Writedown Interest
Distribution Amount for the related distribution date, any related Carryover
Writedown Distribution Amount for the related distribution date, any related
Principal Distribution Amounts remaining unpaid from previous distribution
dates, and any related Principal Distribution Amount until the class M-2
certificate principal balance is reduced to zero;
S-17
<PAGE>
(10) tenth, to the class B-1 certificates, any related Writedown Interest
Distribution Amount for the related distribution date, any related Carryover
Writedown Interest Distribution Amount for the related distribution date, any
related Principal Distribution Amounts remaining unpaid from previous
distribution dates, and any related Principal Distribution Amount until the
class B-1 certificate principal balance is reduced to zero;
(11) eleventh, to the class B-2 certificates, any related Writedown
Interest Distribution Amount for the related distribution date, any related
Carryover Writedown Interest Distribution Amount for the related distribution
date, any related Principal Distribution Amounts remaining unpaid from previous
distribution dates, and any related Principal Distribution Amount until the
class B-2 certificate principal balance is reduced to zero;
(12) twelfth, if [Asset Seller] is the servicer, to the servicer in the
following sequential order:
(i) the Servicing Fee with respect to the related distribution date;
and
(ii) any Servicing Fees from previous distribution dates remaining
unpaid;
(13) thirteenth, to the class X certificates, in the following sequential
order:
(i) the current Class X Strip Amount; and
(ii) any Class X Strip Amounts from previous distribution dates
remaining unpaid; and
(14) finally, any remainder to the class R certificates.
The Cross-over Date will be the later to occur of
. the distribution date occurring in _________ and
. the first distribution date on which the percentage equivalent of a
fraction, which shall not be greater than 1, the numerator of which is
the aggregate certificate principal balance as adjusted for write-
downs of the subordinated certificates for the related distribution
date and the denominator of which is the Pool Scheduled Principal
Balance on the related distribution date, equals or exceeds ____ times
the percentage equivalent of a fraction, which shall not be greater
than 1, the numerator of which is the initial aggregate certificate
principal balance as adjusted for write-downs of the subordinated
certificates and the denominator of which is the Pool Scheduled
Principal Balance as of the Cut-off Date.
The Principal Distribution Tests are met in respect of a distribution date
if the following conditions are satisfied:
S-18
<PAGE>
. the Average Sixty Day Delinquency Ratio as of the related distribution
date does not exceed ___%; the Average Thirty-Day Delinquency Ratio as
of the related distribution date does not exceed ___%;
. the Cumulative Realized Losses as of the related distribution date do
not exceed a specified percentage of the original Pool Scheduled
Principal Balance, depending on the year in which the related
distribution date occurs; and
. the Current Realized Loss Ratio as of the related distribution date
does not exceed ___%.
The Average Sixty-Day Delinquency Ratio and the Average Thirty-Day
Delinquency Ratio are, in general, the ratios of the average of the aggregate
principal balances of assets delinquent 60 days or more and 30 days or more,
respectively, for the preceding three Collection Periods to the average Pool
Scheduled Principal Balance for these periods. Cumulative Realized Losses are,
in general, the aggregate Realized Losses incurred in respect of liquidated
loans since the Cut-off Date. The Current Realized Loss Ratio is, in general,
the ratio of the aggregate Realized Losses incurred on liquidated loans for the
periods specified in the pooling and master servicing agreement to an average
Pool Scheduled Principal Balance specified in the pooling and master servicing
agreement.
With respect to any distribution date the Class B-2 Floor Amount will mean
. ____% of the Pool Scheduled Principal Balance as of the Cut-off Date,
if the class A, class M and class B-1 certificates have not been
reduced to zero immediately prior to the related distribution date,
and
. zero, if the class A, class M and class B-1 certificates have been
reduced to zero immediately prior to the related distribution date.
Subordination of the Subordinated Certificates
The primary credit support for the class A certificates is the
subordination of the subordinated certificates, effected by the allocation of
Writedown Amounts as described in this prospectus supplement and by the
preferential application of the Available Distribution Amount to the class A
certificates relative to the subordinated certificates to the extent described
in this prospectus supplement. See " -- Distributions -- Priority of
Distributions" in this prospectus supplement.
The Asset Pool
General
The certificates represent the entire beneficial ownership interest in NMSC
trust 1999- ___. This trust will be established by the pooling and master
servicing agreement dated as of
S-19
<PAGE>
_________ 1, 1999, among National Mortgage, the servicer and the trustee.
National Mortgage will acquire the assets from [Asset Seller] under a sales
agreement on the closing date. [Asset Seller] will have funded the origination
of each asset. Each asset not originated directly in [Asset Seller]'s name will
have been assigned to [Asset Seller] immediately after its origination. You will
find a description of [Asset Seller]'s general practices with respect to the
origination of certain assets in this prospectus supplement under "Underwriting
Guidelines."
The pooling and master servicing agreement requires the servicer to
maintain or cause to be maintained standard hazard insurance policies with
respect to each mortgaged property. Generally, no other insurance will be
maintained with respect to the manufactured homes, the mortgaged properties or
the assets. See "The Trusts -- Hazard Insurance on the Mortgage Loans --
Standard Hazard Insurance Policies" in the prospectus.
National Mortgage will convey to the trustee the assets and all rights to
receive payments due after _________ 1, 1999 (the "Cut-off Date"), including
scheduled payments due after the Cut-off Date but received prior to this date,
and prepayments and other unscheduled collections on the assets received on or
after the Cut-off Date. The right to payments that were due on or prior to the
Cut-off Date but which are received later will not be conveyed to National
Mortgage by [Asset Seller], and these payments will be the property of [Asset
Seller] when collected. The servicer will retain physical possession of the
contract documents. Except to the extent required to service a mortgage loan,
the trustee will maintain physical possession of the mortgage loan documents.
See " -- Conveyance of Assets" in this prospectus supplement.
Fixed Rate Assets
The assets will consist of ________ Fixed Rate Assets having an aggregate
Scheduled Principal Balance as of the Cut-off Date of approximately
$______________. A total of _______ Fixed Rate Assets, representing
approximately ____% of the Fixed Rate Assets, are step-up rate loans. The
remainder of the Fixed Rate Assets are Level Payment Loans. [Step-up rate loans
are assets that provide for periodic increases of [0.50%, 0.75%, 1.00%, 1.25% or
1.50]% in the applicable asset rates at the end of intervals of twelve months
during the first five years following origination (the "Step-up Periods"), after
which the asset rates are fixed. The total amount and the principal portion of
each monthly payment on any step-up rate loan during any period is determined on
a basis that would cause the asset to be fully amortized over its term if the
asset were to bear interest during its entire term at the asset rate applicable
during this period and as if the asset were to provide for level payments over
its entire term based on the asset rate. In addition to interest rate
adjustments during their Step-up Periods, some step-up rate loans will
experience a one-time increase in their asset rates with respect to their final
monthly payments. The statistical information concerning the Fixed Rate Assets
sets forth only the asset rates borne by these assets as of the Cut-off Date.]
See "The Trust -- The Assets" in the prospectus.
[Except in the case of the step-up rate loans during their Step-up
Periods,] each Fixed Rate Asset bears interest at a fixed annual percentage rate
and provides for level payments over the term of the asset that fully amortize
the principal balance of the asset. All of the Fixed Rate
S-20
<PAGE>
Assets are actuarial obligations. The portion of each monthly payment for any
Fixed Rate Asset allocable to principal is equal to the total amount of the
monthly payment less the portion allocable to interest. The portion of each
monthly payment due in a particular month that is allocable to interest is a
precomputed amount equal to one month's interest on the principal balance of the
Fixed Rate Asset, which principal balance is determined by reducing the initial
principal balance by the principal portion of all monthly payments that were due
in prior months, regardless of whether the monthly payments were made in a
timely fashion, and all prior partial principal prepayments. Thus, each
scheduled monthly payment on an asset will be applied to interest and to
principal in accordance with the precomputed allocation regardless of whether
the monthly payment was received in advance of or subsequent to its Due Date.
See "Servicing of the Assets --Collection and Other Servicing Procedures" in
this prospectus supplement.
As of the Cut-off Date, approximately _____% of the Fixed Rate Assets were
_____________. As of the Cut-off Date, approximately _____% of the Fixed Rate
Assets were mortgage loans.
As of the Cut-off Date, each Fixed-Rate Asset had an asset rate of at least
________% per annum and not more than _____% per annum. The weighted average
asset rate of the Fixed-Rate Assets was approximately ____% per annum[, without
giving effect to any subsequent increase in the asset rates of the step-up rate
loans.] The Fixed Rate Assets had remaining terms to stated maturity as of the
Cut-off Date of at least ___ months but not more than 360 months and original
terms to stated maturity of at least ___ months but not more than 360 months.
Each Fixed Rate Asset was originated on or after ___________. As of the Cut-off
Date, the Fixed Rate Assets had a weighted average original term to stated
maturity of approximately ____ months, and a weighted average remaining term to
stated maturity of approximately ____ months. The remaining term to stated
maturity of an asset is calculated as the number of monthly payments scheduled
to be made on the asset over its term less the number of monthly payments made
or scheduled to have been made on or before the Cut-off Date. The average
Scheduled Principal Balance of the Fixed Rate Assets as of the Cut-off Date was
approximately $_________ and the Scheduled Principal Balance of the Fixed Rate
Assets as of the Cut-off Date ranged from $______ to $_______.
Approximately ________% of the Fixed Rate Assets have Loan-to-Value Ratios
greater than 95%. [Asset Seller] computes each Loan-to-Value Ratio by
determining the ratio of the principal amount of the mortgage or contract to the
purchase price of the home, including taxes, insurance and any land
improvements, and the amount of any prepaid finance charges or closing costs
that are financed. [Asset Seller] computes each Loan-to-Value Ratio by
determining the ratio of the principal amount of the mortgage loan to either
. the sum of the appraised value of the land and improvements, and the
amount of any prepaid finance charges or closing costs that are
financed, or
. the sum of the purchase price of the home, including taxes, insurance
and any land improvements, the appraised value of the land and the
amount of any prepaid finance charges or closing costs that are
financed.
S-21
<PAGE>
The Fixed Rate Assets are secured by mortgaged properties, located in ___
states. Approximately [greater than10]% and [greater than10]% of the Fixed Rate
------------ ------------
Assets were secured as of the Cut-off Date by mortgaged properties located in
______ and _______, respectively. As of the Cut-off Date, no more than
approximately ____%, ____% and ____% of the Fixed Rate Assets were secured by
mortgaged properties which were used, repossessed or transferred to an assignee
of the original obligor, respectively, at the time the related assets were
originated.
Adjustable Rate Assets
The asset pool will consist of ___ adjustable rate assets having an
aggregate Scheduled Principal Balance as of the Cut-off Date of approximately
$________.
Each adjustable rate asset has an asset rate that adjusts annually based on
__________, and provides for [level] payments over the term of the asset that
fully amortize the principal balance of the asset. All of the adjustable rate
assets are actuarial obligations.
Each adjustable rate asset has an annual cap of ___% per annum. The
weighted average lifetime cap of the adjustable rate assets as of the Cut-off
Date was approximately ___% per annum. The adjustable rate assets had Gross
Margins as of the Cut-off Date of at least ___% per annum but not more than ___%
per annum, with a weighted average Gross Margin of approximately ___% per annum.
The portion of each monthly payment for any adjustable rate asset allocable to
principal is equal to the total amount of the monthly payment less the portion
allocable to interest. The portion of each monthly payment due in a particular
month that is allocable to interest is a precomputed amount equal to one month's
interest on the principal balance of the adjustable rate asset, which principal
balance is determined by reducing the initial principal balance by the principal
portion of all monthly payments that were due in prior months, regardless of
whether the Monthly Payments were made in a timely fashion, and all prior
partial principal prepayments. Thus, each scheduled monthly payment on an asset
will be applied to interest and to principal in accordance with the precomputed
allocation regardless of whether the monthly payment was received in advance of
or subsequent to its Due Date. As of the Cut-off Date all of the adjustable
rate assets were mortgage loans. See "Servicing of the Assets -- Collection and
Other Servicing Procedures" in this prospectus supplement.
As of the Cut-off Date, each adjustable rate asset had an asset rate of at
least ____% per annum and not more than ____% per annum. The weighted average
asset rate of the adjustable rate assets was approximately ____% per annum,
without giving effect to any subsequent adjustment in the asset rates of the
adjustable rate assets. The adjustable rate assets had remaining terms to
stated maturity as of the Cut-off Date of at least ____ months but not more than
____ months and original terms to stated maturity of ____ months. Each
adjustable rate asset was originated on or after ____________. As of the Cut-
off Date, the adjustable rate assets had a weighted average original term to
stated maturity of approximately ______ months, and a weighted average remaining
term to stated maturity of approximately ____ months. The remaining term to
stated maturity of an asset is calculated as the number of monthly payments
scheduled to be made on the asset over its term less the number of monthly
payments made or scheduled to have been made on or before the Cut-off Date. The
average Scheduled Principal
S-22
<PAGE>
Balance of the adjustable rate assets as of the Cut-off Date was approximately
$________ and the Scheduled Principal Balance of the adjustable rate assets as
of the Cut-off Date ranged from $________ to $________. Approximately ____% of
the adjustable rate assets have Loan-to-Value Ratios greater than 95%.
The adjustable rate assets are secured by mortgaged properties located in
____ states. Approximately [greater than 10]%, [greater than 10]%, [greater than
------------- ------------ ------------
10]%, [greater than 10]% and [greater than 10]% of the adjustable rate assets
------------ ------------
were secured as of the Cut-off Date by mortgaged properties located in
__________, __________, __________, __________ and __________, respectively.
Selected Data
It is possible that some of the assets may be repaid in full or in part, or
otherwise removed from the asset pool. In this event, other assets may be
transferred to the trust. Consequently, the actual asset pool may vary slightly
from the presentation in this prospectus supplement.
Whenever reference is made to a percentage of the assets, or to a
percentage of the Scheduled Principal Balance of the assets, the percentage is
calculated based on the Scheduled Principal Balances of the assets as of the
Cut-off Date. In addition, numbers in any columns in these tables may not sum
exactly to the total number at the bottom of the column due to rounding.
Fixed Rate Assets
Geographic Distribution of Mortgage assets -- Fixed Rate Assets
<TABLE>
<CAPTION>
Percentage of
Number of Aggregate Fixed Rate
Fixed Rate Scheduled Asset Pool
Geographic Location Assets Principal Balance By SPB
- ------------------- ---------- ----------------- --------------
<S> <C> <C> <C>
Alabama.................... _____ _________ ____
Arizona.................... _____ _________ ____
Arkansas................... _____ _________ ____
California................. _____ _________ ____
Colorado................... _____ _________ ____
Delaware................... _____ _________ ____
Florida.................... _____ _________ ____
Georgia.................... _____ _________ ____
Idaho...................... _____ _________ ____
Illinois................... _____ _________ ____
Indiana.................... _____ _________ ____
Kansas..................... _____ _________ ____
Kentucky................... _____ _________ ____
Louisiana.................. _____ _________ ____
Maine...................... _____ _________ ____
Maryland................... _____ _________ ____
</TABLE>
S-23
<PAGE>
<TABLE>
<S> <C> <C> <C>
Michigan................... _____ _________ ____
Minnesota.................. _____ _________ ____
Mississippi................ _____ _________ ____
Missouri................... _____ _________ ____
Montana.................... _____ _________ ____
Nevada..................... _____ _________ ____
New Jersey................. _____ _________ ____
New Mexico................. _____ _________ ____
New York................... _____ _________ ____
North Carolina............. _____ _________ ____
Ohio....................... _____ _________ ____
Oklahoma................... _____ _________ ____
Oregon..................... _____ _________ ____
Pennsylvania............... _____ _________ ____
South Carolina............. _____ _________ ____
Tennessee.................. _____ _________ ____
Texas...................... _____ _________ ____
Utah....................... _____ _________ ____
Virginia................... _____ _________ ____
Washington................. _____ _________ ____
West Virginia.............. _____ _________ ____
Wisconsin.................. _____ _________ ____
WyOMIng....................
Total................. $ %
===== ========= ====
</TABLE>
_________________
Based on the mailing address of the obligor on the related Fixed Rate Asset as
of the Cut-off Date.
Distribution of Original Fixed Rate Asset Amounts
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Original Fixed Rate Asset Amount Assets Principal Balance Pool By SPB
- -------------------------------- ---------- ------------------ ----------------
<S> <C> <C> <C>
$4,999 or less.................. _____ _________ _________
$5,000 - $ 9,999............... _____ _________ _________
$10,000 - $14,999............... _____ _________ _________
$15,000 - $19,999............... _____ _________ _________
$20,000 - $24,999............... _____ _________ _________
$25,000 - $29,999............... _____ _________ _________
$30,000 - $34,999............... _____ _________ _________
$35,000 - $39,999............... _____ _________ _________
$40,000 - $44,999............... _____ _________ _________
$45,000 - $49,999............... _____ _________ _________
</TABLE>
S-24
<PAGE>
<TABLE>
<S> <C> <C> <C>
$50,000 - $54,999............... _____ _________ _________
$55,000 - $59,999............... _____ _________ _________
$60,000 - $64,999............... _____ _________ _________
$65,000 - $69,999............... _____ _________ _________
$70,000 - $74,999............... _____ _________ _________
$75,000 - $79,999............... _____ _________ _________
$80,000 - $84,999............... _____ _________ _________
$85,000 - $89,999............... _____ _________ _________
$90,000 - $94,999............... _____ _________ _________
$95,000 - $99,999............... _____ _________ _________
$100,000 or more............... _____ _________ _________
Total .................... $ %
===== ========= =========
</TABLE>
The highest original Fixed Rate Asset amount was $_________, which
represents approximately _____% of the aggregate principal balance of the Fixed
Rate Assets at origination. The average original principal amount of the Fixed
Rate Assets was approximately $______ as of the Cut-off Date.
Distribution of Original Loan-to-Value Ratios of Fixed Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Loan-to-Value Ratio Assets Principal Balance Pool By SPB
- ------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
50% or less........... _____ _________ ____
51% - 55%............ _____ _________ ____
56% - 60%............ _____ _________ ____
61% - 65%............ _____ _________ ____
66% - 70%............ _____ _________ ____
71% - 75%............ _____ _________ ____
76% - 80%............ _____ _________ ____
81% - 85%............ _____ _________ ____
86% - 90%............ _____ _________ ____
91% - 95%............ _____ _________ ____
96% - 100%............ _____ _________ ____
101%- 110%............ _____ _________ ____
Total.......... $ %
===== ========= ====
</TABLE>
The weighted average original Loan-to-Value Ratio of the Fixed Rate Assets
was approximately ____% as of the Cut-off Date. Rounded to nearest 1%.
S-25
<PAGE>
Fixed Rate Asset Rates
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Asset Rate Assets Principal Balance Pool By SPB
- ---------- ----------- ----------------- -----------------
<S> <C> <C> <C>
6.000 - 6.999%.......... _____ _________ _________
7.000 - 7.999%.......... _____ _________ _________
8.000 - 8.999%.......... _____ _________ _________
9.000 - 9.999%.......... _____ _________ _________
10.000 - 10.999%.......... _____ _________ _________
11.000 - 11.999%.......... _____ _________ _________
12.000 - 12.999%.......... _____ _________ _________
13.000 - 13.999%.......... _____ _________ _________
14.000 - 14.999%.......... _____ _________ _________
Total ..................... $ %
===== ========= =========
</TABLE>
The weighted average Fixed Rate Asset Rate was approximately _____1% per
annum as of the Cut-off Date. This table reflects the Fixed Rate Asset Rates of
the step-up rate loans as of the Cut-off Date and does not reflect any
subsequent increases in the Rates of the step-up rate loans.
Year of Origination of Fixed Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Year of Origination Assets Principal Balance Pool By SPB
- ------------------- ---------- ------------------- -----------------
<S> <C> <C> <C>
1996................................. _____ _________ ____
1997................................. _____ _________ ____
1998................................. _____ _________ ____
1999................................. _____ _________ ____
Total................................ $ %
===== ========= ====
</TABLE>
The weighted average seasoning of the Fixed Rate Assets was approximately
___ months as of the Cut-off Date.
S-26
<PAGE>
Remaining Terms to Maturity, in months, of Fixed Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Remaining Term to Maturity Assets Principal Balance Pool By SPB
- -------------------------- ---------- ------------------- -----------------
<S> <C> <C> <C>
1 - 60 months....................... _____ _________ ____
61 - 96 months....................... _____ _________ ____
97 - 120 months....................... _____ _________ ____
121 - 156 months....................... _____ _________ ____
157 - 180 months....................... _____ _________ ____
181 - 216 months....................... _____ _________ ____
217 - 240 months....................... _____ _________ ____
241 - 300 months....................... _____ _________ ____
301 - 360 months....................... _____ _________ ____
Total.............................. $ %
===== ========= ====
</TABLE>
The weighted average remaining term to maturity of the Fixed Rate Assets
was approximately ____ months as of the Cut-off Date.
S-27
<PAGE>
Original Terms to Maturity, in months, of Fixed Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Original Term to Maturity Assets Principal Balance Pool By SPB
- ------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
1 - 60 months .......... _____ _________ ____
61 - 96 months .......... _____ _________ ____
97 - 120 months ......... _____ _________ ____
121 - 156 months ......... _____ _________ ____
157 - 180 months ......... _____ _________ ____
181 - 216 months ......... _____ _________ ____
217 - 240 months ......... _____ _________ ____
241 - 300 months ......... _____ _________ ____
301 - 360 months ......... _____ _________ ____
Total ................... $ %
===== ========= ====
</TABLE>
The weighted average original term to maturity of the Fixed Rate Assets was
approximately ___ months as of the Cut-off Date.
Adjustable Rate Assets
Geographic Distribution of Assets - Adjusted Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Geographic Location Assets Principal Balance Pool By SPB
- ------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Arizona.................. _____ _________ ____
California............... _____ _________ ____
Colorado................. _____ _________ ____
Florida.................. _____ _________ ____
Georgia.................. _____ _________ ____
Idaho.................... _____ _________ ____
Kentucky................. _____ _________ ____
New Mexico............... _____ _________ ____
North Carolina........... _____ _________ ____
Oregon................... _____ _________ ____
South Carolina........... _____ _________ ____
Tennessee................ _____ _________ ____
Virginia................. _____ _________ ____
Washington............... _____ _________ ____
Total.................... $ %
===== ========= ====
</TABLE>
Based on the mailing address of the obligor on the related adjustable rate
asset as of the Cut-off Date.
S-28
<PAGE>
Distribution of Original Adjustable Rate Asset Amounts
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Original Adjustable Rate Asset Amount Assets Principal Balance Pool By SPB
- ------------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
$45,000 - $49,999.................... _____ _________ ______
$55,000 - $59,999.................... _____ _________ ______
$60,000 - $64,999.................... _____ _________ ______
$65,000 - $69,999.................... _____ _________ ______
$70,000 - $74,999.................... _____ _________ ______
$75,000 - $79,999.................... _____ _________ ______
$80,000 - $84,999.................... _____ _________ ______
$85,000 - $89,999.................... _____ _________ ______
$90,000 - $94,999.................... _____ _________ ______
$95,000 - $99,999.................... _____ _________ ______
$100,000 or more..................... _____ _________ ______
Total $ %
===== ========= ======
</TABLE>
The highest original adjustable rate asset amount was $__________, which
represents approximately _____% of the aggregate principal balance of the
adjustable rate assets at origination. The average original principal amount of
the adjustable rate assets was approximately $_______ as of the Cut-off Date.
Distribution of Original Loan-to-Value Ratios of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Loan-to-Value Ratio Assets Principal Balance Pool By SPB
- ---------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
51% -- 55% _____ _________ ____
66% -- 70% _____ _________ ____
71% -- 75% _____ _________ ____
76% -- 80% _____ _________ ____
81% -- 85% _____ _________ ____
86% -- 90% _____ _________ ____
91% -- 95% _____ _________ ____
96% -- 100% _____ _________ ____
101% -- 105% _____ _________ ____
Total $ %
===== ========= ====
</TABLE>
The weighted average original Loan-to-Value Ratio of the Adjustable Assets
was approximately _____% as of the Cut-off Date. Rounded to nearest 1%.
S-29
<PAGE>
Current Asset Rates of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Asset Rate Assets Principal Balance Pool By SPB
- ---------- ---------- ----------------- -----------------
<S> <C> <C> <C>
7.000% - 7.999%......... _____ _________ ____
8.000% - 8.999%......... _____ _________ ____
9.000% - 9.999.......... _____ _________ ____
Total $ %
===== ========= ====
</TABLE>
The weighted average adjustable rate asset Rate was approximately _____%
per annum as of the Cut-off Date. This table reflects the Asset Rates of the
adjustable rate assets as of the Cut-off Date and does not reflect any
subsequent adjustments in the Asset Rates of the adjustable rate assets.
Distribution of Gross Margins of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Gross Margin Assets Principal Balance Pool By SPB
- ------------ ---------- ----------------- -----------------
<S> <C> <C> <C>
3.250% - 3.500%...... _____ _________ ____
4.500% - 4.750%...... _____ _________ ____
Total............. $ %
===== ========= ====
</TABLE>
The weighted average Gross Margin of the adjustable rate assets was
approximately ____% per annum as of the Cut-off Date.
Maximum Asset Rates of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Maximum Asset Rates Assets Principal Balance Pool By SPB
- ------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
13.000% to 13.625%....... _____ _________ ____
14.000% to 14.625%....... _____ _________ ____
Total................. $ %
===== ========= ====
</TABLE>
The weighted average maximum Asset Rate of the adjustable rate assets was
approximately ______% per annum as of the Cut-Off Date.
S-30
<PAGE>
Year of Origination of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Year of Origination Assets Principal Balance Pool By SPB
- ------------------- ------ ----------------- -----------
<S> <C> <C> <C>
1997................. _____ _________ ____
1998................. _____ _________ ____
Total............. $ %
===== ========= ====
</TABLE>
The weighted average seasoning of the adjustable rate assets was
approximately ___ months as of the Cut-off Date.
Remaining Terms to Maturity, in months, of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Remaining Term to Maturity Assets Principal Balance Pool By SPB
- -------------------------- ------ ----------------- -----------
<S> <C> <C> <C>
348 - 360 months........... _____ _________ ____
Total................... $ %
===== ========= ====
</TABLE>
The weighted average remaining term to maturity of the adjustable rate
assets was approximately ____ months as of the Cut-off Date.
Original Terms to Maturity, in months, of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Original Terms to Maturity Assets Principal Balance Pool By SPB
- -------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
360 months................ _____ _________ ____
Total.................... $ %
===== ========= ====
</TABLE>
The weighted average original term to maturity of the adjustable rate
assets was approximately ___ months as of the Cut-off Date.
S-31
<PAGE>
Date of Next Asset Rate Adjustment of Adjustable Rate Assets
<TABLE>
<CAPTION>
Number of Aggregate Percentage of
Fixed Rate Scheduled Fixed Rate Asset
Date of Next Asset Rate Adjustment Assets Principal Balance Pool By SPB
- ---------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
August 1, 1999.................... _____ _________ ____
August 15, 1999................... _____ _________ ____
October 1, 1999................... _____ _________ ____
November 1, 1999.................. _____ _________ ____
December 1, 1999.................. _____ _________ ____
January 1, 2000................... _____ _________ ____
Total $ %
===== ========= ====
</TABLE>
Underwriting Guidelines
The mortgage assets were underwritten by [Asset Seller] and were
underwritten and originated substantially in accordance with its guidelines
[Description of Underwriting Policies from Asset Seller].
Conveyance of Assets
On the date of issuance of the certificates [or on each Subsequent Transfer
Date], National Mortgage will transfer to the trustee, without recourse, all of
its right, title and interest in and to the assets, including all principal and
interest received on or with respect to the assets, not including principal and
interest due on the assets on or before the Cut-off Date and any other amounts
collected on the assets before the Cut-off Date other than early collections of
Monthly Payments that were due after the Cut-off Date, and all rights under the
standard hazard insurance policies maintained with respect to the mortgaged
properties. [The pooling and master servicing agreement permits the trust to
purchase Subsequent Assets on one or more dates through the close of business on
________ (each, a "Subsequent Transfer Date").] The asset schedule will
identify the Scheduled Principal Balance of each asset, the amount of each
monthly payment due on each asset, and the asset rate on each asset, in each
case as of the Cut-off Date. Prior to the conveyance of the assets to the
trustee, [Asset Seller]'s operations department will complete a review of all of
the mortgage asset files, including the certificates of title to, or other
evidence of a perfected security interest in, the mortgaged properties to check
the accuracy of the asset schedule delivered to the trustee. The trustee will
complete a review of the mortgage asset files to check the accuracy of the
mortgage asset schedule.
National Mortgage will represent and warrant only that:
. the information set forth in the asset schedule was true and correct
as of the date or dates on which the information was furnished;
. National Mortgage is the owner of, or holder of a first-priority
security interest in, each asset;
S-32
<PAGE>
. National Mortgage acquired its ownership of, or security interest in,
each asset in good faith without notice of any adverse claim;
. except for the sale of the assets to the trustee, National Mortgage
has not assigned any interest or participation in any asset that has
not been released; and
. National Mortgage has the full right to sell the trust estate to the
trustee.
The servicer, on behalf of the certificateholders, will hold the original
and copies of documents and instruments relating to each asset and the security
interest in the asset and any asset property relating to each asset. In order
to provide notice of the assignment of the assets to the trustee, UCC-1
financing statements identifying the trustee as the secured party or purchaser
and identifying all the assets as collateral will be filed in the appropriate
offices in the _________________. Despite these filings, if a subsequent
purchaser were able to take physical possession of the asset without notice of
the assignment of the asset to the trustee, the trustee's interest in the
contracts could be defeated. To provide some protection against this
possibility, in addition to filing UCC-1 financing statements, within one week
after the initial delivery of the certificates or after each Subsequent Transfer
Date, as applicable, the assets will be stamped or otherwise marked to reflect
their assignment to the trustee. The trustee, on behalf of the
certificateholders, will hold the original mortgage notes and mortgages, and
copies of documents and instruments relating to each mortgage loan. See "Legal
Aspects of the Mortgage Loans" in the prospectus.
[Asset Seller] will make representations and warranties regarding the
assets in the sales agreement. These representations and warranties are
detailed in the prospectus under the heading "Sale and Servicing of the Mortgage
assets --- Representations and Warranties."
Under the terms of the pooling and master servicing agreement and the sales
agreement, and subject to [Asset Seller]'s option to effect a substitution as
described in the next paragraph, [Asset Seller] will be obligated to repurchase
any asset for its Repurchase Price within 90 days after [Asset Seller]'s
discovery, or receipt of written notice from the trustee or the servicer, of a
breach of any representation or warranty made by [Asset Seller] in the sales
agreement that materially and adversely affects the trustee's interest in any
asset, if the breach has not been cured by the 90th day. The Repurchase Price
for any asset will be the unpaid principal balance of the asset at the close of
business on the date of repurchase, plus accrued and unpaid interest thereon to
the next Due Date for the asset following the repurchase. Prior to being
distributed to certificateholders, this Repurchase Price will be used to
reimburse the servicer for any previously unreimbursed Advances made by the
servicer in respect of the repurchased asset and, if the repurchaser is the
servicer, the Repurchase Price may be remitted net of reimbursement amounts.
In lieu of repurchasing an asset as specified in the preceding paragraph,
during the two-year period following the date of the initial issuance of the
certificates, [Asset Seller] may, at its option, substitute a qualified
substitute asset for any asset to be replaced. A qualified substitute asset is
any asset that, on the date of substitution,
S-33
<PAGE>
. has an unpaid principal balance not greater than, and not more than
$10,000 less than, the unpaid principal balance of the replaced asset,
. has an asset rate not less than, and not more than one percentage
point in excess of, the asset rate of the replaced asset,
. has a net rate at least equal to the net rate of the replaced asset,
. has a remaining term to maturity not greater than, and not more than
one year less than, that of the replaced asset,
. has a Loan-to-Value Ratio as of the first day of the month in which
the substitution occurs equal to or less than the Loan-to-Value Ratio
of the replaced asset as of such date, in each case, using the
appraised value at origination, and after taking into account the
monthly payment due on this date, and
. complies with each representation and warranty in Section _____ of the
pooling and master servicing agreement and in the sales agreement.
In the event that more than one asset is substituted for a replaced asset, the
unpaid principal balances may be determined on an aggregate basis, and the asset
rate, net rate and term on a weighted average basis, provided that no qualified
substitute asset may have an original term to maturity beyond the latest
original term to maturity of any asset assigned to the trust on the closing
date. In the case of a trust for which a REMIC election has been made, a
qualified substitute asset also shall satisfy the following criteria as of the
date of its substitution for a replaced asset:
. the asset shall not be 30 or more days delinquent,
. the asset file for such asset shall not contain any material
deficiencies in documentation, and shall include an executed contract
or mortgage note, as applicable, and, if it is a Land Secured Contract
or a mortgage loan, a recorded mortgage;
. the Loan-to-Value Ratio of the asset must be 125% or less either on
the date of origination of the asset, or, if any of the terms of such
asset were modified other than in connection with a default or
imminent default on such asset, on the date of such modification, or
on the date of the substitution, based on an appraisal conducted
within the 60 day period prior to the date of the substitution, if
applicable;
. no property securing such asset may be the subject of foreclosure,
bankruptcy, or insolvency proceedings; and
. such asset, if a mortgage asset, must be secured by a valid first lien
on the related real property or mortgaged property.
S-34
<PAGE>
In addition, any replaced asset that is a mortgage loan may only be
replaced by another mortgage loan.
[Asset Seller] will deposit cash into the certificate account in the
amount, if any, by which the aggregate of the unpaid principal balances of any
replaced assets exceeds the aggregate of the unpaid principal balances of the
assets being substituted for the replaced assets. Also, if it is discovered
that the actual Scheduled Principal Balance of an asset is less than the
Scheduled Principal Balance identified for the asset on the asset schedule,
[Asset Seller] may, at its option, deposit the amount of the discrepancy into
the certificate account instead of repurchasing the asset. Any deposit will be
treated as a partial principal prepayment.
In addition, [Asset Seller] is required to indemnify National Mortgage and
its assignees, including the trust, against losses and damages they incur as a
result of breaches of [Asset Seller]'s representations and warranties. [Asset
Seller]'s obligation to repurchase or substitute for an asset affected by a
breach of a representation or warranty and to indemnify National Mortgage and
its assignees for losses and damages caused by a breach constitute the sole
remedies available to the trustee and the certificateholders for a breach of a
representation or warranty under the pooling and master servicing agreement or
the sales agreement with respect to the assets.
[Conveyance of Subsequent Assets and Pre-Funding Account
A Pre-Funding Account will be established by the trustee and funded by
National Mortgage on the closing date to provide the trust with funds to
purchase Subsequent Assets. The Subsequent Assets will be purchased by the
trust during the Pre-Funding Period, which will begin on the closing date and
end on ______ __, _____. The Pre-Funded Amount will initially equal the
difference between the aggregate certificate principal balance of the offered
certificates on the closing date and the aggregate Scheduled Principal Balance
of the initial assets as of the Cut-Off Date. In the event that the trust is
unable to acquire sufficient qualifying assets by _______, any amounts remaining
in the Pre-Funding Account will be applied as a partial principal prepayment to
certificateholders entitled to the payment on the first date distributions are
made. The Pre-Funding Account will be part of the trust but not part of the
Pooling REMIC or the Issuing REMIC. Any investment income earned on amounts on
deposit in the Pre-Funding Account will be paid to National Mortgage and will
not be available for distribution to certificateholders.
Under the pooling and master servicing agreement, the trust will be
obligated to purchase Subsequent Assets from National Mortgage during the Pre-
Funding Period, if available. Subsequent Assets will be transferred to the
trust pursuant to subsequent transfer instruments between National Mortgage and
the trust. Each Subsequent Asset, if it is a mortgage asset, will have been
underwritten in accordance with National Mortgage's standard underwriting
criteria. In connection with the purchase of Subsequent Assets on each
Subsequent Transfer Date, the trust will be required to pay to National Mortgage
from amounts on deposit in the Pre-Funding Account a cash purchase price of 100%
of the Scheduled Principal Balance of the Subsequent
S-35
<PAGE>
Assets as of the related Cut-Off Date. Any conveyance of Subsequent Assets on a
Subsequent Transfer Date must satisfy conditions including, but not limited to:
. each Subsequent Asset must satisfy the representations and warranties
specified in the related subsequent transfer instrument and the
pooling and master servicing agreement;
. National Mortgage will not select Subsequent Assets in a manner that
it believes is adverse to the interests of the certificateholders;
. each Subsequent Asset must not be more than 30 days delinquent as of
its Cut-off Date;
. as a result of the purchase of the Subsequent Assets, the certificates
will not receive from _______ or ________ a lower credit rating than
the rating assigned at the initial issuance of the certificates; and
. an independent accountant will provide a letter stating whether or not
the characteristics of the Subsequent Assets conform to the
characteristics described in this prospectus supplement.
Following the end of the Pre-Funding Period, the asset pool must satisfy the
following criteria:
. the weighted average asset rate must not be less than ____% or more
than ____%;
. the weighted average remaining term to stated maturity must not be
less than ____ months or more than ____ months;
. the weighted average Loan-to-Value Ratio must not be greater than
____%;
. not less than ____% of the asset pool, by Scheduled Principal Balance,
must be attributable to loans to purchase new assets;
. not more than ____%, ____% and ____% of the assets located in
_______________, ______________, or any other individual state,
respectively, and
. not less than ____% of the assets will be either [Land Secured
Contracts] or [mortgage loans.]
Information regarding Subsequent Assets comparable to the disclosure
regarding the initial assets provided in this prospectus supplement will be
filed on a report on Form 8-K with the SEC within 15 days following the end of
the Pre-Funding Period.]
Maturity and Prepayment Considerations
The assets had terms to maturity at origination ranging from ___ months to
360 months, but may be prepaid in full or in part at any time. The prepayment
experience of the assets, including prepayments due to liquidations of defaulted
assets, will affect the weighted average
S-36
<PAGE>
life of each class of the certificates. Based on [Asset Seller]'s experience
with the portfolio of Mortgage assets it services, [Asset Seller] anticipates
that a number of assets will be liquidated or prepaid in full prior to their
respective maturities. A number of factors, including homeowner mobility,
general and regional economic conditions and prevailing interest rates may
influence prepayments. In addition, any repurchases of assets on account of
breaches of representations and warranties will have the same effect as
prepayments of the assets and accordingly will affect the life of the
certificates. Natural disasters may also influence prepayments. Most of the
Assets contain provisions that prohibit the obligors from selling an underlying
mortgaged property without the prior consent of the holder of the asset. These
provisions may not be enforceable in some states. The servicer's policy is to
permit most sales of mortgaged properties without accelerating the assets where
the proposed buyer meets [Asset Seller]'s then-current underwriting standards
and either enters into an assumption agreement or executes a new note, contract
or other form of indebtedness for the unpaid balance of the existing asset. The
execution of a new contract or mortgage note and mortgage would have the same
effect as a prepayment of the existing asset in full. See "Certain Legal Aspects
of Mortgage Loans" in the prospectus.
Weighted Average Lives of the Offered Certificates
The following information is given solely to illustrate the effect of
prepayments of the assets on the weighted average life of each class of the
offered certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced with respect to the assets.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security until each dollar of principal of the
security will be repaid to the investor. The weighted average lives of the
offered certificates will be affected by the rate at which principal on the
assets is paid. Principal payments on assets may be in the form of scheduled
amortization or prepayments --- for this purpose, the term prepayment includes
any voluntary prepayment by an obligor, the receipt of Liquidation Proceeds upon
disposition of the property securing any defaulted asset and the receipt of the
Repurchase Price for any asset upon its repurchase by [Asset Seller] as a result
of any breaches of its representations and warranties. Prepayments on contracts
and mortgage loans may be measured relative to a prepayment standard or model.
The [prepayment model] (the "[[prepayment model]]") is based on an assumed rate
of prepayment each month of the then unpaid principal balance of a pool of new
assets. A prepayment assumption of 100% [prepayment model] assumes constant
prepayment rates of ___% per annum of the then unpaid principal balance of the
assets in the first month of the life of the contracts and mortgage loans and an
additional ____% per annum in each month thereafter until the 24th month.
Beginning in the 24th month and in each month thereafter during the life of all
of the contracts and mortgage loans, 100% [prepayment model] assumes a constant
prepayment rate of ____% per annum each month.
As used in the following tables "0% [[prepayment model]]" assumes no
prepayments on the assets; "100% [prepayment model]" assumes the assets will
prepay at rates equal to 100% of the [prepayment model] assumed prepayment
rates; "200% [prepayment model]" assumes the
S-37
<PAGE>
assets will prepay at rates equal to 200% of the [prepayment model] assumed
prepayment rates; and so on.
There is no assurance, however, that the rate of prepayments of the assets
will conform to any level of the [prepayment model], and no representation is
made that the assets will prepay at the prepayment rates shown or any other
prepayment rate. National Mortgage makes no representations as to the
appropriateness of the [prepayment model].
Modeling Assumptions and [prepayment model] Tables
The asset prepayment tables (the "[prepayment model] Tables") were prepared
based upon the assumptions that there are no delinquencies on the assets and
that there will be a sufficient Available Distribution Amount to distribute all
accrued interest and the Principal Distribution Amount due (collectively, the
"Modeling Assumptions").
The percentages and weighted average lives in the following tables were
determined assuming that
. scheduled interest and principal payments on the assets will be
received each month on their Due Dates and full prepayments on and
liquidations of the assets will be received on the last day of each
month, commencing in ________ 1999, and will include 30 days of
interest thereon,
. the servicer exercises the right of optional termination at the
earliest possible date,
. the assets have the characteristics set forth in the two tables
provided,
. the initial certificate principal balance and pass-through rate of
each class of the offered certificates are as described in this
prospectus supplement,
. no Due Date Interest Shortfalls will arise in connection with
prepayments in full or liquidations of the assets,
. no losses will be experienced on any assets included in the asset
pool,
. the closing date for the issuance of the certificates will be
_________, 1999,
. cash distributions will be received by the holders of the certificates
on ________ 15, 1999 and on the 15th day of each month until
retirement of the certificates,
. 1 year CMT is assumed to be ____% per annum, and One-Month LIBOR is
assumed to be ____% per annum, and
. the assets will prepay monthly at the percentages of [prepayment
model] indicated in the [prepayment model] Tables.
S-38
<PAGE>
No representation is made that the assets will experience delinquencies or
losses at the respective rates assumed or at any other rates.
Assumed Fixed Rate Asset Characteristics
<TABLE>
<CAPTION>
Scheduled Remaining
Principal Balance Term to
As of the Asset Maturity Seasoning
Cut-off-Date Rate (Months) (Months)
----------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Level Pay Assets
1 ................................ ____________ ____________ ____________ ____________
2 ................................ ____________ ____________ ____________ ____________
3 ................................ ____________ ____________ ____________ ____________
4 ................................ ____________ ____________ ____________ ____________
5 ................................ ____________ ____________ ____________ ____________
</TABLE>
Step-Up Rate Assets
<TABLE>
<CAPTION>
Scheduled Remaining
Principal Balance Term to Months to Months to Months to First Step Second Step Third Step
As of the Asset Maturity Seasoning First Second Third Rate Rate Rate
Cut-off-Date Rate (Months) (Months) Step Step Step Step Step Step
----------------- ------ ----------- --------- -------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 .......... ----------------- ------ ----------- --------- -------- --------- --------- ---------- ---------- ---------
2 .......... ----------------- ------ ----------- --------- -------- --------- --------- ---------- ---------- ---------
3 .......... ----------------- ------ ----------- --------- -------- --------- --------- ---------- ---------- ---------
</TABLE>
- ----------
* Not applicable.
Assumed Adjustable Rate Asset Characteristics
<TABLE>
<CAPTION>
Scheduled Remaining
Principal Balance Term to Months to Lifetime Periodic Rate
As of the Asset Maturity Seasoning Gross Next Rate Rate Rate Frequency
Cut-off-Date Rate (Months) (Months) Margin Change Cap Cap Index Months
----------------- ------ ----------- --------- -------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 .......... $---------------- -----% ----------- --------- -------% --------- --------% --------% 1 year CMT ---------
</TABLE>
There will be discrepancies between the assets actually included in the
trust and the assumptions made as to the characteristics of the assets in
preparing the [prepayment model] Tables. There is no assurance that prepayment
of the assets will conform to any of the constant percentages of [prepayment
model] described in the [prepayment model] Tables or any other constant rate.
Among other things, the [prepayment model] Tables assume that the assets prepay
at the indicated constant percentages of [prepayment model], even though the
assets may vary substantially as to asset rates and original terms to maturity.
Variations in actual prepayment experience for the assets will increase or
decrease the percentages of initial principal balances and weighted average
lives shown in the [prepayment model] Tables. Assuming no prepayments, the
step-up rate loans and the Adjustable Rate Loans will cause the Weighted Average
Net Asset Rate for the assets to rise from approximately _____% per annum at the
Cut-
S-39
<PAGE>
off Date to a maximum of approximately _____% per annum, as the asset rates on
the step-up rate loans and the Adjustable Rate Loans increase. Weighted Average
Net Asset Rate means for any distribution date, a rate equal to
. the weighted average of the asset rates applicable to the scheduled
monthly payments that were due in the related Collection Period on
outstanding assets, less
. the Servicing Fee Rate.
The [prepayment model] Tables indicate the weighted average life of each
class of the offered certificates and set forth the percentage of the initial
certificate principal balance of each class of the offered certificates that
would be outstanding after each of the dates shown assuming prepayments of the
assets occur at various percentages of [prepayment model]. The weighted average
life of each class set forth in the [prepayment model] Tables has been
determined by multiplying the amount of each principal payment on the class by
the number of years from the date of delivery of the certificates of the class
to the related distribution date, summing the results and dividing the sum by
the total principal to be paid on the certificates of the class. See "Maturity
and Prepayment Considerations" in the prospectus.
Please make your investment decisions on a basis that includes your
determination as to anticipated prepayment rates based on your own assumptions
as to the matters discussed in this prospectus supplement.
S-40
<PAGE>
Percentage of Initial Certificate Principal Balances Outstanding
<TABLE>
<CAPTION>
Class A-1 Certificates at the following Class A-2 Certificates at the following
Percentages of [prepayment model] Percentages of [prepayment model]
------------------------------------------- -------------------------------------------
0% 100% 150% 200% 250 % 300% 0% 100% 150% 200% 250% 300%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.......... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2000........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2001........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2002........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2003........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2004........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2005........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2006........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2007........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2008........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2009........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2010........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2011........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2012........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2013........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2014........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2015........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2016........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2017........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2018........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2019........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2020........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2021........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2022........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2023........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2024........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2025........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2026........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2027........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2028........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2029........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Avg Life In Years:....... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
</TABLE>
These [prepayment model] Tables have been prepared based on the
Modeling Assumptions, including the assumptions regarding the
characteristics and performance of the assets, which will differ from their
actual characteristics and performance, and should be read in conjunction
with these assumptions.
S-41
<PAGE>
Percentage of Initial Certificate Principal Balances Outstanding
<TABLE>
<CAPTION>
Class A-3 Certificates at the following Class A-4 Certificates at the following
percentages of [prepayment model] percentages of [prepayment model]
------------------------------------- -----------------------------------
0% 100% 150% 200% 250% 300% 0% 100% 150% 200% 250% 300%
---- ---- ---- ---- ---- ---- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent.......... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2000........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2001........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2002........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2003........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2004........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2005........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2006........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2007........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2008........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2009........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2010........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2011........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2012........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2013........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2014........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2015........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2016........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2017........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2018........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2019........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2020........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2021........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2022........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2023........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2024........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2025........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2026........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2027........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2028........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2029........... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Avg Life In Years:....... ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
<CAPTION>
Class A-5 Certificates at the following
percentages of [prepayment model]
-----------------------------------
0% 100% 150% 200% 250% 300%
<S> <C> <C> <C> <C> <C> <C>
Initial Percent.......... ___ ___ ___ ___ ___ ___
_____ 15, 2000........... ___ ___ ___ ___ ___ ___
_____ 15, 2001........... ___ ___ ___ ___ ___ ___
_____ 15, 2002........... ___ ___ ___ ___ ___ ___
_____ 15, 2003........... ___ ___ ___ ___ ___ ___
_____ 15, 2004........... ___ ___ ___ ___ ___ ___
_____ 15, 2005........... ___ ___ ___ ___ ___ ___
_____ 15, 2006........... ___ ___ ___ ___ ___ ___
_____ 15, 2007........... ___ ___ ___ ___ ___ ___
_____ 15, 2008........... ___ ___ ___ ___ ___ ___
_____ 15, 2009........... ___ ___ ___ ___ ___ ___
_____ 15, 2010........... ___ ___ ___ ___ ___ ___
_____ 15, 2011........... ___ ___ ___ ___ ___ ___
_____ 15, 2012........... ___ ___ ___ ___ ___ ___
_____ 15, 2013........... ___ ___ ___ ___ ___ ___
_____ 15, 2014........... ___ ___ ___ ___ ___ ___
_____ 15, 2015........... ___ ___ ___ ___ ___ ___
_____ 15, 2016........... ___ ___ ___ ___ ___ ___
_____ 15, 2017........... ___ ___ ___ ___ ___ ___
_____ 15, 2018........... ___ ___ ___ ___ ___ ___
_____ 15, 2019........... ___ ___ ___ ___ ___ ___
_____ 15, 2020........... ___ ___ ___ ___ ___ ___
_____ 15, 2021........... ___ ___ ___ ___ ___ ___
_____ 15, 2022........... ___ ___ ___ ___ ___ ___
_____ 15, 2023........... ___ ___ ___ ___ ___ ___
_____ 15, 2024........... ___ ___ ___ ___ ___ ___
_____ 15, 2025........... ___ ___ ___ ___ ___ ___
_____ 15, 2026........... ___ ___ ___ ___ ___ ___
_____ 15, 2027........... ___ ___ ___ ___ ___ ___
_____ 15, 2028........... ___ ___ ___ ___ ___ ___
_____ 15, 2029........... ___ ___ ___ ___ ___ ___
Avg Life In Years:....... ___ ___ ___ ___ ___ ___
</TABLE>
These [prepayment model] Tables have been prepared based on the
Modeling Assumptions, including the assumptions regarding the
characteristics and performance of the assets, which will differ from their
actual characteristics and performance, and should be read in conjunction
with these assumptions.
S-42
<PAGE>
Percentage of Initial Certificate Principal Balances Outstanding
<TABLE>
<CAPTION>
Class M-1 Certificates at the following Class M-2 Certificates at the following
Percentages of [prepayment model] Percentages of [prepayment model]
----------------------------------------- -------------------------------------------
0% 100% 150% 200% 250% 300% 0% 100% 150% 200% 250% 300%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2000 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2001 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2002 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2003 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2004 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2005 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2006 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2007 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2008 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2009 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2010 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2011 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2012 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2013 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2014 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2015 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2016 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2017 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2018 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2019 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2020 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2021 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2022 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2023 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2024 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2025 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2026 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2027 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2028 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
_____ 15, 2029 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
Avg Life In Years: ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___
</TABLE>
These [prepayment model] Tables have been prepared based on the
Modeling Assumptions, including the assumptions regarding the
characteristics and performance of the assets, which will differ from their
actual characteristics and performance, and should be read in conjunction
with these assumptions.
S-43
<PAGE>
Percentage of Initial Certificate Principal Balances Outstanding
<TABLE>
<CAPTION>
Class B-1 Certificates at the following
Percentages of [prepayment model]
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------
0% 100% 150% 200% 250% 300%
Initial Percent........... ___ ___ ___ ___ ___ ___
_________ 15,2000......... ___ ___ ___ ___ ___ ___
_________ 15,2001......... ___ ___ ___ ___ ___ ___
_________ 15,2002......... ___ ___ ___ ___ ___ ___
_________ 15,2003......... ___ ___ ___ ___ ___ ___
_________ 15,2004......... ___ ___ ___ ___ ___ ___
_________ 15,2005......... ___ ___ ___ ___ ___ ___
_________ 15,2006......... ___ ___ ___ ___ ___ ___
_________ 15,2007......... ___ ___ ___ ___ ___ ___
_________ 15,2008......... ___ ___ ___ ___ ___ ___
_________ 15,2009......... ___ ___ ___ ___ ___ ___
_________ 15,2010......... ___ ___ ___ ___ ___ ___
_________ 15,2011......... ___ ___ ___ ___ ___ ___
_________ 15,2012......... ___ ___ ___ ___ ___ ___
_________ 15,2013......... ___ ___ ___ ___ ___ ___
_________ 15,2014......... ___ ___ ___ ___ ___ ___
_________ 15,2015......... ___ ___ ___ ___ ___ ___
_________ 15,2016......... ___ ___ ___ ___ ___ ___
_________ 15,2017......... ___ ___ ___ ___ ___ ___
_________ 15,2018......... ___ ___ ___ ___ ___ ___
_________ 15,2019......... ___ ___ ___ ___ ___ ___
_________ 15,2020......... ___ ___ ___ ___ ___ ___
_________ 15,2021......... ___ ___ ___ ___ ___ ___
_________ 15,2022......... ___ ___ ___ ___ ___ ___
_________ 15,2023......... ___ ___ ___ ___ ___ ___
_________ 15,2024......... ___ ___ ___ ___ ___ ___
_________ 15,2025......... ___ ___ ___ ___ ___ ___
_________ 15,2026......... ___ ___ ___ ___ ___ ___
_________ 15,2027......... ___ ___ ___ ___ ___ ___
_________ 15,2028......... ___ ___ ___ ___ ___ ___
_________ 15,2029......... ___ ___ ___ ___ ___ ___
Avg Life In Years:........ ___ ___ ___ ___ ___ ___
<CAPTION>
Class B-2 Certificates at the following
Percentages of [prepayment model]
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------
0% 100% 150% 200% 250% 300%
Initial Percent........... ___ ___ ___ ___ ___ ___
_________ 15,2000......... ___ ___ ___ ___ ___ ___
_________ 15,2001......... ___ ___ ___ ___ ___ ___
_________ 15,2002......... ___ ___ ___ ___ ___ ___
_________ 15,2003......... ___ ___ ___ ___ ___ ___
_________ 15,2004......... ___ ___ ___ ___ ___ ___
_________ 15,2005......... ___ ___ ___ ___ ___ ___
_________ 15,2006......... ___ ___ ___ ___ ___ ___
_________ 15,2007......... ___ ___ ___ ___ ___ ___
_________ 15,2008......... ___ ___ ___ ___ ___ ___
_________ 15,2009......... ___ ___ ___ ___ ___ ___
_________ 15,2010......... ___ ___ ___ ___ ___ ___
_________ 15,2011......... ___ ___ ___ ___ ___ ___
_________ 15,2012......... ___ ___ ___ ___ ___ ___
_________ 15,2013......... ___ ___ ___ ___ ___ ___
_________ 15,2014......... ___ ___ ___ ___ ___ ___
_________ 15,2015......... ___ ___ ___ ___ ___ ___
_________ 15,2016......... ___ ___ ___ ___ ___ ___
_________ 15,2017......... ___ ___ ___ ___ ___ ___
_________ 15,2018......... ___ ___ ___ ___ ___ ___
_________ 15,2019......... ___ ___ ___ ___ ___ ___
_________ 15,2020......... ___ ___ ___ ___ ___ ___
_________ 15,2021......... ___ ___ ___ ___ ___ ___
_________ 15,2022......... ___ ___ ___ ___ ___ ___
_________ 15,2023......... ___ ___ ___ ___ ___ ___
_________ 15,2024......... ___ ___ ___ ___ ___ ___
_________ 15,2025......... ___ ___ ___ ___ ___ ___
_________ 15,2026......... ___ ___ ___ ___ ___ ___
_________ 15,2027......... ___ ___ ___ ___ ___ ___
_________ 15,2028......... ___ ___ ___ ___ ___ ___
_________ 15,2029......... ___ ___ ___ ___ ___ ___
Avg Life In Years:........ ___ ___ ___ ___ ___ ___
</TABLE>
These [prepayment model] Tables have been prepared based on the Modeling
Assumptions, including the assumptions regarding the characteristics and
performance of the assets, which will differ from their actual characteristics
and performance, and should be read in conjunction with these assumptions.
[Pre-Funding
The certificates will be prepaid in part on the first distribution date
after the Pre-Funding Period if any Pre-Funding Amount remains in the Pre-
Funding Account on this distribution date. These amounts will be treated as a
partial principal prepayment. It is expected that substantially all of the Pre-
Funded Amount will be used to acquire Subsequent Assets. It is unlikely,
however, that the aggregate Scheduled Principal Balance of the Subsequent Assets
purchased by the trust will be identical to the Pre-Funded Amount, and
consequently, certificateholders will likely receive some prepayment of
principal.]
S-44
<PAGE>
Factors Affecting Prepayments
The rate of principal payments on pools of assets is influenced by a
variety of economic, geographic, social and other factors, including the
prevailing level of interest rates from time to time and the rate at which
owners of Mortgage assets sell their assets or default on their loans. Other
factors affecting prepayment of assets include changes in obligors' housing
needs, job transfers, unemployment and obligors' net equity in the mortgaged
properties.
In general, if prevailing interest rates fall significantly below the
interest rates on the assets in your pool, these assets are likely to experience
higher prepayment rates than if prevailing interest rates remained at or above
the rates borne by these assets, because the obligors may refinance and obtain
new loans with lower interest rates and lower monthly payments. Conversely, if
prevailing interest rates rise above the interest rates on these assets, the
rate of prepayment would be expected to decrease because new loans would bear
higher interest rates and require higher monthly payments.
The assets may be prepaid by the obligors at any time without imposition of
any prepayment fee or penalty. In addition, defaults on assets leading to
repossession, and foreclosure in the mortgage loans, and the ultimate
liquidation of the related mortgaged properties, may occur with greater
frequency during their early years. Prepayments, liquidations and repurchases
of the assets will result in distributions of principal to certificateholders of
amounts that would otherwise have been distributed over the remaining terms of
the assets. See "Yield on the Offered Certificates" in this prospectus
supplement.
[Asset Seller], as seller under the sales agreement, may be required to
repurchase assets if it breaches its representations and warranties contained in
the sales agreement, including those relating to the qualification of the assets
for REMIC purposes. Any repurchase of an asset will have the same effect as a
prepayment in full of the asset and will affect your yield to maturity. See "The
Asset Pool -- Conveyance of Contracts" in this prospectus supplement.
The servicer has the option to terminate the trust, thereby causing the
retirement of all outstanding certificates, on any distribution date on or after
the distribution date on which the sum of the certificate principal balance of
the certificates is less than ___% of the sum of their original certificate
principal balance. If the servicer does not exercise its optional termination
rights within 90 days after becoming eligible to do so, the trustee shall
solicit bids for the purchase of all assets, REO properties and repo properties
remaining in the trust. This purchase, if consummated, would likewise cause the
retirement of all outstanding certificates. See "The Trust" in this prospectus
supplement.
Yield on the Offered Certificates
Distributions of interest on the offered certificates, other than the class
A-1 certificates, on any distribution date will include interest accrued thereon
through the last day of the month preceding the month in which this distribution
date occurs. Because interest will not be distributed on the certificates until
the 15th day, or, if this day is not a business day, then on the next succeeding
business day, of the month following the month in which this interest accrues,
S-45
<PAGE>
the effective yield to the holders of the classes of offered certificates will
be lower than the yield otherwise produced by the pass-through rate and purchase
price.
The yield to maturity of, and the amount of distributions on, each class of
the offered certificates will be related to the rate and timing of principal
payments on the assets. The rate of principal payments on the assets will be
affected by the amortization schedules of the assets and by the rate of
principal prepayments, including for this purpose payments resulting from
refinancings, liquidations of the assets due to defaults, casualties,
condemnations and repurchases by or on behalf of National Mortgage or [Asset
Seller], as the case may be. No assurance can be given as to the rate of
principal payments or on the prepayments on the assets.
Delinquencies on assets could produce payment delays and could lead to
repossessions of assets and foreclosures in the case of mortgage loans.
Repossession of assets or foreclosure on a real property or mortgaged property
and the subsequent resale of the home securing assets or a property securing a
mortgage loan may produce net liquidation proceeds that are less than the
Scheduled Principal Balance of the related asset plus interest accrued and the
expenses of sale. This shortfall upon repossession and disposition of an asset
or foreclosure on a real property or mortgaged property would result in a
Realized Loss on the asset.
The timing of changes in the rate of prepayments and defaults on the assets
may affect an investor's actual yield to maturity significantly, even if the
average rate of principal payments and defaults experienced over time is
consistent with an investor's expectations. In general, the earlier a
prepayment of principal of or a default on an asset, the greater will be the
effect on the investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments or defaults occurring at a rate higher --
- - or lower --- than the rate anticipated by the investor during the period
immediately following the issuance of the certificates would not be fully offset
by a subsequent like reduction --- or increase --- in the rate of principal
payments or defaults.
If a purchaser of certificates of a class calculates its anticipated yield
based on an assumed rate of default and an assumed amount of Realized Losses
that are lower than the default rate and amount of Realized Losses actually
incurred and the amount of Realized Losses actually incurred is not entirely
covered by Excess Interest or by the subordination of the certificates of
classes subordinated to the purchaser's class, the purchaser's actual yield to
maturity will be lower than that so calculated. The timing of Realized Losses
on liquidated loans will also affect an investor's actual yield to maturity,
even if the rate of defaults and severity of losses are consistent with an
investor's expectations. There can be no assurance that the delinquency or
repossession experience set forth in this prospectus supplement under the
heading "Servicing of the Assets -- Delinquency and Loan Loss/Repossession
Experience" will be representative of the results that may be experienced with
respect to the assets. There can be no assurance as to the delinquency,
repossession, foreclosure or loss experience with respect to the assets.
If the purchaser of a certificate offered at a discount from its Parity
Price calculates its anticipated yield to maturity based on an assumed rate of
payment of principal that is faster than that actually experienced on the
assets, the actual yield to maturity will be lower than that so
S-46
<PAGE>
calculated. Similarly, if the purchaser of a certificate offered at a premium
above its Parity Price calculates its anticipated yield to maturity based on an
assumed rate of payment of principal that is slower than that actually
experienced on the assets, the actual pre-tax yield to maturity will be lower
than that so calculated. Parity Price is the price at which a security will
yield its coupon.
Generally, a class A certificate will not receive principal until each
class of class A certificates with a lower numerical designation has been paid
in full. The allocation of distributions will have the effect of amortizing the
class A-1, class A-2, class A-3, class A-4 and class A-5 certificates,
particularly the class A-1 certificates, at a faster rate than the rate at which
the certificates would have been amortized if the Principal Distribution Amount
were required to be allocated among the classes of the certificates pro rata
prior to the Cross-over Date.
The holders of the offered subordinated certificates will not be entitled
to receive any distributions of principal on any distribution date unless either
the Cross-over Date has occurred and the Principal Distribution Tests are
satisfied for this distribution date or the certificate principal balance of the
class A certificates has been reduced to zero. Further, payments of principal
will be made on the class B-2 certificates only if tests with respect to the
class B-2 Floor Amount are met. It is not possible to predict with certainty
the timing of the date, if any, on which the Cross-over Date will occur, or
whether the Principal Distribution Tests will be met as to any distribution
date. A high level of Realized Losses or delinquencies could result in the
Principal Distribution Tests not being met for one or more distribution dates.
This would delay the amortization of the offered subordinated certificates,
particularly the class B-2 certificates, beyond what would otherwise be the
case.
While partial prepayments of principal on the assets are applied on Due
Dates for the assets, obligors are not required to pay interest on the assets
after the date of a full prepayment of principal. As a result, full prepayments
of assets in advance of their Due Dates during the Collection Period will reduce
the amount of interest received from obligors during that Collection Period to
less than one month's interest on all the assets. If a sufficient number of
assets are prepaid in full during the Prepayment Period in advance of their
respective Due Dates, then interest payable on all of the assets during the
related Collection Period may be less than the interest payable on all of the
certificates with respect to the Collection Period. If the level of Due Date
Interest Shortfalls was large enough, these shortfalls could result in a
Writedown Amount being allocated to the subordinated certificates. A Writedown
Amount is, with respect to each distribution date, the amount, if any, by which
the aggregate certificate principal balance of all the certificates, after all
distributions have been made on the certificates on that distribution date,
exceeds the Pool Scheduled Principal Balance of the assets for the next
distribution date. See "Description of the Offered Certificates" in this
prospectus supplement.
[Investors in the class A-1 certificates should understand that the pass-
through rate of the class A-1 certificates will not exceed the Weighted Average
Net Asset Rate. Investors in this class should also consider the risk that
lower than anticipated levels of One-Month LIBOR could result in actual yields
to investors that are lower than anticipated yields.]
S-47
<PAGE>
[Investors in the class A-1 certificates should understand that the timing
of changes in the level of One-Month LIBOR may affect the actual yields to
investors even if the average level is consistent with the investor's
expectations. Each investor must make an independent decision as to the
appropriate One-Month LIBOR assumption to be used in deciding whether to
purchase a class A-1 certificate. ]
Because the pass-through rate on the offered subordinated certificates may
vary on the basis of the Weighted Average Net Asset Rate, the pass-through rate
and the yield on these certificates could be affected by disproportionate
collections of principal in respect of assets with different asset rates,
including obligor prepayments and collections resulting from liquidations and
repurchases of assets. Accordingly:
. the yield to maturity of the class M-1 certificates will be lower than
that which would otherwise result if all or a substantial portion of the
assets with net rates higher than _____% per annum prepaid prior to
those with net rates lower than _____% per annum,
. the yield to maturity of the class M-2 certificates will be lower than
that which would otherwise result if all or a substantial portion of the
assets with net rates higher than _____% per annum prepaid prior to
those with net rates lower than _____% per annum,
. the yield to maturity of the class B-1 certificates will be lower than
that which would otherwise result if all or a substantial portion of the
assets with net rates higher than _____% per annum prepaid prior to
those with net rates lower than _____% per annum, and
. the yield to maturity of the class B-2 certificates will be lower than
that which would otherwise result if all or a substantial portion of the
assets with net rates higher than _____% per annum prepaid prior to
those with net rates lower than _____% per annum.
The aggregate amount of distributions and the yield to maturity of the
offered certificates will also be affected by early payments of principal on the
assets resulting from any purchases of assets not conforming to representations
and warranties of [Asset Seller] and by the exercise by the servicer of its
option to purchase the assets and other assets of the trust, thereby effecting
early retirement of any outstanding classes of offered certificates. If the
servicer does not exercise its optional termination right within 90 days after
it first becomes eligible to do so, the trustee shall solicit bids for the
purchase of all assets, REO Properties and Repo Properties remaining in the
trust. The trustee shall sell these assets, REO Properties and Repo Properties
only if the net proceeds to the trust from the sale would at least equal the
Termination Price The net proceeds from the sale will be distributed first to
the servicer to reimburse it for all previously unreimbursed Liquidation
Expenses paid and Advances made by, and not previously reimbursed to, it with
respect to the assets and second to the Holders of the certificates and the
servicer. Accordingly, it is possible that your certificates could be redeemed
at a price less than their outstanding principal amount plus accrued and unpaid
interest.
If the net proceeds from the sale would not at least equal the Termination
Price, the trustee shall decline to sell the assets, REO Properties and Repo
Properties and shall not be under
S-48
<PAGE>
any obligation to solicit any further bids or otherwise negotiate any further
sale of the assets, REO Properties and Repo Properties.
The Trust
General
The certificates will be issued pursuant to the pooling and master
servicing agreement. This summary of the provisions of the pooling and master
servicing agreement does not purport to be complete. Reference is made to the
prospectus for important information in addition to that set forth in this
prospectus supplement regarding the terms and conditions of the offered
certificates. A copy of the pooling and master servicing agreement relating to
the certificates, in the form in which it was executed by National Mortgage, the
servicer and the trustee, without exhibits, will be filed with the SEC in a
Current Report on Form 8-K within 15 days after the closing date.
The trust created pursuant to the pooling and master servicing agreement
will consist of the assets, including all rights to receive payments due on the
assets after the Cut-off Date; assets as from time to time are identified as
deposited in any account held for the benefit of certificateholders, including
the certificate account and the distribution account; any asset, real property
or mortgaged property acquired on behalf of certificateholders by repossession,
foreclosure or by deed in lieu of foreclosure; the rights of the trustee to
receive the proceeds of any standard hazard insurance policies maintained with
respect to the mortgaged properties in accordance with the pooling and master
servicing agreement and of any FHA insurance maintained with respect to the
assets; and certain rights of National Mortgage relating to the enforcement of
representations and warranties made by [Asset Seller] relating to the assets.
The Trustee
The trustee is _______________________________________. Any notices to the
trustee relating to the certificates or the pooling and master servicing
agreement should be sent to
_______________________________________________________________________.
Investors may contact the trustee's corporate trust office by telephone to
ascertain the certificate principal balance of each class of offered
certificates and the then current pass-through rate applicable to each class of
the offered certificates. The telephone number currently maintained by the
trustee for the purpose of reporting this information is (___) ___________.
National Mortgage will file a Current Report on Form 8-K with the SEC within 15
days following the closing date. This Current Report on Form 8-K will specify
the initial principal amount of each class of the certificates.
The trustee may resign at any time, in which event National Mortgage will
be obligated to appoint a successor trustee. National Mortgage may also remove
the trustee if the trustee ceases to be eligible to continue as such under the
pooling and master servicing agreement or if the trustee becomes insolvent. In
these circumstances, National Mortgage will also be obligated
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<PAGE>
to appoint a successor trustee. Any resignation or removal of the trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee.
The pooling and master servicing agreement requires the trustee to
maintain, at its own expense, an office or agency where certificates may be
surrendered for registration of transfer or exchange and where notices and
demands to or upon the trustee and the Certificate Registrar in respect of the
certificates pursuant to the pooling and master servicing agreement may be
served.
Optional Termination
The servicer may terminate the trust by purchasing all assets, REO
Properties and Repo Properties remaining in the trust on any distribution date
(the "Call Option Date") occurring on or after the distribution date on which
the sum of the Certificate Balance of the certificates is less than [10]% of the
sum of the original certificate principal balance of the certificates. The
trust also may be terminated and the certificates retired on any distribution
date upon the servicer's determination, based on an opinion of counsel, that the
REMIC status of either the Pooling REMIC or the Issuing REMIC has been lost or
that a substantial risk exists that this status will be lost for the then
current taxable year. See "Description of the Certificates -- Optional
Redemption or Termination" in the prospectus.
The Termination Price will equal the greater of
. the sum of
. any Liquidation Expenses incurred by the servicer in respect of any
asset that has not yet been liquidated,
. all amounts required to be reimbursed or paid to the servicer in respect
of previously unreimbursed Advances, and
. the sum of
. the aggregate unpaid principal balance of the assets, plus
accrued and unpaid interest thereon at the asset rates borne by
your assets through the end of the Interest Accrual Period in
respect of the date of the terminating purchase, plus
. the lesser of
. the aggregate unpaid principal balance of each asset that
had been secured by any REO Property or Repo Property
remaining in the trust, plus accrued interest thereon at
the asset rates borne by assets through the end of the
month preceding the month of the terminating purchase, and
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. the current appraised value of any REO Property or Repo
Property, net of Liquidation Expenses to be incurred in
connection with the disposition of this property
estimated in good faith by the servicer, the appraisal
to be conducted by an appraiser mutually agreed upon by
the servicer and the trustee, plus all previously
unreimbursed P&I Advances made in respect of the REO
Property or Repo Property, and
. the aggregate fair market value of the assets of the trust, as
determined by the servicer, plus all previously unreimbursed P&I
Advances made with respect to the assets.
The fair market value of the assets of the trust as determined for purposes of a
terminating purchase shall be deemed to include accrued interest at the
applicable asset rate on the unpaid principal balance of each asset, including
any asset that has become a REO Property or a Repo Property, which REO Property
or Repo Property has not yet been disposed of by the servicer, through the end
of the month preceding the month of the terminating purchase. Accordingly, it is
possible that your certificates could be redeemed by an optional termination at
a price less than their outstanding principal amount plus accrued and unpaid
interest. The basis for a valuation shall be furnished by the servicer to the
certificateholders upon request. See "Description of the Certificates --
Optional Redemption or Termination" in the prospectus.
On the date of any termination of the trust, the Termination Price shall be
distributed first to the servicer to reimburse it for all previously
unreimbursed Liquidation Expenses paid and Advances made by and not previously
reimbursed to the servicer with respect to the assets and second to the
certificateholders in accordance with the distribution priorities set forth
under " -- Distributions -- Priority of Distributions" in this prospectus
supplement. The Termination Price shall be deemed to be a principal prepayment
in full, together with related interest, received during the related Prepayment
Period for purposes of determining the allocation of the distributions. Upon
the termination of the trust and payment of all amounts due on the certificates
and all administrative expenses associated with the trust, any remaining assets
of the REMICs shall be sold and the proceeds distributed pro rata to the holders
of the class R certificates. See "Description of the Certificates -- Optional
Redemption or Termination" in the prospectus.
Auction Sale
If the servicer does not exercise its optional termination right within 90
days after it first becomes eligible to do so, the trustee shall solicit bids
for the purchase of all assets, REO Properties and Repo Properties remaining in
the trust. The trustee shall sell the assets, REO Properties and Repo
Properties only if the net proceeds to the trust from the sale would at least
equal the Termination Price, and the net proceeds from the sale will be
distributed first to the servicer to reimburse it for all previously
unreimbursed Liquidation Expenses paid and Advances made by, and not previously
reimbursed to, it with respect to the assets and second to the
certificateholders and the servicer in accordance with the distribution
priorities set forth under "Description of the Offered Certificateholders --
Distributions -- Priority of Distributions" in
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this prospectus supplement. Accordingly, it is possible that your certificates
could be redeemed by reason of an auction sale at a price less than their
outstanding principal amount plus accrued and unpaid interest. If the net
proceeds from the sale would not at least equal the Termination Price, the
trustee shall decline to sell the assets, REO Properties and Repo Properties and
shall not be under any obligation to solicit any further bids or otherwise
negotiate any further sale of the assets, REO Properties and Repo Properties.
Termination of the Agreement
The pooling and master servicing agreement will terminate upon the last
action required to be taken by the trustee on the final distribution date
following the later of the purchase by the servicer of all assets and all
property acquired in respect of any asset remaining in the trust estate, as
described under " -- Optional Termination" and "Auction Sale" in this prospectus
supplement and the final payment or other liquidation, or any related advance,
of the last asset remaining in the trust estate or the disposition of all
property acquired upon repossession or foreclosure on any mortgaged property.
Upon presentation and surrender of the certificates, the trustee shall
cause to be distributed, to the extent of available funds, to the
certificateholders on the final distribution date the amounts due them in
accordance with the pooling and master servicing agreement. The amount
remaining on deposit in the certificate account, other than amounts retained to
meet claims, after all required distributions have been made to the holders of
the offered certificates and the X certificates, or to the Termination Account,
will be paid to the class R certificateholders pro rata, based upon the holders'
respective percentage interests, in accordance with the provisions of the
pooling and master servicing agreement.
Voting Rights
The voting rights of the trust will be allocated [0.5]% to the class R
certificates, [0.5]% to the class X certificates and [99]% to the other
certificates in proportion to their respective certificate principal balances.
For a description of the limited matters on which the certificateholders may
vote, see "The Pooling and Master Servicing Agreements" in the prospectus.
Reports to Certificateholders
The trustee will furnish the certificateholders with monthly statements
prepared by the servicer (each, a "Remittance Report") containing information
with respect to principal and interest distributions on the certificates and
Realized Losses on the assets. Any financial information contained in these
reports will not have been examined or reported upon by an independent public
accountant. Copies of the monthly statements and any annual reports prepared by
the servicer evidencing the status of its compliance with the provisions of a
pooling and master servicing agreement will be furnished to related
certificateholders upon request addressed to the trustee.
A Remittance Report for a distribution date will identify the following
items
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. the Available Distribution Amount for the related distribution date,
. the Interest Distribution Amount and the carryover amounts, as well as
any Writedown Interest Distribution Amount and any Carryover Writedown
Interest Distribution Amount, for each class of the certificates for
the related distribution date, and the amount of interest of each
category to be distributed on each class based upon the Available
Distribution Amount for the related distribution date,
. the amount to be distributed on the related distribution date on each
class of the certificates to be applied to reduce the certificate
principal balance of each class, separately identifying any portion of
the amount attributable to prepayments, and the aggregate of any
Principal Distribution Amounts remaining unpaid from previous
distribution dates for each class of the certificates for the related
distribution date, and the amount to be distributed to reduce any
Principal Distribution Amounts remaining unpaid from previous
distribution dates on each class based upon the Available Distribution
Amount for the related distribution date,
. the aggregate amount of P&I Advances required to be made by the
servicer with respect to the related distribution date,
. the amount of any Realized Losses incurred on the assets during the
related Prepayment Period and in the aggregate since the Cut-off Date
and the amount of any Writedown Amount to be allocated to any class of
the subordinated certificates,
. the certificate principal balance of each class of the certificates and
the certificate principal balance as adjusted for write-downs of each
class of the subordinated certificates after giving effect to the
distributions to be made, and any Writedown Amounts to be allocated, on
the related distribution date,
. the aggregate Interest Distribution Amount remaining unpaid, if any,
and the aggregate carryover amount remaining unpaid, if any, for each
class of certificates, after giving effect to the distributions to be
made on the related distribution date,
. the aggregate Writedown Interest Distribution Amount remaining unpaid,
if any, and the aggregate Carryover Writedown Interest Distribution
Amount remaining unpaid, if any, for each class of certificates, after
giving effect to the distributions to be made on the related
distribution date,
. the aggregate of any Principal Distribution Amounts remaining unpaid
from previous distribution dates, if any, for each class of
certificates, after giving effect to the distributions to be made on
the related distribution date,
. the amount of the aggregate Servicing Fee in respect of the related
distribution date,
. the aggregate number and the aggregate of the unpaid principal balances
of outstanding assets that are delinquent one month --- 30 to 59
days --- as of the end of the related
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<PAGE>
Prepayment Period, delinquent two months --- 60 to 89 days --- as of
the end of the related Prepayment Period, delinquent three months
--- 90 days or longer --- as of the end of the related Prepayment
Period and as to which repossession, foreclosure or other comparable
proceedings have been commenced as of the end of the related Prepayment
Period,
. the aggregate number and the aggregate unpaid principal balance of
outstanding contracts and outstanding mortgage loans, stated
separately, for which the obligor is also a debtor, whether voluntary
or involuntary, in a proceeding under the Bankruptcy Code; and the
aggregate number and the aggregate Unpaid Principle Balance of
outstanding contracts and outstanding mortgage loans for which the
obligor is also a debtor, whether voluntary or involuntary, in a
proceeding under the Bankruptcy Code, stated separately, that are
delinquent one month --- 30 to 59 days --- as of the end of the related
Prepayment Period, delinquent two months --- 60 to 89 days --- as of
the end of the related Prepayment Period, and delinquent three months
--- 90 days or longer --- as of the end of the related Prepayment
Period,
. [the Pre-Funded Amount, if any, in the Pre-Funding Account on the
related distribution date, the amount of funds, if any, used to
purchase Subsequent Assets during the Pre-Funding Period and the amount
of funds, if any allocated as a prepayment of principal at the end of
the Pre-Funding Period,] and
. any other information required to be provided to certificateholders by
the REMIC Provisions.
In the case of information furnished pursuant to the second and third
bullet points, the amounts shall be expressed, with respect to any certificate,
as a dollar amount per $1,000 denomination.
Servicing of the Assets
The Servicer
_______________ is incorporated in the state of ____________. The servicer
is primarily engaged in the business of underwriting, originating, pooling,
selling and servicing [Asset Type]. The servicer's principal offices are
located at _________________________ _______________________________________,
telephone (___) ___-____.
Servicing Portfolio
The servicer services all of the assets it originates or purchases ---
except for some asset portfolios which it sells on a servicing-released basis --
- - collecting loan payments, insurance premiums and other payments from borrowers
and remitting principal and interest payments to the holders of the
certificates. The following table shows the composition of the servicer's
servicing portfolio of assets, secured by a lien on the real estate, on the
dates indicated.
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<PAGE>
Asset Servicing Portfolio
<TABLE>
<CAPTION>
At _________ 30, At ______ 31,
------------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- --------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Total Number of Serviced
Assets
[Asset Seller] Originated.......................
Acquired Portfolios.............................
Aggregate Outstanding Principal Balance
of Serviced Assets
[Asset Seller] Originated.......................
Acquired Portfolios.............................
Average Outstanding Principal Balance
per Serviced Asset
[Asset Seller] Originated.......................
Acquired Portfolios.............................
Weighted Average Interest Rate of Serviced
Assets
[Asset Seller] Originated.......................
Acquired Portfolios.............................
</TABLE>
Delinquency and Loan Loss/Repossession Experience
The following tables set forth information concerning the delinquency
experience and the loan loss and repossession experience of the portfolio
of assets, serviced by the servicer, in each case for each of the
servicer's fiscal years from ____ through ____. Because delinquencies,
losses and repossessions are affected by a variety of economic, geographic
and other factors, there can be no assurance that the delinquency and loss
experience of the assets will be comparable to that set forth.
Delinquency Experience
<TABLE>
<CAPTION>
At _________ 30, At ______ 31,
------------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- --------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Number of Serviced Assets
[Loan Seller] Originated..................
Acquired Portfolios.......................
Number of Delinquent Assets
[Loan Seller] Originated:
30 to 59 days past due....................
60 to 89 days past due....................
90 days or more past due..................
Total Number of Assets Delinquent.........
Acquired Portfolios:
30-59 days past due.......................
60-89 days past due.......................
90 days or more past due..................
Total Number of Assets Delinquent.........
Total Delinquencies as a Percentage of Serviced
Assets, by Number of Assets
[Loan Seller] Originated..................
Acquired Portfolios.......................
</TABLE>
______________
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<PAGE>
Assets that are already the subject of repossession or foreclosure procedures
are not included in "delinquent assets" for purposes of this table. The period
of delinquency is based on the number of days payments are contractually past
due, assuming 30-day months. Consequently, a payment due on the first day of a
month is not 30 days delinquent until the first day of the following month.
Loan Loss/Repossession Experience
<TABLE>
<CAPTION>
At or for the
Six Months
At _________ 30, At ______ 31,
------------------------------------------------------ ----------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- --------- --------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Total Number of Serviced Assets at Period End......
Average Number of Serviced Assets During Period.....
Number of Serviced Assets Repossessed...............
Serviced Assets Repossessed as a Percentage of Total
Serviced Assets (1).............................
Serviced Assets Repossessed as a Percentage of Average
Number of
Serviced Assets.................................
Average Outstanding Principal Balance of Assets
[Loan Seller] Originated........................
Acquired Portfolios.............................
Net Losses from Asset Liquidations (2):
Total Dollars
[Loan Seller] Originated........................
Acquired Portfolios.............................
As a Percentage of Average Outstanding Principal
Balance of Assets(3)
[Loan Seller] Originated........................
Acquired Portfolios.............................
</TABLE>
Percentages expressed in the six month tables are annualized.
(1) Total number of serviced assets repossessed during the applicable period
expressed as a percentage of the total number of serviced assets at the end
of the applicable period.
(2) Net losses represent all losses incurred on servicer-serviced portfolios.
Such amounts include estimates of net losses with respect to certain
defaulted assets. The length of the accrual period for the amount of
accrued and unpaid interest included in the calculation of the net loss
varies depending upon the period in which the loss was charged and whether
the asset was owned by an entity other than the servicer.
(3) Total net losses incurred on assets liquidated during the applicable period
expressed as a percentage of the average outstanding principal balance of
all assets.
The servicer owns few of the assets in the foregoing tables, and
accordingly does not maintain loan loss reserves or charge-off loans. The policy
with respect to the vast majority of loans reflected in these tables, which the
servicer services primarily for the accounts of securitization trusts, is to
reflect credit loss only when an REO Property or a Repo Property has been
finally disposed of and not before. In most cases, disposition occurs shortly
after the asset becomes 90 days delinquent; however it may occur before this
time and it may occur later. This policy exists because only at the final
disposition of the collateral does the servicer know with certainty the amount
of the loss, if any, for reporting purposes.
Macroeconomic and social conditions likely are responsible for the trend to
some extent as well, although it is difficult to say for certain. For example,
the U.S. economy has witnessed a general increase in consumer credit over the
past several years, and credit also has been made more generally available to
all economic classes than in the past. Finally, there seems to be an increased
willingness on the part of consumers to seek the protection of federal
bankruptcy laws.
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The data in the foregoing tables are presented for illustrative purposes
only, and there is no assurance that the delinquency, loan loss and repossession
experience of the assets will be similar to that set forth. The delinquency,
loan loss and repossession experience of assets historically has been sharply
affected by downturns in regional or local economic conditions. For instance, a
downturn was experienced in areas dependent on the oil and gas industry in the
1980s, causing increased levels of delinquencies, repossessions and loan losses
on assets in the affected areas. The asset pool consists primarily of
contracts. Regional and local economic conditions are often volatile, and no
predictions can be made regarding their effects on future economic losses upon
repossessions or as to the levels of losses that will be incurred as a result of
any repossessions of or foreclosures on assets. See "Risk Factors -- You May
Experience A Loss On Your Investment If Losses And Delinquencies On Assets in
The Trust Are High" in this prospectus supplement.
Collection and Other Servicing Procedures
The servicer will administer, service and make collections on the assets,
exercising the degree of care that the servicer exercises with respect to
similar contracts serviced by the servicer.
[Except for the step-up rate loans during their Step-up Periods], each
Fixed Rate Asset bears interest at a fixed annual percentage rate and provides
for level payments over the term of the asset that fully amortize the principal
balance of the asset. All payments received on the assets --- other than
payments allocated to items other than principal and interest or payments
sufficient to pay the outstanding principal balance of and all accrued and
unpaid interest on the assets --- will be applied when received first to any
previously unpaid scheduled monthly payments, and then to the currently due
monthly payment, in the chronological order of occurrence of the Due Dates for
the monthly payments. Any payments on an asset that exceed the amount necessary
to bring the asset current are applied to the partial prepayment of principal of
the asset if the servicer determines, based on specific directions from the
obligor as to the payment or on a course of dealing with the obligor, that the
obligor intended the payment as a partial principal prepayment. If the servicer
cannot determine the obligor's intent with respect to any excess payment, the
servicer will apply the excess payment as an early payment of scheduled monthly
payments for subsequent Due Dates to the extent the excess payment is an
integral multiple of the obligor's scheduled monthly payment, and will apply the
remainder of the excess payment as a partial principal prepayment.
Servicing Compensation and Payment of Expenses
On each distribution date, the servicer will be entitled to receive a
monthly Servicing Fee equal to _____% per annum (the "Servicing Fee Rate")
multiplied by the aggregate Scheduled Principal Balance of the assets at the
beginning of the related Collection Period, without giving effect to any
principal prepayments, net liquidation proceeds and Repurchase Prices received
(or Realized Losses incurred, during the related Prepayment Period). If [Asset
Seller] is the servicer, the Servicing Fee in respect of a distribution date
will be paid pursuant to clause (12) under "Description of the Offered
Certificates -- Distributions" in this prospectus supplement and
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<PAGE>
only to the extent of funds available pursuant to clause (12), except that it
may retain its Servicing Fee out of collections on the assets to the extent that
the amount already on deposit in the certificate account for the related
distribution date will allow the full distribution of all amounts required to be
distributed pursuant to clauses (1) through (11) under "Description of the
Offered Certificates -- Distributions -- Priority of Distributions" in this
prospectus on the related distribution date. If [Asset Seller] is not the
servicer, the Servicing Fee in respect of each asset may be retained by the
servicer at the time of the related collection on the asset or may be withdrawn
from the certificate account at a later time, in which case the amount will not
be part of the Available Distribution Amount.
The Servicing Fee provides compensation for customary third-party servicing
activities to be performed by the servicer for the trust and for additional
administrative services performed by the servicer on behalf of the trust.
Customary servicing activities include collecting and recording payments,
communicating with obligors, investigating payment delinquencies, providing
billing and tax records to obligors and maintaining internal records with
respect to each asset. Administrative services performed by the servicer on
behalf of the trust include calculating distributions to certificateholders and
providing related data processing and reporting services for certificateholders
and on behalf of the trustee. Expenses incurred in connection with servicing of
the assets and paid by the servicer from its monthly Servicing Fee include,
without limitation, payment of fees and expenses of accountants, payment of all
fees and expenses incurred in connection with the enforcement of contracts or
mortgage loans, except Liquidation Expenses, and payment of expenses incurred in
connection with distributions and reports to certificateholders. The servicer
will be reimbursed out of the Liquidation Proceeds of a defaulted asset for all
reasonable, out-of-pocket Liquidation Expenses incurred by it in repossessing,
foreclosing on and liquidating the related mortgaged property.
As part of its servicing fees, the servicer will also be entitled to
retain, as compensation for the additional services provided in connection with
the pooling and master servicing agreement, any late payment fees made by
obligors, extension fees paid by obligors for the extension of scheduled
payments and assumption fees paid in connection with permitted assumptions of
assets by purchasers of the mortgaged properties, as well as investment earnings
on funds in the certificate account.
Advances
On or prior to the business day preceding each distribution date, the
servicer will either
. deposit from its own funds the related aggregate P&I Advance into the
certificate account,
. cause appropriate entries to be made in the records of the certificate
account that funds in the certificate account that are not part of the
Available Distribution Amount for the related distribution date have
been used to make the aggregate P&I Advance,
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<PAGE>
. if the certificate account is maintained by the trustee, instruct the
trustee to use investment earnings on the certificate account to
defray the servicer's P&I Advance obligation, or
. make or cause to be made the aggregate P&I Advance through any
combination of the methods described.
Any funds held for future distribution and used in accordance with the second
bullet point must be restored by the servicer from its own funds or from early
payments collected on the assets when they become part of a future Available
Distribution Amount. The aggregate required P&I Advance for a distribution date
is the sum of delinquent scheduled monthly payments due in the related
Collection Period, exclusive of all Non-Recoverable Advances.
P&I Advances are intended to maintain a regular flow of scheduled interest
and principal payments to certificateholders rather than to guarantee or insure
against losses.
The servicer will also be obligated to make advances ("Servicing
Advances"), to the extent the servicer deems the Advances recoverable out of
Liquidation Proceeds of, or from collections on, the related contract or
mortgage loan, in respect of Liquidation Expenses and taxes and insurance
premiums not paid by an obligor on a timely basis.
The servicer may reimburse itself for Servicing Advances out of collections
of the late payments in respect of which the Advances were made and, upon the
determination that a Non-recoverable Advance has been made in respect of an
asset or upon an asset becoming a liquidated loan, out of Funds in the
certificate account for unreimbursed amounts advanced by it in respect of the
asset. In addition, the servicer may reimburse itself out of funds in the
certificate account for unreimbursed amounts advanced by it in respect of P&I
Advances.
Successors to Servicer, Delegation of Duties
Any entity with which the servicer is merged or consolidated, or any entity
resulting from any merger, conversion or consolidation to which the servicer is
a party, or any entity succeeding to the business of the servicer, will be the
successor to the servicer under the pooling and master servicing agreement so
long as each rating agency has delivered to the trustee a letter to the effect
that the successorship will not result in a downgrading of the rating then
assigned by the rating agency to any class of the certificates. The servicer
may delegate computational, data processing, collection and foreclosure,
including repossession, duties under the pooling and master servicing agreement
without any notice to or consent from National Mortgage or the trustee, provided
that the servicer will remain fully responsible for the performance of these
duties.
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Use of Proceeds
Substantially all of the net proceeds to be received from the sale of the
certificates will be used to purchase the assets and to pay other expenses
connected with pooling the assets and issuing the certificates.
Underwriting
National Mortgage [and Asset Seller] have entered into an underwriting
agreement dated _________ __, 1999 with __________________ and _________________
(the "Underwriters"), for whom ______________________ is acting as
representative (the "Representative"). In the underwriting agreement, National
Mortgage has agreed to sell to the Underwriters, and the Underwriters have
agreed to purchase, the principal amount of the offered certificates set forth
opposite each of their names:
<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3 Class A-4 Class A-5
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
[Underwriter].... $_________ $_________ $_________ $__________ $_________
[Underwriter].... $_________ $_________ $_________ $__________ $_________
Total.......... $_________ $_________ $_________ $__________ $_________
<CAPTION>
Class M-1 Class M-2 Class B-1 Class B-2
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
[Underwriter]................ $_________ $_________ $__________ $_________
[Underwriter]................ $_________ $_________ $__________ $_________
Total...................... $_________ $_________ $__________ $_________
</TABLE>
The underwriting agreement provides that there are conditions precedent to
the obligations of the several Underwriters and that the Underwriters will be
obligated to purchase all of the offered certificates if any of the offered
certificates are purchased. In the event of default by any Underwriter, the
underwriting agreement provides that, in some circumstances, the purchase
commitments of the nondefaulting Underwriter may be increased or the
underwriting agreement may be terminated.
National Mortgage has been advised by the Representative that the several
Underwriters propose to offer the offered certificates to the public initially
at the respective public offering prices set forth on the cover page of this
prospectus supplement, and to dealers at such prices less a concession not in
excess of the amount set forth for each class. The Underwriters and dealers may
allow a discount not in excess of the amount set forth for each class to other
dealers. After the initial public offering of the offered certificates, the
public offering prices and concessions and discounts to dealers may be changed
by the Representative.
S-60
<PAGE>
<TABLE>
<CAPTION>
Concession Discount
(Percent of (Percent of
Principal Principal
Amount) Amount)
----------- -----------
<S> <C> <C>
Class A-1............................. _____% _____%
Class A-2............................. _____% _____%
Class A-3............................. _____% _____%
Class A-4............................. _____% _____%
Class A-5............................. _____% _____%
Class M-1............................. _____% _____%
Class M-2............................. _____% _____%
Class B-1............................. _____% _____%
Class B-2............................. _____% _____%
</TABLE>
The Underwriters and any dealers that participate with the Underwriters in
the distribution of the offered certificates may be deemed to be underwriters,
and any discounts, concessions or commissions received by them, and any profit
on the resale of the offered certificates purchased by them, may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended (the "Act").
National Mortgage [and Asset Seller] have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Act, or contribute to payments which the Underwriters may be required to make.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the offered
certificates in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Underwriters
to reclaim a selling concession from a syndicate member when the offered
certificates originally sold by syndicate member are purchased in a syndicate
covering transaction to cover syndicate short positions. Stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the offered certificates to be higher than it would otherwise be in the
absence of these transactions. These transactions, if commenced, may be
discontinued at any time.
National Mortgage estimates that its expenses in connection with the
issuance and offering of the certificates will be approximately $________. This
information concerning National Mortgage's fees and expenses is an approximation
and may be changed by future contingencies.
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<PAGE>
Legal Matters
Legal matters will be passed upon for National Mortgage by Hunton &
Williams, Richmond, Virginia, and for the Underwriters by
________________________________. The material federal income tax consequences
of the offered certificates will be passed upon for National Mortgage by Hunton
& Williams.
ERISA Considerations
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds in which such plans, accounts, annuities
or arrangements are invested, that must follow the requirements of ERISA or
corresponding provisions of the Code (collectively, "Plans"), persons acting on
behalf of a Plan, or persons using the assets of a Plan ("Plan Investors")
should carefully review with their legal advisors whether the purchase or
holding of any certificates could result in unfavorable consequences for the
Plan or its fiduciaries under the Plan Asset Regulations or the prohibited
transaction rules of ERISA or the Code. Prospective investors should be aware
that, although exceptions from the application of the Plan Asset Regulations and
the prohibited transaction rules exist, there can be no assurance that any such
exception will apply with respect to the acquisition of a certificate. See
"ERISA Considerations" in the prospectus.
Sections 406 and 407 of ERISA and Section 4975 of the Code prohibit certain
transactions that involve
. a Plan that must follow the requirements of ERISA and any party in
interest or disqualified person with respect to the Plan and
. plan assets.
The Plan Asset Regulations define plan assets to include not only securities,
such as the certificates, held by a Plan but also the underlying assets of the
issuer of any equity securities (the "Look-Through Rule"), unless one or more
exceptions specified in the regulations are satisfied. The offered certificates
will be treated as equity securities for purposes of the Plan Asset Regulations.
The Look-Through Rule would not apply to the offered certificates if one or more
of the exceptions specified in the Plan Asset Regulations are satisfied.
However, based on the information available to the Underwriters at the time of
the printing of the prospectus, there can be no assurance that either the
Publicly Offered Exception or the Insignificant Participation Exception will
apply to the initial or any subsequent purchases of the offered certificates.
See "ERISA Considerations" in the prospectus.
The U.S. Department of Labor has granted an administrative exemption to
_____________________________ (Prohibited Transaction Exemption ____; Exemption
Application No. ____, ____Fed. Reg. ____ (____), referred to in this prospectus
supplement as the "Exemption") from certain of the prohibited transaction rules
of ERISA and the related
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<PAGE>
excise tax provisions of Section 4975 of the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates in
passs-through trusts that consist of receivables, loans, and other obligations
and that meet the conditions and requirements of the Exemption.
Among the general conditions that must be satisfied for the Exemption to
apply are the following
. the acquisition of the certificates by a Plan is on terms, including the
price for the certificates, that are at least as favorable to the Plan
as they would be in an arm's-length transaction with an unrelated party,
. the rights and interests evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
certificates of the related trust,
. the certificates acquired by the Plan have received a rating at the time
of such acquisition that is in one of the three highest generic rating
categories from either Moody's Investors Service, Inc., Standard &
Poor's Rating Services, a division of The McGraw-Hill Companies, Inc.,
Fitch IBCA, Inc. or Duff & Phelps Credit Rating Co. (collectively, the
"Exemption Rating Agencies"),
. the trustee of the related trust must not be an affiliate of any other
member of the Restricted Group,
. the sum of all payments made to and retained by the Underwriters in
connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates,
. the sum of all payments made to and retained by National Mortgage
pursuant to the assignment of the loans to the trust represents not more
than the fair market value of such loans, and
. the sum of all payments made to and retained by the servicer represents
not more than reasonable compensation for such person's services under
any servicing agreement and reimbursement of the servicer's reasonable
expenses.
The Exemption defines the term reasonable compensation by reference to DOL
Regulation (S) 2550.408c-2, 29 C.F.R. (S) 2550.480c-2, which states that whether
compensation is reasonable depends upon the particular facts and circumstances
of each case. Each fiduciary of a Plan considering the purchase of an offered
certificate should satisfy itself that all amounts paid to or retained by the
Underwriters, National Mortgage and the servicer represent reasonable
compensation for purposes of the Exemption. In addition, it is a condition to
application of the Exemption that the Plan investing in the certificates is an
accredited investor as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Act. Furthermore, in order for its certificates to qualify under the
Exemption, a trust must meet the following requirements:
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<PAGE>
. the corpus of the trust must consist solely of assets of the type that
have been included in other investment pools;
. certificates in such other investment pools must have been rated in one
of the three highest rating categories of S&P, Moody's, D&P or Fitch for
at least one year prior to the Plan's acquisition of certificates; and
. certificates evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of certificates.
The Exemption does not apply to Plans sponsored by National Mortgage, the
Underwriters, [Asset Seller], the trustee, the servicer and any obligor with
respect to assets included in the trust constituting more than five percent of
the aggregate unamortized principal balance of the assets in the trust, or any
affiliate of such parties (the "Restricted Group"). Moreover, the Exemption
provides certain Plan fiduciaries relief from certain self-dealing/conflict of
interest prohibited transactions only if, among other requirements,
. in the case of an acquisition in connection with the initial issuance of
certificates, at least 50% of each class of certificates in which Plans
have invested is acquired by persons independent of the Restricted Group
and at least 50% of the aggregate interest in the trust is acquired by
persons independent of the Restricted Group,
. such fiduciary or its affiliate is an obligor with respect to five
percent or less of the fair market value of the obligations contained in
the trust,
. the Plan's investment in certificates of any class does not exceed 25%
of all of the certificates of that class outstanding at the time of the
acquisition, and
. immediately after the acquisition, no more than 25% of the assets of the
Plan with respect to which such person is a fiduciary is invested in
certificates representing an interest in one or more trusts containing
assets sold or serviced by the same entity.
The Exemption may apply to the acquisition and holding of the class A
certificates by Plans provided that all conditions to application of the
Exemption are met. Based upon information provided to National Mortgage by
members of the Restricted Group, National Mortgage expects that the conditions
set forth in the second, third and fourth bullet points of the fifth paragraph
of this section will be satisfied with respect to the class A certificates.
Prospective investors should be aware, however, that even if all of the
conditions specified in the Exemption are met, the scope of the relief provided
by the Exemption might not cover all acts that might be construed as prohibited
transactions. However, one or more alternative exemptions may be available with
respect to certain prohibited transactions to which the Exemption is not
applicable, depending in part upon the class of certificate to be acquired, the
type of Plan fiduciary that is making the decision to acquire such certificate
and the circumstances under which such decision is made, including, but not
limited to,
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<PAGE>
. PTCE 96-23, regarding investment decisions by in-house asset managers,
. PTCE 95-60, regarding investments by insurance company general accounts,
. PTCE 91-38, regarding investments by bank collective investment funds,
. PTCE 90-1, regarding investments by insurance company pooled separate
accounts, or
. PTCE 84-14, regarding investment decisions made by a qualified plan
asset manager.
Before purchasing class A certificates, a Plan that must follow the
fiduciary responsibility provisions of ERISA or described in Section 4975(e)(1)
of the Code should consult with its counsel to determine whether the conditions
to application of the Exemption or any other exemptions would be met. In
addition, any Plan Investor contemplating an investment in the class A
certificates should note that the duties and obligations of the trustee and the
servicer are limited to those expressly set forth in the pooling and master
servicing agreement, and such specified duties and obligations may not comport
with or satisfy the provisions of ERISA setting forth the fiduciary duties of
Plan fiduciaries.
Because the offered subordinated certificates are Subordinated Securities,
and the class B certificates are not expected to be rated in one of the three
highest rating categories by the Rating Agencies, the Exemption will not apply
to the purchase, sale or holding of the offered subordinate certificates.
Accordingly, the offered subordinated certificates will not be offered for sale,
and are not transferable, to Plan Investors unless such Plan Investor provides
[Asset Seller] and the trustee with a Benefit Plan Opinion, or the circumstances
described in clause (ii) below are satisfied. A Benefit Plan Opinion is an
Opinion of Counsel to the effect that the purchase of an offered subordinated
certificate will not (A) cause the assets of the trust to be regarded as Plan
Assets for purposes of the Plan Asset Regulations, (B) give rise to a fiduciary
duty under ERISA on the part of [Asset Seller], the servicer or the trustee or
(C) be treated as, or result in, a prohibited transaction under Sections 406 or
407 of ERISA or Section 4975 of the Code. Unless this opinion is delivered,
each person acquiring an offered subordinated certificate will be deemed to
represent to the trustee, [Asset Seller] and the servicer that either (i) such
person is not a Plan Investor that must follow ERISA or Section 4975 of the Code
or (ii) such person is an insurance company that is purchasing an offered
subordinated certificate with funds from its general account and the provisions
of Prohibited Transaction Class Exemption 95-60 will apply to exempt the
acquisition and holding of the offered subordinated certificate and the
transactions in connection with the servicing, management and operation of the
trust from the Prohibited Transaction Rules of ERISA and the Code.
Ratings
It is a condition to the issuance of the certificates that each class of
offered certificates obtain the following ratings by _____ and ______:
S-65
<PAGE>
<TABLE>
<CAPTION>
[Rating Agencies]
<S> <C> <C>
Class A-1 _____ _____
Class A-2 _____ _____
Class A-3 _____ _____
Class A-4 _____ _____
Class A-5 _____ _____
Class M-1 _____ _____
Class M-2 _____ _____
Class B-1 _____ _____
Class B-2 _____ _____
</TABLE>
The ratings on asset-backed pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions on the
underlying assets to which they are entitled. Rating opinions address the
structural, legal and issuer-related aspects associated with the securities,
including the nature of the underlying assets. Ratings on pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by borrowers with respect to the underlying assets or
of the degree to which the rate of prepayments might differ from that originally
anticipated. As a result, the ratings do not address the possibility that
holders of the offered certificates purchased at a premium might suffer a lower
than anticipated yield in the event of rapid prepayments of the assets or in the
event that the trust is terminated prior to the Final Scheduled distribution
date for the certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be revised or withdrawn at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
National Mortgage will request _______ and _______ to rate the offered
certificates. There can be no assurance as to whether any rating agency not
requested to rate the offered certificates will nonetheless issue a rating and,
if so, what the rating would be. A rating assigned to the offered certificates
by a rating agency that has not been requested by National Mortgage to do so may
be lower than the rating assigned by a rating agency pursuant to National
Mortgage's request.
Legal Investment Considerations
[If pre-funding account is used, classes become mortgage related securities for
SMMEA after pre-funded amount is reduced to zero.] [Certificates will not be
SMMEA if junior lien assets are in the trust.] 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 for so long as they are
rated in one of the two highest rating categories by one or more nationally
recognized statistical rating organizations. As mortgage related securities,
the class A certificates and the class M-1 certificates will be legal
investments for entities to the extent provided in SMMEA, unless there are state
laws overriding SMMEA. A number of states have enacted legislation
S-66
<PAGE>
overriding the legal investment provisions of SMMEA. See "Legal Investment
Considerations" in the prospectus.
The class M-2 and class B certificates will not constitute mortgage related
securities for purposes of SMMEA because they are not rated in one of the two
highest rating categories by a nationally recognized statistical rating
organization. These are significant interpretive uncertainties in determining
the appropriate characterization of the class M-2 and class B certificates under
various legal investment restrictions, and thus the ability of investors that
face legal restrictions to purchase the class M-2 and class B certificates. Any
financial institution regulated by the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the National Credit Union
Administration, any state insurance commission or any other federal or state
agency with similar authority should review any applicable rules, guidelines and
regulations prior to purchasing any certificates. Financial institutions should
review and consider the applicability of the Federal Financial Institutions
Examination Counsel Supervisory Policy Statement on the Selection of Securities
Dealers and Unsuitable Investment Practices, to the extent adopted by their
respective federal regulators, which, among other things, sets forth guidelines
for investing in certain types of mortgage related securities and prohibits
investment in high-risk mortgage securities.
National Mortgage makes no representations as to the proper
characterization of any class of the offered certificates for legal investment
or other purposes, or as to the legality of investment by particular investors
in any class of the offered certificates under applicable legal investment
restrictions. Accordingly, all institutions that must observe legal investment
laws and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their own legal advisors in determining whether
and to what extent the offered certificates constitute legal investments under
SMMEA or must follow investment, capital or other restrictions. See "Legal
Investment Considerations" in the prospectus.
S-67
<PAGE>
Prospectus
National Mortgage Securities Corporation
Depositor
Pass-Through Certificates
Asset-Backed Notes
Issuable in Series
Consider carefully the Your securities
risk factors beginning on
page 1 in this prospectus . will evidence an ownership interest in
or be secured by the property of your
trust and will be paid only from your
trust's assets,
Your securities will . will be rated in one of the four highest
represent obligations of rating categories by at least one
your trust only and will nationally recognized rating
not represent interests organization, and
in or obligations of
National Mortgage or any . will be issued as part of a designated
of its affiliates. series that may include one or more
Unless expressly provided classes of securities and credit
in the accompanying enhancement.
prospectus supplement,
your securities are not Your trust may include
insured or guaranteed by
any person. . various types of one- to four-family
residential first and junior lien
mortgage loans, multifamily residential
mortgage loans, cooperative apartment
loans or manufactured housing
conditional sales contracts and
installment loan agreements, or
beneficial interests in these items,
This prospectus may be . pass-through or participation
used to offer and sell certificates issued or guaranteed by
any series of securities Ginnie Mae, Fannie Mae or Freddie Mac,
only if accompanied by
the prospectus supplement . pass-through or participation
for that series. certificates or other mortgage-backed
securities issued or guaranteed by
private entities, and
. funding agreements secured by any of the
above described assets.
Investors
. will receive interest and principal
payments from collections on their
trust's assets but have no entitlement
to payments from other assets of
National Mortgage.
Neither the SEC 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.
December 17, 1999
<PAGE>
Important Notice About Information Presented in This
Prospectus And The Accompanying Prospectus Supplement
We provide information to you about your investment in two separate
documents that progressively provide more detail: this prospectus, which
provides general information, some of which may not apply to your series of
securities and the accompanying prospectus supplement, which will describe the
specific terms of your series of securities, including:
. the timing of interest and principal payments,
. statistical and other information about the specific assets of your
trust,
. information about credit enhancement for each class,
. the ratings for each class, and
. the method for selling your securities.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. We have not authorized anyone to provide you with different
information. Your securities are not offered in any state where the offer is
not permitted.
We have included cross-references in this prospectus and in the
accompanying prospectus supplement to captions in these materials where you can
find further related discussions. The table of contents included in the
accompanying prospectus supplement provides the pages on which these captions
are located.
ii
<PAGE>
Risk Factors
You should consider the following risk factors in deciding whether to purchase
the securities.
The timing and amount Prepayment
of prepayments on your
securities could Prepayment levels are affected by
reduce your yield to a variety of economic, geographic, tax,
maturity legal, and other factors, including
. the extent of prepayments on the
underlying mortgage loans in your trust,
. how payments of principal are allocated
among the classes of securities of a
series as specified in the prospectus
supplement,
. if any party has an option to terminate
your trust or redeem the securities
early, the effect of the exercise of the
option,
. the rate and timing of defaults and
losses on the assets in your trust,
. the extent that amounts in any pre-
funding account have not been used to
purchase additional assets for your
trust, and
. repurchases of assets in your trust as a
result of material breaches of
representations and warranties made by
National Mortgage, the master servicer
or the seller.
The assets included in your trust generally
may be prepaid at any time. When interest
rates decline, home buyers are more likely to
prepay so that they may obtain lower
alternative financing on their homes. In this
event, you may not be able to reinvest the
proceeds of prepayments in another investment
of similar credit risk and yield. Conversely,
prepayments are likely to decline if interest
rates rise and you could reinvest prepayment
proceeds in investments of similar credit
risk and higher yield.
Yield
In general, if you purchased your securities
at a price greater than their original
principal amount, your investment will become
less valuable if prepayments are higher than
you anticipate and will become more valuable
if prepayments are lower than you anticipate.
Conversely, if you purchased your securities
at a price less than their initial principal
amount, your investment will become more
valuable if prepayments are higher than you
anticipate and will become less valuable if
prepayments are lower than you anticipate.
Your securities' sensitivity to prepayments
will be magnified by any disproportionate
allocation of principal or interest. You
could fail to recover your initial investment
if
<PAGE>
your securities receive a disproportionate
amount of principal or interest, and if
prepayments occur differently than you
anticipate.
The yield to maturity on certain classes of
securities including securities with
disproportionate allocations of interest,
securities with an interest rate which
fluctuates inversely with an index or certain
other classes in a series, may be more sensitive
to the rate of prepayment on the mortgage loans
than other classes of securities and to the
occurrence of an early retirement of the
securities.
Your securities will be Your securities will be payable solely from the
obligations of your assets of your trust, including any credit
trust only, and not of support, and will not have any claims against
any other party the assets of any other trust or recourse to any
other party. Your securities will not represent
an interest in or obligation of National
Mortgage, the master servicer, the seller, any
of their affiliates, or any other person.
Neither your securities nor the underlying trust
assets will be guaranteed or insured by any
governmental agency or instrumentality, by
National Mortgage, the master servicer, the
seller, any of their affiliates, or any other
person, unless identified as guaranteed or
insured in the accompanying prospectus
supplement. Although payment of principal and
interest on agency securities will be guaranteed
by Ginnie Mae, Fannie Mae or Freddie Mac, the
securities of any series collateralized by
agency securities will not be guaranteed.
The payment performance The mortgage assets backing your securities may
of your securities include mortgage loans or manufactured housing
will be related to the installment sales contracts. Certain mortgage
payment performance of assets may have a greater likelihood of
your trust assets and delinquency, foreclosure, and loss. In the event
there may be greater that the mortgaged properties fail to provide
risk of loss adequate security for the mortgage assets
associated with included in your trust, resulting losses not
certain types of trust covered by credit support will be allocated to
assets the securities in the manner described in the
prospectus supplement. We 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 mortgage
assets. You should consider the following risks
associated with mortgage assets included in your
trust.
Negatively Amortizing Loans
In the case of mortgage loans that are subject
to negative amortization, their principal
balances could be increased to an
<PAGE>
amount at or above the value of the underlying
mortgaged properties. This would increase the
likelihood of default. To the extent that losses
are not covered by credit support, your trust
will bear the risk of loss resulting from
default by obligors and will look primarily to
the value of the mortgaged properties for
recovery of the outstanding principal and unpaid
interest on the defaulted mortgage assets.
Buydown Mortgage Assets
Some mortgage assets are subject to temporary
buydown plans in which the monthly payments made
by the obligor during the early years of the
mortgage asset will be less than the scheduled
monthly payments on the mortgage asset. The
difference will be made up from an amount
contributed by the obligor, the seller of the
mortgaged property or another source and placed
in a custodial account, investment earnings on
the amount, if any, contributed by the obligor,
or additional buydown funds to be contributed
over time by the obligor's employer or another
source. Generally, the obligor under each
buydown mortgage asset will be qualified at the
lower monthly payment. Accordingly, the
repayment of a buydown mortgage asset is
dependent on the ability of the obligor to make
larger monthly payments after the buydown funds
are depleted and, for some buydown mortgage
assets, during the initial buydown period. If an
obligor is not able to make larger monthly
payments there could be losses on the mortgage
asset. If these losses are not covered by credit
support, they could adversely affect your yield
to maturity.
Balloon Loans
Certain mortgage assets, particularly those
secured by multifamily properties, may not be
fully amortizing -- or may not amortize at all
-- over their terms to maturity and will require
substantial payments of principal at their
stated maturity. Mortgage assets of this type
involve a greater degree of risk than fully
amortizing loans because the ability of an
obligor to make a balloon payment typically will
depend upon his ability either to refinance
fully the loan or to sell the mortgaged property
at a price sufficient to permit him to make the
balloon payment. The ability of an obligor to
accomplish either of these goals will be
affected by a number of factors, including the
value of the mortgaged property, the level of
mortgage rates, the obligor's equity in the
mortgaged property, prevailing general economic
conditions, the availability of credit for loans
secured by comparable real properties and, in
the case of multifamily properties, the
financial condition and operating history of the
obligor and the mortgaged property, tax
<PAGE>
laws and rent control laws.
Adjustable Rate Mortgage Assets
The interest rates on adjustable rate mortgage
assets will adjust periodically, generally after
an initial period during which the interest rate
is fixed. They will equal the sum of an index,
for example, one-month LIBOR, and a margin. When
an index adjusts, the amount of an obligor's
monthly payment will change. As a result,
obligors on adjustable rate mortgage assets may
be more likely to default on their obligations
than obligors on mortgage assets bearing
interest at fixed rates. In addition, some
adjustable rate mortgage assets allow the
obligor to elect to convert his mortgage asset
to a fixed rate mortgage asset. The seller of
convertible mortgage assets may be required to
repurchase a convertible mortgage assets if the
obligor elects conversion. This repurchase of a
convertible mortgage asset will have the same
effect on you as a repayment in full of the
mortgage asset. If your trust includes
convertible mortgage assets with this repurchase
obligation, your securities may experience a
higher rate of prepayment than would otherwise
be the case.
Non-Recourse Obligations
Some or all of the mortgage assets included in
your trust, particularly mortgage assets secured
by multifamily properties, may be nonrecourse
assets or assets for which recourse may be
restricted or unenforceable. As to those
mortgage assets, recourse in the event of
obligor default will be limited to the specific
real property and other assets, if any, that
were pledged to secure the mortgage asset.
However, even with respect to those mortgage
assets that provide for recourse against the
obligor and its assets generally, there can be
no assurance that enforcement of the recourse
provisions will be practicable, or that the
other assets of the obligor will be sufficient
to permit a recovery in excess of the
liquidation value of the mortgaged property.
Multifamily Loans
Mortgage loans made on the security of
multifamily properties may entail risks of
delinquency, foreclosure, and loss that are
greater than similar risks associated with loans
made on the security of single family
properties. The ability of an obligor to repay a
loan secured by an income-producing property
typically is dependent upon the successful
operation of the property rather than upon the
existence of independent income or assets of the
borrower. Accordingly, the value of an income-
producing property is related to the net
operating income derived from the
<PAGE>
property. If the net operating income of the
property is reduced, for example, if rental or
occupancy rates decline or real estate tax rates
or other operating expenses increase, the
obligor's ability to repay the loan may be
impaired. In addition, the risk of default,
foreclosure and loss for a pool of mortgage
assets secured by multifamily properties may be
greater than for a pool of mortgage assets
secured by single family properties because the
pool of mortgage assets secured by multifamily
properties is likely to consist of a smaller
number of loans with higher principal balances.
Non-Conforming Loans
Non-conforming mortgage loans are mortgage
assets that do not qualify for purchase by
government sponsored agencies such as Fannie Mae
and Freddie Mac. This is due primarily to credit
characteristics that to not satisfy Fannie Mae
and Freddie Mac guidelines, including obligors
whose creditworthiness and repayment ability do
not satisfy Fannie Mae and Freddie Mac
underwriting standards and obligors who may have
a record of derogatory credit items.
Accordingly, non-conforming mortgage assets are
likely to experience rates of delinquency,
foreclosure and loss that are higher, and that
may be substantially higher, than mortgage loans
originated in accordance with Fannie Mae or
Freddie Mac standards. The principal differences
between conforming mortgage assets and non-
conforming mortgage assets include the
applicable loan-to-value ratios, the credit and
income histories of the obligors, the
documentation required for approval of the
mortgage assets, the types of properties
securing the mortgage loans, the loan sizes and
the mortgagors' occupancy status. The interest
rates charged on non-conforming mortgage assets
are often higher than those charged on
conforming mortgage assets. The combination of
different underwriting criteria and higher rates
of interest may also lead to higher delinquency,
foreclosure and losses on non-conforming
mortgage assets.
High LTV Loans
Mortgage assets with original combined loan-to-
value ratios in excess of 80% and as high as
125% and not insured by primary mortgage
insurance policies are designated by National
Mortgage as high LTV loans. High LTV loans with
combined loan-to-value ratios in excess of 100%
may have been originated with a limited
expectation of recovering any amounts from the
foreclosure of the mortgaged property and are
underwritten with an emphasis on the
creditworthiness of the obligor. If high LTV
loans go into
<PAGE>
foreclosure and are liquidated, there may not be
sufficient amounts recovered from the mortgaged
property unless the value of the property
increases or the principal amount of all liens
have been reduced so that the combined loan-to-
value ratio of the mortgage loan becomes less
than 100%. Any losses, to the extent not covered
by credit enhancement, may affect the yield to
maturity of your securities.
Junior Lien Mortgage Assets
Your trust may contain mortgage assets secured
by junior liens and the senior liens may not be
included in your trust. A decline in residential
real estate values could reduce the value of a
mortgaged property securing a junior lien
mortgage asset to below that of all liens on the
mortgaged property. Because mortgage assets
secured by junior liens are subordinate to the
rights under senior liens, a decline would
adversely affect the position of the junior
lienholder before having any affect on the
position of the senior lienholder. Interest
rates, the condition of the mortgaged property
and other factors may also reduce the value of
the mortgaged property. As a result, the
loan-to-value ratio may rise. This increase will
reduce the likelihood that, in the event of a
default by the obligor, liquidation or other
proceeds will be sufficient to repay amounts
owing on the junior lien mortgage asset.
Other factors may influence the prepayment rate
of junior lien mortgage assets. These include
the amounts of, and interest on, the senior
mortgage loan and the use of senior lien
mortgage loans as long-term financing for home
purchases and junior lien mortgage loans as
shorter-term financing. Accordingly, junior lien
mortgage assets may experience a higher rate of
prepayments than senior lien mortgage loans. Any
future limitations on the rights of obligors to
deduct interest payments on junior lien mortgage
assets for federal income tax purposes may
increase the rate of prepayments on junior lien
mortgage assets.
Varying underwriting Mortgage assets included in your trust will have
standards of mortgage been purchased by National Mortgage from
asset sellers may mortgage asset sellers. These mortgage assets
present a greater risk generally will have been originated in
of loss accordance with underwriting standards
acceptable to National Mortgage and generally
described in this prospectus and in the
accompanying prospectus supplement. In some
cases, particularly those involving various
mortgage asset sellers, National Mortgage may
not be able to establish the underwriting
standards used in the origination of the
mortgage assets. To the extent the mortgage
<PAGE>
assets cannot be re-underwritten or the
underwriting criteria cannot be verified, the
mortgage assets might suffer losses greater than
they would had they been underwritten according
to identified standards. These losses, to the
extent not covered by credit support, may
adversely affect the yield to maturity of your
securities.
Failure of the mortgage Each mortgage asset seller will make
asset seller to representations and warranties in respect of the
repurchase or replace mortgage assets sold by it. In the event of a
a mortgage asset may breach of a mortgage asset seller's
result in losses representation or warranty that materially
adversely affects your interests, the mortgage
asset seller will be obligated to cure the
breach, repurchase or replace the mortgage
asset. A mortgage asset seller may not have the
resources to honor its obligation to cure,
repurchase or replace any mortgage asset as to
which such a breach of a representation or
warranty arises. A mortgage asset 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 your
securities.
In instances where a mortgage asset seller is
unable or disputes its obligation to repurchase
affected mortgage assets, the master servicer
may negotiate and enter into settlement
agreements that may provide for the repurchase
of only a portion of the affected mortgage
assets. A settlement could lead to losses on the
mortgage assets, which would be borne by the
securities. Neither National Mortgage nor the
master servicer will be obligated to purchase a
mortgage asset if a mortgage asset seller
defaults on this obligation. We cannot assure
you that mortgage asset sellers will carry out
their repurchase obligations. A default by a
mortgage asset seller is not a default by
National Mortgage or by the master servicer. Any
affected mortgage asset not repurchased or
substituted for shall remain in your trust and
losses shall be allocated first to the reduction
of credit support and next to the classes of
securities. A mortgage asset seller's
representations and warranties will have been
made as of the cut-off date, which is prior to
the initial issuance of your securities. A
substantial period of time may have elapsed
between these dates. Accordingly, the mortgage
asset seller's repurchase and substitution
obligation does not attach to events occurring
on or after the cut-off date. The occurrence of
events during this period could lead to losses
that, to the extent not covered by credit
support, may adversely affect the yield to
maturity of your securities.
Regional economic An investment in the securities may be affected
by a decline in
<PAGE>
downturns and the real estate values and changes in obligors'
decline in the value financial condition. Downturns in regional or
of mortgaged local economic conditions will affect the
properties could frequency of delinquency and the amount of losses
result in losses on the assets in your trust. If residential real
estate values decline and the balances of the
mortgage assets in your trust exceed the value of
the mortgaged properties, the rates of
delinquencies, foreclosures and losses will
increase. High LTV loans are at greater risk
because they have less equity than mortgaged
properties with low loan-to-value ratios.
Delinquencies, foreclosures and losses due to
declining values of mortgaged properties,
especially high LTV loans, likely will cause
losses and, to the extent not covered by credit
support, likely will adversely affect your yield
to maturity. Localities within the United States
periodically will experience weaker regional
economic conditions and housing markets.
Consequently, loans secured by mortgaged
properties located in these areas likely will
experience higher rates of loss and delinquency
than will be experienced on mortgage loans
generally. For example, a region's economic
condition and housing market may be adversely
affected by natural disasters or civil
disturbances such as earthquakes, hurricanes,
floods, fires, eruptions or riots. The mortgage
assets underlying your securities may be
concentrated in these regions, and this
concentration presents risk considerations in
addition to those generally present for asset-
backed securities.
State law may limit the Substantial delays can be encountered in
master servicer's connection with the liquidation of defaulted
ability to foreclose mortgage assets and corresponding delays in the
on assets in a manner receipt of proceeds could occur. An action to
that maximizes your foreclose on a mortgaged property is regulated by
return state statutes, rules and judicial decisions and
is subject to many of the delays and expenses of
other lawsuits. In some 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 an
obligor, these restrictions may impede the
ability of the servicer to foreclose on or sell
the mortgaged property or to obtain sufficient
liquidation proceeds. The servicer will be
entitled to deduct from liquidation proceeds all
expenses reasonably incurred in attempting to
recover amounts due on the liquidated mortgage
asset and not yet repaid, including payments to
prior lienholders, accrued servicing fees, legal
fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses.
In the event that any mortgaged properties fail
to provide adequate security for the mortgage
assets and insufficient funds are available from
any applicable credit support, you could
experience
<PAGE>
a loss on your investment.
Liquidation expenses do not vary directly with
the outstanding principal balance of the mortgage
asset at the time of default. Assuming that the
master servicer takes the same steps in realizing
upon defaulted mortgage assets, the amount
realized after expenses of liquidation would be
less as a percentage of the outstanding principal
balance of smaller principal balance mortgage
assets than would be the case with larger
principal balance mortgage assets.
Contesting the The steps necessary to create and perfect a
trustee's security security interest in manufactured homes differ
interest in from state to state. Because of the expense
manufactured homes involved, the master servicer will not take any
could reduce or delay steps toname National Mortgage or the trustee, on
distributions behalf of your trust,as the lien-holders of any
manufactured home. As a consequence,a person may
contest the security interest of the trustee.
Whether successful or unsuccessful, any contest
of the security interest could reduce or delay
distributions to you.
The mortgaged Under various federal, state and local
properties are subject environmental laws, ordinances and regulations,
to environmental risks a current or previous owner of real property may
and the cost of repair be liable for the costs of removal or remediation
may increase losses on of hazardous or toxic substances on, under or in
the mortgage assets the property.These laws often impose liability on
owners and operators or property whether or not
they knew of, or were responsible for, the
presence of hazardous or toxic substances. A
lender also risks liability on foreclosure of the
mortgage on this property. The presence of
hazardous or toxic substances may adversely
affect the owner's or operator's ability to sell
the property. Mortgage assets contained in your
trust may be secured by mortgaged properties in
violation of environmental laws, ordinances or
regulations. The master servicer and servicer
generally are prohibited from foreclosing on a
mortgaged property unless they have taken
adequate steps to ensure environmental
compliance. However, to the extent the master
servicer or servicer forecloses on mortgaged
property that is subject to environmental law
violations, and to the extent a mortgage asset
seller does not provide adequate representations
and warranties against these violations or is
unable to honor its obligations, your trust could
experience losses which, to the extent not
covered by credit support, could adversely affect
the yield to maturity of your securities.
Your ability to resell A secondary market for your securities may not
your securities will be develop. If a secondary market does develop, it
might not continue or it might
<PAGE>
limited not be sufficiently liquid to allow you to resell
your securities. Your securities will not be
listed on any trading exchange. Also, ERISA plans
and investors subject to legal investment
restrictions may be prohibited from purchasing
your securities, if noted in the accompanying
prospectus supplement.
Book-entry registration Because transfers and pledges of securities
may affect the registered in the name of a nominee of Depository
liquidity of your Trust Company can be effected only through book
securities entries at DTC through participants, the
liquidity of the secondary market for DTC
registered securities may be reduced to the
extent that some investors are unwilling to hold
securities in book entry form in the name of DTC
and the ability to pledge DTC registered
securities may be limited due to the lack of a
physical certificate. Beneficial owners of DTC
registered securities may, in certain cases,
experience delay in the receipt of payments of
principal and interest because payments will be
forwarded by the trustee to DTC. DTC will then
forward payment to the participants, who will
thereafter forward payment to beneficial owners.
In the event of the insolvency of DTC or a
participant in whose name DTC registered
securities are recorded, the ability of
beneficial owners to obtain payment of principal
and interest on DTC registered securities may be
impaired.
The failure to comply A failure by an originator to comply with federal
with consumer or state consumer protection laws could create
protection laws may liabilities on behalf of your trust. These
create liabilities on liabilities could include a reduction in the
your trust amount payable under the mortgage assets, the
inability to foreclose on the mortgaged property,
or liability of your trust to an obligor. Each
originator will warrant that the origination of
each mortgage asset materially complied with all
requirements of law and that there exists no
right of rescission, set-off, counterclaim or
defense in favor of the obligor under any
mortgage asset and that each mortgage asset is
enforceable against the obligor in accordance
with its terms. A breach of any warranty that
materially and adversely affects your trust's
interest in any mortgage asset would create an
obligation on the part of the originator to
repurchase or substitute for the mortgage asset
unless the breach is cured. However, the failure
of an originator to repurchase the defective
asset or pay the liability could expose your
trust to losses.
<PAGE>
Credit enhancement may Credit enhancement is intended to reduce the
not cover all losses effect on your securities of delinquent payments
on your securities or losses on the underlying trust assets.
Regardless of the form of credit enhancement,
the amount of coverage will be limited in amount
and in most cases will be subject to periodic
reduction in accordance with a schedule or
formula. Furthermore, credit support may provide
only very limited coverage as to a variety of
types of losses or risks, and may provide no
coverage as to other types of losses or risks. In
the event losses exceed the amount of coverage
provided by any credit enhancement or losses of a
type not covered by credit enhancement occur,
these losses will be borne by the holders of the
securities.
The subordination of The fact that some classes are paid after your
other classes to your class of securities does not protect you from all
class will not protect risks of loss. If losses cannot be absorbed by
you from all losses the subordinated securities or other items of
credit enhancement, like a reserve fund, then you
may have losses on your securities.
You will experience The acquisition of the mortgage assets by
delays or reductions National Mortgage is intended to be a sale.
of distributions on However, in the event that a mortgage asset
your securities if the seller or one of its affiliates becomes
transfer of assets to insolvent, a court may decide that this
your trust is not acquisition was a loan rather than a sale. This
considered a sale in could delay or reduce distributions to you.
the event of bankruptcy Likewise, if an affiliate of National Mortgage
becomes insolvent, a court might decide to
consolidate the assets and liabilities of
National Mortgage and its affiliates. This also
could delay or reduce distributions to you.
Exercise of the Your trust may be subject to optional termination
optional termination prior to the retirement of your securities.
right or optional Additionally, your securities may be repurchased
redemption right will in whole or in part in the manner described in
affect the yield to the accompanying prospectus supplement. The
maturity on your exercise of this right may effect an early
securities retirement of the securities of your series. Upon
the optional termination of your trust or the
repurchase of your securities you will receive
the redemption or termination price set forth in
the prospectus supplement. After these events,
the securities of your series may be retired,
held or resold by the party that elected to
terminate your trust or redeem your securities.
The accompanying prospectus supplement sets forth
the details concerning an optional termination or
repurchase.
If one or more REMIC elections are made for your
trust, then your
<PAGE>
trust also may be terminated and your securities
retired upon the master servicer's determination,
based upon an opinion of counsel, that the REMIC
status of the trust has been lost or that a
substantial risk exists that such status will be
lost.
The termination of your trust and the early
retirement of securities may adversely affect
your yield.
You may have income for Securities purchased at a discount and securities
tax purposes prior to purchased at a premium that are deemed to have
your receipt of cash original issue discount may incur tax liabilities
prior to a holder's receiving the related cash
payments.
In addition, holders of REMIC residual
certificates will be required to report on their
federal income tax returns as ordinary income
their pro rata share of the taxable income of the
REMIC, regardless of the amount or timing of
their receipt of cash payments, as described in
"Federal Income Tax Consequences." Accordingly,
holders of offered securities that constitute
REMIC residual certificates may have taxable
income and tax liabilities arising from their
investment during a taxable year in excess of the
cash received during that year. The requirement
that holders of REMIC residual certificates
report their pro rata share of the taxable income
and net loss will continue until the outstanding
balances of all classes of securities of the
series have been reduced to zero, even though
holders of REMIC residual certificates have
received full payment of their stated interest
and principal. The holder's share of the REMIC
taxable income may be treated as excess inclusion
income to the holder, which:
. generally, will not be subject to offset by
losses from other activities,
. for a tax-exempt holder, will be treated as
unrelated business taxable income, and
. for a foreign holder, will not qualify for
exemption from withholding tax.
Individual holders of REMIC residual certificates
may be limited in their ability to deduct
servicing fees and other expenses of the REMIC.
In addition, REMIC residual certificates are
subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC
residual certificates, the taxable income arising
in a given year on a REMIC residual certificate
will not be equal to the taxable income
associated with investment in a corporate bond or
stripped instrument having similar cash flow
<PAGE>
characteristics and pre-tax yield. Therefore, the
after-tax yield on the REMIC residual certificate
may be significantly less than that of a
corporate bond or stripped instrument having
similar cash flow characteristics.
See "Federal Income Tax Consequences" in this
prospectus.
ERISA plans that invest If you are buying the securities on behalf of an
in the securities must individual retirement account, Keogh plan or
follow technical employee benefit plan, special rules may apply
benefit plan to you. However, due to the complexity of
regulations regulations that govern these plans, if you are
subject to the Employment Retirement Income
Security Act of 1974, as amended, we suggest that
you consult with your counsel regarding any
consequences under ERISA of the acquisition,
ownership and disposition of the securities.
See "ERISA Considerations" in this prospectus.
The ratings provided by Your securities will be rated in one of the four
the rating agencies do highest rating categories by one or more rating
not purport to address agencies. A rating is not a recommendation to
all risks contained in buy, sell or hold your securities and may be
your investment revised or withdrawn at any time. You may obtain
further details with respect to any rating on
your securities from the rating agency that
issued the rating. A rating generally is based on
the credit quality of the underlying assets, and
will represent only an assessment of the
likelihood of receipt by you of payments. The
rating is not an assessment of the prepayment
experience, and does not rate the possibility
that you may fail to recover your initial
investment if you purchase your securities at a
premium. Security ratings assigned to the
securities representing a disproportionate
entitlement to principal or interest on the
assets should be evaluated independently of
similar security ratings assigned to other kinds
of securities. In the event any rating is reduced
or withdrawn, the liquidity or the market value
of the security may be adversely affected.
<PAGE>
Description of the Securities
General
The securities will be issued from time to time in series. Each series of
certificates will be issued pursuant to a pooling and master servicing agreement
among National Mortgage Securities Corporation, a Virginia corporation
("National Mortgage"), the master servicer and the trustee. Each series of
notes will be issued pursuant to an indenture between an issuer and the
indenture trustee. The issuer of a series of notes will be either National
Mortgage or an owner trust established by it for the sole purpose of issuing the
series of notes pursuant to an owner trust agreement between National Mortgage
and the owner trustee. The master servicer and any trustee, indenture trustee
and owner trustee, if any, will be named in the accompanying prospectus
supplement. The provisions of each agreement will vary depending on the nature
of the securities to be issued and the nature of the trust. Forms of pooling
and master servicing agreement, indenture and owner trust agreement have been
filed as exhibits to the registration statement of which this prospectus is a
part.
National Mortgage will assign and transfer to the trust for the benefit of
the holders of the securities the trust assets, the asset proceeds account, and
possibly a reserve fund or other funds, the insurance policies, trust asset sale
agreement or agreements, the servicing agreement or agreements and any
additional assets. See "The Trusts" and "The Agreements" in this prospectus.
The following summaries describe the material provisions common to each series
of securities. These summaries do not purport to be complete and are subject to
and qualified by the accompanying prospectus supplement and the provisions of
the agreements. When particular provisions or terms used in the agreement are
referred to, the actual provisions, including definitions of terms, are
incorporated by reference.
The trust agreement or indenture for a series will generally provide that
securities may be issued up to a maximum aggregate principal amount. Each
series will consist of one or more classes and may include
. one or more classes of senior securities entitled to certain
preferential rights to distributions of principal and interest,
. one or more classes of subordinated securities,
. one or more classes representing an interest only in a specified
portion of interest payments on the Assets in the related trust and
that may have no principal balance, a nominal principal balance or a
notional principal balance ("Strip Class"),
. one or more classes representing an interest only in payments of
principal on the assets ("Principal Only Class"),
<PAGE>
. one or more classes upon which interest will accrue but will not be
distributed until certain other classes of that series have received
their final distribution ("Compound Interest Class" and "Capital
Appreciation Class" and, collectively "Accretion Classes"),
. one or more classes entitled to distributions from specified portions
of the assets in the related trust, and
. one or more classes entitled to fixed or targeted principal payments
under certain conditions ("PAC Classes") and companion classes thereto
("Companion Classes").
Each series as to which a real estate mortgage investment conduit (a
"REMIC") election has been or is to be made will consist of one or more classes
of REMIC regular certificates, which may consist of certificates of the types
specified in the preceding sentence, and one, but no more than one, class of
residual certificates for each REMIC (the "Residual Certificates"). A Residual
Certificate is a certificate evidencing a residual interest in a REMIC. A REMIC
is a real estate mortgage investment conduit as defined in the Internal Revenue
Code of 1986, as amended (the "Code"). In addition, the ownership of the equity
of a trust relating to a series of notes will be represented by equity
certificates issued under the owner trust agreement. Any equity certificate
will be subordinate to the notes of the same series.
National Mortgage may sell to investors one or more classes of a series of
securities in transactions not requiring registration under the Securities Act
of 1933. The offered securities of each series will be rated on issuance by a
nationally-recognized statistical securities rating organization, like Standard
& Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.,
Moody's Investors Service, Inc., Fitch IBCA, Inc., and Duff & Phelps Credit
Rating Co.
The securities will be issued in fully registered certificated or book-
entry form in the authorized denominations for each class specified in the
related prospectus supplement. The securities of each series in certificated
form may be transferred or exchanged at the corporate trust office of the
trustee or such other office specified in the related prospectus supplement
without the payment of any service charge, other than any tax or other
governmental charge payable in connection with such transfer. The trustee will
make distributions of principal and interest to each class of securities in
certificated form by check mailed to each person in whose name a security is
registered as of the close of business on the record date specified in the
related prospectus supplement at the address appearing on the books and records
of the Trust, except that the final distributions in retirement of each class of
securities in certificated form will be made only upon presentation and
surrender of such securities at the corporate trust office of the trustee or
such other office specified in the related prospectus supplement. Under certain
circumstances, if so provided in the related agreement and described in the
related prospectus supplement, distributions of principal and interest may be
made to certain holders of a class of securities by wire transfer of
"immediately available" or "next day" funds. Distributions with respect to
securities in book-entry form will be made as set forth below.
<PAGE>
Book-Entry Procedures
The prospectus supplement for a series may specify that some classes
of securities initially will be issued as book-entry securities in the
authorized denominations specified in the prospectus supplement. Each book-entry
class will be represented by a single security registered in the security
register in the name of a nominee of the depository, which is expected to be The
Depository Trust Company (together with any successor or other depository
selected by National Mortgage). No person acquiring a book-entry security (a
"Beneficial Owner") will be entitled to receive a definitive certificate
representing its security.
DTC performs services for its Participants, some of whom, including
their representatives, own DTC. Participants means the participating
organizations that utilize the services of DTC, including securities brokers and
dealers, banks and trust companies and clearing corporations and may include
certain other organizations. 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 securities will be
subject to the rules, regulations and procedures governing DTC and Depository
Participants as in effect from time to time.
A Beneficial Owner's ownership of a book-entry security will be
reflected in the records of the brokerage firm, bank, thrift institution or
other financial intermediary (any of the foregoing, a "Financial Intermediary")
that maintains such Beneficial Owner's account for such purpose. In turn, the
Financial Intermediary's ownership of a book-entry security will be reflected in
the records of DTC, or of a participating firm that acts as agent for the
Financial Intermediary whose interest in turn will be reflected in the records
of DTC, if the Beneficial Owner's Financial Intermediary is not a direct
Depository Participant. Therefore, the Beneficial Owner must rely on the
procedures of its Financial Intermediary or Intermediaries and of DTC in order
to evidence its beneficial ownership of a book-entry security, and beneficial
ownership of a book-entry security may only be transferred by compliance with
the procedures of Financial Intermediaries and Depository Participants.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a clearing
corporation within the meaning of the New York Uniform Commercial Code, and a
clearing agency registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC accepts securities for deposit
from its participating organizations ("Depository Participants") and facilitates
the clearance and settlement of securities transactions between Depository
Participants in securities through electronic book-entry changes in accounts of
Depository Participants, thereby eliminating the need for physical movement of
certificates. Depository Participants include securities brokers and dealers,
banks and trust companies and clearing corporations and may include other
organizations. Indirect access to the DTC system is also available to others
like banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Depository Participant, either directly or
indirectly ("indirect participants").
<PAGE>
Distributions of principal and interest on the book-entry securities
will be made to DTC. DTC will be responsible for crediting the amount of these
distributions to the accounts of the applicable Depository Participants in
accordance with DTC's normal procedures. Each Depository Participant will be
responsible for disbursing these payments to the Beneficial Owners of the book-
entry securities 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 securities that it represents.
As a result of the foregoing procedures, Beneficial Owners of the book-entry
securities may experience some delay in their receipt of payments.
While the offered securities are outstanding, except if the offered
securities are subsequently issued in certificated, fully-registered form, under
the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the offered securities and
is required to receive and transmit distributions of principal of, and interest
on, the offered securities. Unless and until the offered securities are issued
in certificated form, Beneficial Owners who are not Participants may transfer
ownership of the offered securities only through Participants by instructing
Participants to transfer the offered securities, by book-entry transfer, through
DTC for the account of the purchasers of securities, which account is maintained
with the purchasers' respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of the offered securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Because transactions in book-entry securities
can be effected only through DTC, participating organizations, indirect
participants and banks, the ability of a Beneficial Owner of a book-entry
certificate to pledge a certificate to persons or entities that are not
Depository Participants, or otherwise to take actions in respect of a security,
may be limited due to the lack of a physical certificate representing the
security. Issuance of the book-entry securities in book-entry form may reduce
the liquidity of your securities in the secondary trading market because
investors may be unwilling to purchase book-entry securities for which they
cannot obtain physical certificates.
The book-entry securities will be issued in fully-registered,
certificated form to Beneficial Owners of book-entry securities or their
nominees, rather than to DTC or its nominee, only if
. National Mortgage advises the trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities
as depository with respect to the book-entry securities and
National Mortgage is unable to locate a qualified successor
within 30 days, or
. National Mortgage, at its option, elects to terminate the book-
entry system maintained through DTC.
Upon the occurrence of either event described in the preceding sentence, the
trustee is required to notify DTC, which in turn will notify all Beneficial
Owners of book-entry securities through Depository Participants, of the
availability of certificated securities. Upon surrender of DTC of
<PAGE>
the certificates representing the book-entry securities and receipt of
instructions for re-registration, the trustee will reissue the book-entry
securities as certificated securities to the Beneficial Owners of the book-entry
securities. Upon issuance of certificated securities to Beneficial Owners, they
will be transferable directly, and not exclusively on a book-entry basis, and
registered holders will deal directly with the trustee with respect to
transfers, notices and distributions.
DTC has advised National Mortgage and the trustee that, unless and until
the offered securities are issued in certificated, fully-registered form under
the circumstances described, DTC will take any action permitted to be taken by a
securityholder under the related trust agreement or indenture only at the
direction of one or more Participants to whose DTC accounts the securities are
credited. DTC has advised National Mortgage that DTC will take this action with
respect to any percentage interests of the offered securities only at the
direction of and on behalf of Participants with respect to percentage interests
of the offered securities. DTC may take action, at the direction of the related
Participants, with respect to some offered securities which conflict with
actions taken with respect to other offered securities.
Neither National Mortgage, the servicer nor the trustee will have any
liability for any aspect of the records relating to or payment made on account
of beneficial ownership interests of the book-entry securities held by DTC, or
for maintaining, supervising or reviewing any records relating to beneficial
ownership interests.
Allocation of Collections from the Assets
The prospectus supplement will specify the available distribution amount,
which in general will be equal to the amount of principal and interest paid on
the assets with respect to the due date in the current month and the amount of
principal prepaid during the preceding month, net of applicable servicing,
administrative, guarantee and other fees, insurance premiums, the costs of any
other credit enhancement and amounts required to reimburse any unreimbursed
advances. The available distribution amount will be allocated among the classes
of securities of your series -- including any securities not offered through
this prospectus -- in the proportion and order of application found in the
pooling and master servicing agreement or indenture and described in the
accompanying prospectus supplement. The available distribution amount may be
allocated so that amounts paid as interest on the assets may be distributed as
principal on the securities and amounts paid as principal on the assets may be
distributed as interest on the securities.
A class of securities entitled to distributions of interest may receive
interest at a specified rate, which may be fixed or adjustable. The classes of
securities within a series may have the same or different security interest
rates. The accompanying prospectus supplement will specify the security
interest rate, or the method for determining the security interest rate, for
each applicable class, and the method of determining the amount to be
distributed on any Strip Classes on each distribution date. Residual
Certificates may or may not have a security interest rate. In addition to
representing entitlement to regular distributions of principal and interest, if
any, that are allocated to the Residual Certificates, Residual Certificates also
generally will represent
<PAGE>
entitlement to regular distributions of principal and interest, if any, that are
allocated to the Residual Certificates, Residual Certificates also generally
will represent entitlement to receive amounts remaining in the distribution
account on any distribution date after allocation of scheduled distributions to
all other outstanding classes of securities of that series and after all
required deposits have been made into any related reserve funds. Strip Classes
may have a notional principal amount, which is a fictional principal balance
used solely for determining the class' amount of distributions and other rights.
A notional principal amount is determined by reference to the principal amount
of the assets, a subset of the assets, or one or more classes of securities.
Interest distributions on the securities generally will include interest accrued
through the accounting date preceding the distribution date. Interest will be
computed on the basis of a 360-day year consisting of twelve 30-day months, or
on the basis of actual elapsed days, as specified in the related prospectus
supplement.
With respect to a series that includes one or more classes of
subordinated securities, the senior securities will generally not bear any
Realized Losses on the related assets in the related trust, until the
subordinated securities of that series have borne Realized Losses up to a
specified subordination amount or loss limit or until the principal amount of
the subordinated securities has been reduced to zero, either through the
allocation of Realized Losses, distributions of principal, or both.
Distributions of interest may be reduced to the extent the amount of interest
due on the assets exceeds the amount of interest collected or advanced, which
may be due to Due Date Interest Shortfall or Soldiers' and Sailors' Shortfall on
the assets. Soldiers' and Sailors' Shortfall means a shortfall in respect of an
asset resulting from application of the federal Soldiers' and Sailors' Civil
Relief Act of 1940, as amended. With respect to a series that includes a class
of subordinated securities, any shortfall may result in a reallocation of
amounts otherwise distributable to less senior securities for distribution to
more senior securities.
Realized Loss means
. the amount of any loss realized by a trust in respect of any
related liquidated loan, which may be a special hazard loss or a
fraud loss, which shall generally equal the unpaid principal
balance of the liquidated loan, plus accrued and unpaid interest
on such liquidated loan, plus amounts reimbursable to the
servicer for previously unreimbursed servicing advances, minus
net liquidation proceeds in respect of the liquidated loan,
or
. the amount of any principal cramdown in connection with any asset
that was the subject of a principal cramdown in bankruptcy during
the calendar month immediately preceding the month in which the
related distribution date occurs (a "Prepayment Period")
preceding a distribution date. The amount of any principal
cramdown is the amount by which the unpaid principal balance of
the asset exceeds, as applicable, depending upon the type of
principal cramdown that was applied to the asset, either the
portion of the unpaid principal balance that remains secured by
the manufactured home or mortgaged property after taking the
principal cramdown into account or the unpaid principal balance
after taking into account the permanent forgiveness of debt
ordered by the bankruptcy court in connection with the principal
cramdown, or
<PAGE>
. any other amount of a loss realized by a trust in respect of any
asset, which has been allocated to the asset in accordance with
its terms as described in the prospectus supplement -- for
example, losses realized on a funding agreement or allocated to a
mortgage security included in a trust.
Due Date Interest Shortfall means, for any asset that is prepaid in
full or liquidated on other than a Due Date for the asset, the difference
between the amount of interest that would have accrued on the asset through the
day preceding the first Due Date after the prepayment in full or liquidation had
the asset not been prepaid in full or liquidated, net of any other
administrative fees payable out of such interest had it accrued and been paid,
and the amount of interest that actually accrued on the asset prior to the
prepayment in full or liquidation, net of an allocable portion of any other
administrative fees payable from interest payments on the asset during the
period commencing on the second day of the calendar month preceding the month in
which the distribution date occurs and ending on the first day of the month in
which the distribution date occurs (each, a "Collection Period").
Principal and interest distributable on a class of securities may be
distributed among the securities of a class pro rata in the proportion that the
outstanding principal or notional amount of each security of the class bears to
the aggregate outstanding principal or notional amount of all securities of the
class, or in another manner as may be detailed in the related prospectus
supplement. Interest distributable on a class of securities will be allocated
among the securities of the class pro rata in the proportion that the
outstanding principal or notional amount of each security of the class bears to
the aggregate outstanding principal or notional amount of all securities of the
class, or in another manner as may be detailed in the related prospectus
supplement.
The final scheduled distribution date for each class of securities
will be the date on which the last distribution of the principal thereof is
scheduled to occur, assuming no prepayments of principal with respect to the
assets included in the trust for that series, as defined in the prospectus
supplement.
Valuation of Mortgage Assets
The mortgage assets and other assets included in the trust will have
an initial aggregate asset value at least equal to 100% of the initial principal
amount of the securities. The asset value of any mortgage asset in the trust
will generally equal
. the scheduled principal balance of the mortgage asset, or
. the lesser of the present value of the stream of remaining
regularly scheduled payments of principal and interest due on
such mortgage asset -- after taking into account charges for
servicing, administration, insurance and related matters --
discounted at a discount rate, if any, and the scheduled
principal balance of the mortgage asset multiplied by the
applicable asset value percentage.
<PAGE>
The asset value percentage will be the percentage limitation that, based
upon the scheduled net payments on the mortgage assets included in the trust, is
intended to assure the availability of sufficient funds to make scheduled
distributions on the securities in the event of substantial principal
prepayments on the mortgage assets. In each case asset value will be determined
after the subtraction of applicable servicing, master servicing, administrative
and guarantee fees, and insurance premiums and the addition, if the related
prospectus supplement so specifies, of any reinvestment income on the amounts on
deposit in the accounts held by the trust. The asset value of an asset that has
been liquidated or purchased from the trust pursuant to the related sale
agreement shall be zero.
Optional Redemption or Termination
To the extent and under the circumstances specified in the related
prospectus supplement, the securities of any series may be redeemed, and/or the
trust terminated, prior to their final scheduled distribution date at the option
of National Mortgage, the issuer, the master servicer, securities administrator,
the servicer or another party, or parties, specified in the prospectus
supplement. A redemption or termination may be accomplished by the purchase of
the outstanding series of securities or the purchase of the assets of the trust.
The right to redeem the securities generally will be conditioned upon
. the passage of a certain date specified in the prospectus supplement,
or
. the asset value or scheduled principal balance of the mortgage assets
in the trust, or the outstanding principal balance of a specified
class of securities at the time of purchase aggregating less than a
percentage specified in the prospectus supplement, of the initial
asset value of the mortgage assets in the trust or the initial
principal balance of the applicable class of securities.
In the event the option to redeem any series is exercised, the purchase
price to be paid with respect to each security will generally equal 100% of its
then outstanding principal amount, plus accrued and unpaid interest thereon at
the applicable security interest rate, net of any unreimbursed advances and
unrealized losses allocated to such security. Notice of the redemption of the
securities of any series will be given to related securityholders as provided in
the related pooling agreement or indenture.
Maturity And Prepayment Considerations
Generally, all of the mortgage loans that are assets of a trust and the
mortgage loans underlying the other mortgage assets included in a trust for a
series will consist of first lien residential or multifamily mortgages or deeds
of trust. However, if so specified in the prospectus supplement, certain or all
of the mortgage loans that are assets of the trust and the mortgage loans
underlying the other mortgage assets included in the trust for a series may
consist of second or junior lien, residential or multifamily mortgages or deeds
of trust.
The prepayment experience on the mortgage assets will affect
<PAGE>
. the average life of the securities and each class thereof issued by
the related trust,
. the extent to which the final distribution for each class occurs prior
to its final scheduled distribution date, and
. the effective yield on each class of such securities.
Because prepayments will be passed through to the holders of securities as
distributions or payments of principal on such securities, it is likely that the
actual final distributions on the classes of securities of a series will occur
prior to their respective final scheduled distribution dates. Accordingly, in
the event that the mortgage assets of a trust experience significant
prepayments, the actual final distributions on the securities of the related
series may occur materially before their respective final scheduled distribution
dates
Prepayments on mortgages are commonly measured relative to a prepayment
standard or model, such as the FHA prepayment experience, the single monthly
mortality prepayment model, the constant prepayment rate model, or some other
prepayment assumption model. The prospectus supplement for a series may contain
a table setting forth percentages of the original principal amount of each class
of securities of such series anticipated to be outstanding after each of the
dates shown in the table. It is unlikely that the prepayment of the mortgage
assets of any trust will conform to any of the percentages of the prepayment
assumption model described in any table set forth in the related prospectus
supplement.
FHA has compiled statistics relating to one- to four-family, fixed rate
level payment mortgage loans insured by the FHA under the National Housing Act
of 1934, as amended, at various interest rates, all of which permit assumption
by the new buyer if the home is sold. Such statistics indicate that while some
of such mortgage loans remain outstanding until their scheduled maturities, a
substantial number are paid prior to their respective stated maturities.
Moreover, although each of the FHA Loans included in the FHA statistics is
assumable, it is likely that a number of mortgage loans included in a trust and
a number of mortgage loans backing other mortgage assets will include "due-on-
sale" clauses which allow the holder of the mortgage loan to demand payment in
full of the remaining principal balance of the mortgage loan upon sale or
certain other transfers of the underlying mortgaged property. The resulting
acceleration of mortgage payments upon transfer of the underlying mortgaged
property is another factor affecting prepayment rates that is not reflected in
the FHA statistics. See "Certain Legal Aspects of Mortgage Assets -- `Due-on-
Sale' Clauses" in this prospectus.
No assurance can be given as to the rate of principal payments or
prepayments on the mortgage loans. The rate of principal payments on mortgage
loans included in a trust (or mortgage loans underlying other mortgage assets)
will be affected by the amortization schedules of the mortgage loans and by the
rate of principal prepayments -- including for this purpose payments resulting
from refinancings, liquidations due to defaults, casualties, condemnations, and
purchases by or on behalf of National Mortgage, the servicer or the master
servicer, as the case may be. The rate of principal prepayments on pools of
mortgages is influenced by a variety of economic, geographic, tax, legal and
other factors. In general, however, if prevailing interest
<PAGE>
rates fall significantly below the interest rates on the mortgage loans included
in a trust-- or mortgage loans underlying other mortgage assets --, such
mortgage loans are likely to be the subject of higher principal prepayments than
if prevailing rates remain at or above the rates borne by such mortgage loans.
It should also be noted that certain mortgage assets in the trust for a
series may be backed by mortgage loans with different interest rates.
Accordingly, the prepayment experience of such mortgage assets will to some
extent be a function of the mix of interest rates of the underlying mortgage
loans. For example, the stated certificate rate on certain mortgage
certificates may be up to 3% less than the stated interest rate on the
underlying mortgage loans. Other factors affecting the prepayment of mortgage
loans included in a trust -- or mortgage loans underlying other mortgage assets
- -- include changes in borrowers' housing needs, job transfers, unemployment,
borrowers' net equity in the mortgaged properties and servicing decisions.
Yield Considerations
Distributions of interest on the securities generally will include interest
accrued through the accounting date, which is, for any distribution date, the
last day of the preceding calendar month for securities that pay interest at a
fixed rate, and the 14th day of the same calendar month for securities that pay
at a floating rate. Your effective yield will be lower than the yield otherwise
produced by the applicable security interest rate and purchase price for your
securities, because distributions to you will not be made until the distribution
date following the accounting date, which causes a delay in distributions.
The yield to maturity of any security will be affected by the rate and
timing of payment of principal of the underlying mortgage assets. If the
purchaser of a security offered at a discount from its Parity Price, which is
the price at which a security will yield its coupon, after giving effect to any
payment delay, calculates the anticipated yield to maturity of a security based
on an assumed rate of payment of principal that is faster than that actually
received on the underlying mortgage assets, the actual yield to maturity will be
lower than that so calculated. Similarly, if the purchaser of a security
offered at a premium over its Parity Price calculates the anticipated yield to
maturity of a security based on an assumed rate of payment of principal that is
slower than that actually received on the underlying mortgage assets, the actual
yield to maturity will be lower than that so calculated.
The timing of changes in the rate of prepayments on the mortgage assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a prepayment of principal on an
asset, the greater will be the effect on a related investor's yield to maturity.
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 securities would not
be fully offset by a subsequent like reduction --- or increase --- in the rate
of principal payments. Because the rate of principal payments on the underlying
assets affects the weighted average life and other characteristics of any class
of securities, prospective investors are urged to consider their own estimates
as to the
<PAGE>
anticipated rate of future prepayments on the underlying contracts and mortgage
loans and the suitability of the applicable securities to their investment
objectives. See "Maturity and Prepayment Considerations" in this prospectus.
The yield on your securities also will be affected by Realized Losses or
shortfalls allocated to your securities. If Realized Losses and shortfalls are
not absorbed by securities subordinated to your securities or other items of
credit support, like a reserve fund, then you may have losses or delays in
payment on your securities. Losses on your securities will, in turn, reduce
distributions to you. Delays in payment will interrupt the timely distribution
of amounts owed to you. Losses or delays in payment will reduce your yield.
The Trusts
General
National Mortgage will pledge or sell, assign and transfer to your trust:
. single family or multifamily mortgage loans, manufactured housing
installment sales contracts, agency securities, private mortgage-
backed securities, or funding agreements,
. the asset proceeds account for the series,
. if applicable, a reserve fund and other funds and accounts for the
series,
. if applicable, a pre-funding account,
. if applicable, rights to additional assets,
. if applicable, all proceeds that may become due under insurance
policies for the series,
. if applicable, National Mortgage's rights under the servicing and
sales agreements, and
. all payments on these items, having an aggregate initial unpaid
principal balance at least equal to 100% of the original principal
amount of the securities.
Mortgage loans and manufactured housing installment sales contracts are
called "mortgage assets." Agency securities, private mortgage-backed securities
and funding agreements are called "financial assets." Mortgage assets and
financial assets, together with other items deposited in your trust, are called
"trust assets."
The trust assets for your series will be assigned and transferred to your
trust for the sole benefit of securityholders, except that some credit
enhancement items required by the rating agencies may also be assigned to trusts
for other series of securities or may secure other series of securities issued
by National Mortgage. Particular assets that might be assigned to trusts for
<PAGE>
other series or that secure other notes may include pool insurance policies,
special hazard insurance policies, mortgagor bankruptcy insurance, reserve funds
and additional assets.
Assignment of Trust Assets
In connection with the issuance of certificates, National Mortgage will
cause the trust assets to be sold, assigned and transferred to the trustee,
together with all principal and interest paid on the trust assets from the cut-
off date under a pooling and master servicing agreement. The trustee will, in
exchange for the trust assets, deliver to the order of National Mortgage
certificates of a series in authorized denominations registered in the names
National Mortgage requests, representing the beneficial ownership interest in
the trust assets. In connection with the issuance of notes by an issuer that is
an owner trust, National Mortgage will cause the Trust Assets to be sold,
assigned and transferred to the owner trustee, together with all principal and
interest paid on the trust assets from the cut-off date pursuant to a
contribution agreement between the issuer and National Mortgage. The issuer,
which can be either an owner trust or National Mortgage, will pledge all of its
rights in and to the trust assets to the trustee pursuant to an indenture. The
issuer will direct the trustee to deliver notes of a series secured by a first
priority security interest in the trust assets. The notes will be issued in
authorized denominations registered in the names requested by National Mortgage.
Each pool of trust assets will constitute a trust or trusts held by the trustee
for the benefit of the holders of the series of securities. Each mortgage
asset and financial asset included in your trust will be identified in a
schedule appearing as an exhibit to the pooling and master servicing agreement
or indenture. This schedule will include information as to the scheduled
principal balance of each mortgage asset and financial asset as of the cut-off
date and its interest rate, original principal balance and other information.
In addition, necessary steps will be taken by National Mortgage to have the
trustee -- for an offering of certificates -- or the issuer -- for an offering
of notes -- become the registered owner of each financial asset included in your
trust and to provide for all payments on each financial asset to be made
directly to your trustee. National Mortgage will deliver or cause to be
delivered to your trustee or the issuer the mortgage note endorsed to the order
of the trustee or the issuer, evidence of recording of the security instrument,
an assignment of each security instrument in recordable form naming the trustee
or the issuer as assignee, and certain other original documents evidencing or
relating to each mortgage loan. Within one year following the settlement date,
National Mortgage will cause the assignments of the mortgage loans to be
recorded in the appropriate public office for real property records wherever
necessary to protect the trustee's interest in the mortgage loans. In lieu of
recording the assignments of mortgage loans in a particular jurisdiction,
National Mortgage may deliver or cause to be delivered an opinion of local
counsel to the effect that recording is not required to protect the right, title
and interest of the trustee or the issuer in the mortgage loans. The original
mortgage documents will be held by the trustee, the issuer or a custodian,
except to the extent released to a servicer or the master servicer from time to
time in connection with servicing the mortgage loan. The servicer or the master
servicer, on behalf of the securityholders, will hold the original documents and
copies of documents and instruments concerning your trust's assets.
<PAGE>
National Mortgage will make certain representations and warranties in the
pooling and master servicing agreement or contribution agreement with respect to
the trust assets, including representations that it either is the owner of the
trust assets or has a first priority perfected security interest in the trust
assets. In addition, the seller of the mortgage may make certain
representations and warranties with respect to the trust assets in the sales
agreement. See "Sale and Servicing of Mortgage Assets -- Representations and
Warranties" in this prospectus.
National Mortgage's right to enforce representations and warranties of a
seller, servicer or master servicer will be assigned or made to the trustee
under the pooling and master servicing agreement or indenture. To the extent
that a seller, servicer or master servicer makes representations and warranties
regarding the characteristics of the trust assets, National Mortgage will
generally not also make these representations and warranties. In the event that
the representations and warranties of National Mortgage or the seller are
breached, and the breach or breaches adversely affect your interests in your
trust's assets, National Mortgage or the seller will be required to cure the
breach or, in the alternative, to substitute new trust assets, or to repurchase
the affected trust assets, generally at a price equal to the unpaid principal
balance of these trust assets, together with accrued and unpaid interest at the
asset's rate. In addition, in the event a servicer or the master servicer
breaches its representations and warranties and this breach adversely affects
your interests, the servicer or the master servicer generally will be required
to cure this breach or to repurchase the trust asset for the purchase price, net
of any unreimbursed advances of principal made by the servicer or the master
servicer and any outstanding servicing fees. Neither National Mortgage nor any
servicer or master servicer will be obligated to substitute trust assets or to
repurchase trust assets if a seller, master servicer or servicer defaults upon
its obligation to do so, and no assurance can be given that sellers, master
servicers or servicers will perform their obligations.
The Trust Assets
Your prospectus supplement describes the type of trust assets that will be
transferred to your trust. The trust assets may include
. Ginnie Mae certificates,
. Freddie Mac certificates,
. Fannie Mae certificates,
. mortgage-backed securities of private issuers,
. mortgage loans, which may include single family residential loans,
balloon loans, multifamily loans, high LTV loans and junior lien
mortgage loans,
. manufactured housing retail installment sales contracts,
. other assets evidencing interests in loans secured by residential
property, and
<PAGE>
. funding agreements with finance companies that are secured by mortgage
certificates, mortgage loans or other similar assets.
Ginnie Mae certificates are mortgage pass-through certificates as to which
the timely payment of principal and interest is guaranteed by Government
National Mortgage Association, a wholly owned corporate instrumentality of the
United States within HUD. Ginnie Mae's guaranty obligations are backed by the
full faith and credit of the United States. The mortgage loans underlying
Ginnie Mae certificates may consist of loans insured by FHA and secured by
mortgages on one- to four-family residential properties or multi-family
residential properties, loans partially guaranteed by VA, and other mortgage
loans eligible for inclusion in mortgage pools underlying Ginnie Mae
certificates.
Freddie Mac certificates are mortgage pass-through certificates as to which
the Federal Home Loan Mortgage Corporation has guaranteed the timely payment of
interest and, generally, the ultimate collection of principal. Freddie Mac is a
federally chartered corporation whose obligations are not guaranteed by the
United States or any of its agencies or instrumentalities. Each Freddie Mac
certificate will represent an undivided interest in a group of mortgage loans or
participations in mortgage loans secured by a first lien on one-to-four family
residential properties or multi-family residential properties.
Fannie Mae certificates are mortgage pass-through certificates as to which
the Federal National Mortgage Association has guaranteed the timely payment of
principal and interest. Fannie Mae is a federally chartered and privately owned
corporation whose obligations are not guaranteed by the United States or any of
its agencies or instrumentalities. Each Fannie Mae certificate will represent
an undivided interest in a pool of mortgage loans formed by Fannie Mae. Each
mortgage loan will be secured by a first lien on one- to four-family residential
properties or multifamily residential properties.
Although payment of principal and interest on the Ginnie Mae certificates,
Freddie Mac certificates and Fannie Mae certificates, if any, assigned to your
trust is guaranteed by Ginnie Mae, Freddie Mac and Fannie Mae, respectively,
your securities do not represent an obligation of or an interest in National
Mortgage or any of its affiliates and are not guaranteed or insured by Ginnie
Mae, Freddie Mac, Fannie Mae, National Mortgage or any of their affiliates, or
any other person.
The mortgage loans included in your trust will be secured by first or
junior liens on one-family, two- to four-family residential property and may
also include multifamily residential loans, high LTV loans, and cooperative
loans evidenced by promissory notes secured by a lien or the shares issued by
private, non-profit, cooperative housing corporations and on proprietary leases
or occupancy agreements granting exclusive rights to occupy specific cooperative
dwellings. Regular monthly installments of principal and interest on each
mortgage loan or contract paid by the obligor will be collected by the servicer
or master servicer and ultimately remitted to the trustee.
The mortgaged property securing mortgage assets may consist of
<PAGE>
. detached homes,
. units having a common wall,
. units located in condominiums, and
. other types of homes or units set forth in the accompanying prospectus
supplement including but not limited to multifamily residential
complexes and cooperative units evidenced by a stock certificate.
Each detached or attached home will be constructed on land owned in fee
simple by the obligor or on land leased by the obligor for a term at least one
year greater than the term of the applicable mortgage asset. Attached homes may
consist of duplexes, triplexes and fourplexes or townhouses. The mortgage
assets included in your trust may be secured by mortgaged properties that are
owner-occupied, are owned by investors or serve as second residences or vacation
homes.
The mortgage assets included in your trust may provide for
. the payment of interest and full repayment of principal in level
monthly payments with a fixed rate of interest computed on the
declining principal balance,
. may provide for periodic adjustments to the rate of interest to equal
the sum of a fixed margin and an index,
. may consist of mortgage assets for which funds have been provided to
reduce the obligor's monthly payments during the early period of the
mortgage assets,
. may provide for the one-time reduction of the asset rate,
. may provide for
. monthly payments during the first year that are at least
sufficient to pay interest due, and
. an increase in the monthly payment in subsequent years at a
predetermined rate resulting in full repayment over a shorter
term than the initial amortization schedule,
. may include graduated payment mortgage assets, which allow for
payments during a portion of their term which are or may be less than
the amount of interest due on the unpaid principal balance of the
mortgage assets, and which unpaid interest will be added to the
principal balance and will be paid, together with accrued interest, in
the later years,
<PAGE>
. may include mortgage assets on which only interest is payable until
maturity, as well as mortgage assets that provide for the amortization
of principal over a certain period, although all remaining principal
is due at the end of a shorter period,
. may include mortgage assets that provide for obligor payments to be
made on a bi-weekly basis, and
. may include such other types of mortgage assets as are described in
the accompanying prospectus supplement.
Your trust may contain contracts secured by manufactured homes. These
contracts typically will provide for regular monthly payments that will amortize
their principal amount over the term of the contract, typically ten to twenty
years. Interest may be fixed or adjustable based upon an index. Unless the
manufactured home is affixed to the real estate, the security interest in the
manufactured home will be governed by state motor vehicle titling laws or the
state's Uniform Commercial Code. Manufactured homes may consist of either
"single-wide" or "double-wide" units. Additional information about the contracts
and manufactured homes included in your trust is contained in the accompanying
prospectus supplement.
Your trust also may include other trust assets consisting of conventional
mortgage pass-through certificates or collateralized mortgage obligations
representing interests in the types of mortgage assets described in this
section, more fully described in the accompanying prospectus supplement.
Repurchase of Converted Mortgage Assets
Your trust may include mortgage assets that are convertible from adjustable
interest rates to fixed interest rates. Generally, the converted mortgage assets
will be purchased from your trust at a purchase price equal to their unpaid
principal balance, plus 30 days of accrued interest. A servicer or the master
servicer will be obligated to deposit the amount of the purchase price in an
account established for this purpose and the purchase price will be treated as a
prepayment of the mortgage asset. An obligation of a servicer or the master
servicer to repurchase converted mortgage assets may be supported by cash,
letters of credit, third party guarantees or other similar arrangements.
Substitution of Trust Assets
National Mortgage or the seller may, within three months of the settlement
date, deliver to the trustee other trust assets in substitution for any one or
more trust assets initially included in your trust. In general, substitute trust
assets must, on the date of substitution,
. have an unpaid principal balance not greater than, and not more than
$10,000 less than, the unpaid principal balance of the deleted trust
asset,
. have an asset rate not less than, and not more than one percentage
point in excess of, the asset rate of the deleted trust asset,
<PAGE>
. have a net asset rate equal to the net asset rate of the deleted trust
asset,
. have a remaining term to maturity not greater than, and not more than
one year less than, that of the deleted trust asset, and
. comply with each representation and warranty relating to the trust
assets and, if the seller is effecting the substitution, comply with
each representation and warranty set forth in the transfer agreement
conveying the trust assets to National Mortgage.
In addition, only like-kind collateral may be substituted. If mortgage
assets are being substituted, the substitute mortgage asset must have a loan-to-
value ratio as of the first day of the month in which the substitution occurs
equal to or less than the loan-to-value ratio of the deleted mortgage asset on
this date, using the value at origination, and after taking into account the
payment due on this date. Further, no adjustable-rate loan may be substituted
unless the deleted mortgage asset is an adjustable-rate loan, in which case, the
substituted mortgage asset must also
. have a minimum lifetime asset rate that is not less than the minimum
lifetime asset rate on the deleted mortgage asset,
. have a maximum lifetime asset rate that is not less than the maximum
lifetime asset rate on the deleted mortgage asset,
. provide for a lowest possible net asset rate that is not lower than
the lowest possible net asset rate for the deleted mortgage asset and
a highest possible net asset rate that is not lower than the highest
possible net asset rate for the deleted mortgage asset,
. have a gross margin not less than the gross margin of the deleted
mortgage asset,
. have a periodic rate cap equal to the periodic rate cap on the deleted
mortgage asset,
. have a next interest adjustment date that is the same as the next
interest adjustment date for the deleted mortgage asset or occurs not
more than two months prior to the next interest adjustment date for
the deleted mortgage asset, and
. not be a mortgage asset convertible from an adjustable rate to a fixed
rate unless the deleted mortgage asset is so convertible.
In the event that more than one mortgage asset is substituted for a deleted
mortgage asset, one or more of the foregoing characteristics may be applied on a
weighted average basis as described in the pooling and master servicing
agreement or indenture.
Funding Agreements
National Mortgage may enter into a funding agreement with a limited-purpose
finance subsidiary or affiliate of an operating company. This finance company
will be authorized to engage in any business activities other than the financing
and sale of mortgage-related assets.
<PAGE>
Pursuant to a funding agreement
. National Mortgage will lend a finance company a portion of the
proceeds from the sale of your securities and the finance company will
pledge to National Mortgage trust assets having an aggregate unpaid
principal balance or asset value equal to at least the amount of the
loan, and
. the finance company will agree to repay this loan by causing payments
on your trust's assets to be made to the trustee, as assignee of
National Mortgage, in amounts as are necessary to pay accrued interest
on this loan and to amortize the principal amount of the loan.
A finance company need not provide additional collateral to secure the loan
pursuant to a funding agreement subsequent to the issuance of your securities.
Unless National Mortgage, a servicer, the master servicer or another
organization designated in the accompanying prospectus supplement exercises its
option to terminate your trust and retire your securities, or a finance company
defaults, the finance company's loan may not be prepaid other than as a result
of prepayments on the pledged trust assets. If the finance company attempts to
prepay its loan, the loan would only be deemed prepaid in full if the finance
company paid National Mortgage an amount sufficient to enable National Mortgage
to purchase other trust assets comparable in yield and maturity to the finance
company's trust assets pledged under the funding agreement. The trustee then
could either
. purchase such other trust assets and substitute them for the trust
assets pledged by the finance company, to the extent that this
purchase and substitution did not adversely affect the tax treatment
of your securities, or
. deposit the amount of the finance company's prepayment in the asset
proceeds account.
In the event of a default under a funding agreement, the trustee will have
recourse to the finance company for the benefit of the securityholders,
including the right to foreclose upon the trust assets securing that funding
agreement. The participating finance companies will be limited-purpose finance
entities. It is unlikely that a defaulting finance company will have any
significant assets except those pledged to your trust and those that secure
other securities. The trustee has no recourse to assets pledged to secure other
securities except to the limited extent that funds generated by those assets
exceed the amount required to pay those securities and are released from the
lien securing the other securities and returned to a finance company. For that
reason, you should make your investment decisions on the basis that your
securities have rights only to the trust assets of your trust.
In the event of a default under a funding agreement and the sale by the
trustee of the trust assets securing the obligations of the finance company
under the funding agreement, the trustee may distribute principal in an amount
equal to the unpaid principal balance of the trust assets so
<PAGE>
liquidated ratably among all classes of securities within your series, or in
another manner noted in the accompanying prospectus supplement.
Pre-Funding
If specified in the accompanying prospectus supplement, a portion of the
issuance proceeds of your securities (the "Pre-Funded Amount"}) will be
deposited in an account to be established with the trustee, which will be used
to acquire additional trust assets from time to time during the time period
specified in the prospectus supplement (the "Pre-Funding Period"}). Prior to the
investment of the Pre-Funded Amount in additional trust assets, the Pre-Funded
Amount may be invested in one or more eligible investments. Any eligible
investment must mature no later than the business day prior to the next
distribution date.
During any Pre-Funding Period, National Mortgage will be obligated, subject
only to availability, to transfer to your trust additional trust assets from
time to time during the Pre-Funding Period. Additional trust assets will be
required to satisfy eligibility criteria more fully set forth in the prospectus
supplement. This eligibility criteria will be consistent with the eligibility
criteria of the trust assets included in your trust on the settlement date, but
exceptions may expressly be stated in the prospectus supplement.
Use of a Pre-Funding Account with respect to any issuance of securities
will be conditioned upon the following:
. the Pre-Funding Period will not exceed three months from the
settlement date,
. the additional assets to be acquired during the Pre-Funding Period
will satisfy the same underwriting standards, representations and
warranties as the trust assets included in the trust on the settlement
date, although additional criteria may also be required to be
satisfied, as described in the prospectus supplement ,
. the Pre-Funded Amount will not exceed 25% of the principal amount of
the securities issued,
. the Pre-Funded Amount will not exceed 25% of the scheduled principal
balance of the trust assets, inclusive of the Pre-Funded Amount, as of
the cut-off date, and
. the Pre-Funded Amount shall be invested in eligible investments.
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of additional trust assets by the end of the
Pre-Funding Period, the securityholders then entitled to receive distributions
of principal will receive a prepayment of principal in an amount equal to the
related Pre-Funded Amount remaining in the Pre-Funding Account on the first
distribution date following the end of the Pre-Funding Period. Any prepayment of
principal would have an adverse effect on the yield to maturity of securities
purchased at a premium, and would expose securityholders to the risk that
alternative investments of equivalent value may not be available at a later
time.
<PAGE>
Information regarding additional assets acquired by your trust during the
Pre-Funding Period comparable to the disclosure regarding the assets in the
prospectus supplement will be filed on a Current Report in Form 8-K within
fifteen days following the end of the Pre-Funding Period.
Asset Proceeds Account
Payments on the mortgage assets will be remitted to the servicer custodial
account or master servicer custodial account and then to the asset proceeds
account for your series, net of amounts required to pay servicing fees and
amounts included in any reserve fund. All payments received on financial assets
will be remitted to the asset proceeds account. All or a portion of the amounts
in the asset proceeds account, together with reinvestment income, if payable to
you, will be available for the payment of master servicing and administrative
fees and distributions of principal and interest on your securities in
accordance with the allocations set forth in the accompanying prospectus
supplement.
Reserve Fund or Accounts
National Mortgage may deposit or cause to be deposited cash, certificates
of deposit or letters of credit in reserve funds or accounts. These accounts may
be used by the trustee to make distributions of principal or interest on your
securities to the extent funds are not otherwise available, if so provided in
the pooling and master servicing agreement or indenture and described in the
accompanying prospectus supplement. The reserve funds will be maintained in
trust but may or may not constitute trust assets of your trust. National
Mortgage may have certain rights on a distribution date to cause the trustee to
make withdrawals from the reserve fund and to pay these amounts in accordance
with the instructions of National Mortgage, as specified in the accompanying
prospectus supplement, to the extent that these funds are no longer required to
be maintained for you.
Financial Guarantee Insurance Policy
If specified in the accompanying prospectus supplement, your series of
securities may have the benefit of one or more financial guarantee insurance
policies provided by one or more insurers. Financial guarantee insurance may
guarantee 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 accompanying prospectus supplement. A copy of the
financial guarantee insurance policy for your securities, if any, will be filed
with the SEC as an exhibit to a Current Report on Form 8-K within 15 days of
issuance of your securities.
Mortgage Insurance on the Mortgage Assets
Conventional mortgage loans included in your trust may be covered by
primary mortgage insurance policies or one or more mortgage pool insurance
policies or any combination. In lieu of mortgage insurance policies, additional
trust assets may be delivered to the trustee to secure the timely payment of
principal and interest on the mortgage loans. FHA loans and VA loans
<PAGE>
included in your trust will be covered by FHA insurance or VA guarantees and may
be covered by a pool insurance policy.
Conventional mortgage loans that have initial loan-to-value ratios of
greater than 80% will, to the extent specified in the accompanying prospectus
supplement, be covered by primary mortgage insurance policies. PMI policies will
provide coverage on at least the amount of the mortgage loan in excess of 75% of
the original fair market value of the mortgaged properties, and will remain in
force until the principal balance of the mortgage loan is reduced to 80% of its
original fair market value or, with the consent of the master servicer and
mortgage insurer, after the policy has been in effect for more than two years if
the loan-to-value ratio of the mortgage loan has declined to 80% or less based
upon its current fair market value. The initial loan-to-value ratio of any
mortgage loan represents the ratio of the principal amount of the mortgage loan
outstanding at the origination divided by the fair market value of the mortgaged
property. The fair market value of the mortgaged property securing a mortgage
loan is the lesser of the purchase price paid by the obligor or the appraised
value of the mortgaged property at origination. Some mortgage loans also may be
covered by PMI and some PMI will, subject to their provisions, provide full
coverage against any loss sustained by reason of nonpayments by the obligors.
The pool insurance policy or policies for any series of securities will
generally be designed to provide coverage for all conventional mortgage loans
that are not covered by full coverage insurance policies. However, the mortgage
insurance policies will not insure against some losses sustained in the event of
a personal bankruptcy of the obligor under a mortgage asset. See "Certain Legal
Aspects of Mortgage Assets -- Anti-Deficiency Legislation and Other Limitations
on Lenders" in this prospectus.
The mortgage insurance policies will not provide coverage against hazard
losses. Each mortgage loan will be covered by a standard hazard insurance policy
but these policies typically will 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 full replacement cost of the
losses. Further, to the extent that mortgage loans are covered by a special
hazard insurance policy, the special hazard insurance policy will not cover all
risks, and the coverage of the policy will be limited. Not all hazard risks will
be covered and losses may reduce distributions to you.
To the extent necessary to restore or prevent a reduction of the rating
assigned by a rating agency, a servicer or the master servicer will use its
reasonable best efforts to replace a mortgage insurance policy with a new
mortgage insurance policy issued by an insurer whose claims paying ability is
acceptable to each rating agency.
Primary Mortgage Insurance
Each PMI policy covering mortgage assets in your trust will be issued by a
mortgage insurer under its master policy. National Mortgage and the trustee, as
assignee of the lender under each mortgage asset, generally will be the insureds
or assignees of record, as their interests may appear, under each PMI policy.
The servicer or master servicer will cause a PMI policy to be maintained in full
force and effect on each mortgage asset requiring this insurance and to act
<PAGE>
on behalf of the insured concerning all actions required to be taken by the
insured under each PMI policy.
The amount of a claim for benefits under a PMI policy will consist of the
insured portion of the unpaid principal amount of the covered mortgage asset and
accrued and unpaid interest and reimbursement of some expenses, less
. all rents or other payments collected or received by the insured --
other than the proceeds of hazard insurance -- that are derived from
or are in any way related to the mortgaged property,
. hazard insurance proceeds in excess of the amount required to restore
the mortgaged property and which have not been applied to the payment
of the mortgage asset,
. amounts expended but not approved by the mortgage insurer,
. claim payments previously made by the mortgage insurer, and
. unpaid premiums.
As conditions precedent to the filing of or payment of a claim under a PMI
policy, the insured will generally be required to, in the event of default by
the obligor
. advance or discharge
. all hazard insurance premiums and
. as necessary and approved in advance by the mortgage
insurer,
* real estate property taxes,
* all expenses required to preserve, repair and prevent
waste to the mortgaged property so as to maintain the
mortgaged property in at least as good a condition as
existed at the effective date of the PMI policy,
ordinary wear and tear excepted,
* property sales expenses,
* any outstanding liens on the mortgaged property, and
* foreclosure costs, including court costs and reasonable
attorneys' fees,
. in the event of any physical loss or damages to the mortgaged
property, have restored and repaired the mortgaged property to at
least as good a condition as existed at the effective date of the PMI
policy, ordinary wear and tear excepted, and
<PAGE>
. tender to the mortgage insurer good and merchantable title to and
possession of the mortgaged property.
The PMI policy may not reimburse the insured for attorneys' fees on a
foreclosed mortgage asset in excess of 3% of the unpaid balance of that mortgage
asset. As a result, legal expenses in excess of this reimbursement limitation
may be charged as a loss on your securities.
Other provisions and conditions of each PMI policy generally will provide
that:
. no change may be made in the terms of the mortgage asset without the
consent of the mortgage insurer,
. written notice must be given to the mortgage insurer within 10 days
after the insured becomes aware that an obligor is delinquent in the
payment of a sum equal to the aggregate of two scheduled payments due
under the mortgage asset or that any proceedings affecting the
obligor's interest in the mortgaged property have been commenced, and
then the insured must report monthly to the mortgage insurer the
status of any affected mortgage loan until the mortgage loan is
brought current, such proceedings are terminated or a claim is filed,
. the mortgage insurer will have the right to purchase the mortgage loan
at any time subsequent to the 10 days' notice described in the
immediately preceding bullet point and prior to the commencement of
foreclosure proceedings, at a price equal to the unpaid principal
balance of the mortgage loan plus accrued and unpaid interest and
reimbursable amounts expended by the insured for the real estate taxes
and hazard insurance on the mortgaged property for a period not
exceeding 12 months and less the sum of any claim previously paid
under the policy and any due and unpaid premium with respect to the
policy,
. the insured must commence proceedings at certain times specified in
the policy and diligently proceed to obtain good and merchantable
title to and possession of the mortgaged property,
. the insured must notify the mortgage insurer of the institution of any
proceedings, provide it with copies of documents relating thereto,
notify the mortgage insurer of the price specified in the third bullet
point at least 15 days prior to the sale of the mortgaged property by
foreclosure, and bid this amount unless the mortgage insurer specifies
a lower or higher amount,
. the insured may accept a conveyance of the mortgaged property in lieu
of foreclosure with written approval of the mortgage insurer, provided
that the ability of the insured to assign specified rights to the
mortgage insurer are not impaired or the specified rights of the
mortgage insurer are not adversely affected,
. the insured agrees that the mortgage insurer has issued the policy in
reliance upon the correctness and completeness of the statements
contained in the application for the
<PAGE>
policy and in the appraisal, plans and specifications and other
exhibits and documentation submitted therewith or at any time
thereafter,
. under some policies, the mortgage insurer will not pay claims
involving or arising out of dishonest, fraudulent, criminal or
knowingly wrongful acts -- including error or omission -- by some
persons, or claims involving or arising out of the negligence of
persons if this negligence is material either to the acceptance of the
risk or to the hazard assumed by the mortgage insurer, and
. the insured must comply with other notice provisions in the policy.
As noted below, a seller and the servicer of mortgage assets must represent
and warrant that each mortgage insurance policy is the valid and binding
obligation of the mortgage insurer and that each mortgage insurance application
was complete and accurate in all material respects when made. See "Sale and
Servicing of Mortgage Assets -- Representations and Warranties" in this
prospectus.
Generally, the mortgage insurer will be required to pay to the insured
either the insured percentage of the loss or, at its option under some of the
PMI policies, the sum of the delinquent scheduled payments plus any advances
made by the insured, both to the date of the claim payment, and thereafter,
scheduled payments in the amount that would have become due under the mortgage
asset if it had not been discharged plus any advances made by the insured until
the earlier of the date the mortgage asset would have been discharged in full if
the default had not occurred, or an approved sale. Any rents or other payments
collected or received by the insured that are derived from or are in any way
related to the mortgaged property will be deducted from any claim payment.
Pool Insurance
If any mortgage asset is not covered by a full coverage insurance policy or
other credit enhancement, National Mortgage may obtain a pool insurance policy
to cover loss by reason of default by the obligors of the mortgage assets
included in your trust to the extent not covered by a PMI policy. The master
servicer must maintain the pool insurance policies, if any, for your series and
to present or cause the servicers to present claims to the insurer on behalf of
National Mortgage, the trustee and you.
The amount of the pool insurance policy, if any, is specified in the
accompanying prospectus supplement. A pool insurance policy will not be a
blanket policy against loss, because claims may only be made for particular
defaulted mortgage assets and only upon satisfaction of certain conditions.
The pool insurance policy generally will provide that before the payment of
any claim the insured will be required
. to advance hazard insurance premiums on the mortgaged property
securing the defaulted mortgage asset,
<PAGE>
. to advance, as necessary and approved in advance by the related
insurer,
. real estate property taxes,
. all expenses required to preserve and repair the mortgaged
property, to protect the mortgaged property from waste, so that
the mortgaged property is in at least as good a condition as
existed on the date when coverage under the pool insurance policy
with respect to the mortgaged property first became effective,
ordinary wear and tear excepted,
. property sales expenses,
. any outstanding liens on the mortgaged property, and
. foreclosure costs including court costs and reasonable attorneys'
fees, and
. if there has been physical loss or damage to the mortgaged property,
to restore the mortgaged property to its condition -- ordinary wear
and tear excepted -- as of the issue date of the pool insurance
policy.
It will be a condition precedent to the payment of claims under the pool
insurance policy that the insured maintain a PMI policy acceptable to the pool
insurer on all mortgage assets that have original loan-to-value ratios in excess
of 80%. If these conditions are satisfied, the pool insurer will pay to the
insured the amount of the loss, which will equal
. the amount of the unpaid principal balance of the mortgage asset
immediately prior to the approved sale of the mortgaged property,
. the amount of the accumulated unpaid interest on the mortgage asset to
the date of claim settlement at the contractual rate of interest, and
. reimbursable amounts advanced by the insured described above, less
payments such as the proceeds of any prior approved sale and any
primary insurance policies.
The pool insurance policy may not reimburse the insured for attorneys' fees
on a foreclosed mortgage asset in excess of 3% of the unpaid balance of that
mortgage asset. As a result, legal expenses in excess of the reimbursement
limitation may be charged as a loss against your securities. An approved sale is
. a sale of the mortgaged property acquired by the insured because of a
default by the obligor, to which the pool insurer has given prior
approval,
. a foreclosure or trustee's sale of the mortgaged property at a price
exceeding the minimum amount specified by the pool insurer,
. the acquisition of the mortgaged property under the PMI policy by the
mortgage insurer, or
<PAGE>
. the acquisition of the mortgaged property by the pool insurer.
If the pool insurer elects to take title to the mortgaged property, the
insured must, as a condition precedent to the payment of a loss, provide the
pool insurer with good and merchantable title to the mortgaged property. If any
property securing a defaulted mortgage asset is damaged and the proceeds, if
any, from the standard hazard insurance policy or the applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the pool insurance policy, the servicer or
the master servicer of the mortgage asset will not be required to expend its own
funds to restore the damaged mortgaged property unless it determines and the
master servicer agrees that the restoration will increase the proceeds to your
trust on liquidation of the mortgage asset after reimbursement of the servicer
or the master servicer for its expenses and that these expenses will be
recoverable by it through liquidation proceeds or insurance proceeds.
The pool insurance policies will generally not insure -- and many primary
insurance policies may not insure -- against loss sustained by reason of a
default arising from, among other things,
. fraud or negligence in the origination or servicing of a mortgage
asset, including misrepresentation by the obligor or the originator,
. failure to construct mortgaged property in accordance with plans and
specifications and
. a claim regarding a defaulted mortgage asset occurring when the
servicer of the mortgage asset, at the time of default or later, was
not approved by the mortgage insurer.
A failure of coverage attributable to one of the foregoing events might
result in a breach of the seller's or servicer's representations and warranties.
This occurrence might give rise to an obligation on the part of the seller or
servicer to purchase the defaulted mortgage asset if the breach cannot be cured.
In addition, if a terminated servicer has failed to comply with its obligation
to purchase a mortgage loan upon which coverage under a pool insurance policy
has been denied on the grounds of fraud, dishonesty or misrepresentation - or if
the servicer has no such obligation -- the master servicer may be obligated to
purchase the mortgage asset. See "Sale and Servicing of Mortgage Assets --
General" and " -- Maintenance of Insurance Policies; Claims Thereunder and Other
Realization Upon Defaulted Mortgage Assets" in this prospectus.
The original amount of coverage under any pool insurance policy assigned to
your trust will be reduced over the life of your securities by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the pool insurer upon disposition of all foreclosed mortgaged property. The
amount of claims paid includes some expenses incurred by the servicer or the
master servicer of the defaulted mortgage asset, as well as accrued interest on
delinquent mortgage assets to the date of payment of the claim.
<PAGE>
The net amounts realized by the pool insurer will depend primarily on the
market value of the mortgaged property securing the defaulted mortgage asset.
The market value of the mortgaged property will be determined by a variety of
economic, geographic, environmental and other factors and may be affected by
matters that were unknown and could not reasonably be anticipated at the time
the original loan was made.
If aggregate net claims paid under a pool insurance policy reach the
original policy limit, coverage under the pool insurance policy will lapse and
any further losses may affect adversely distributions to you. In addition,
unless the servicer or master servicer determine that an advance on a delinquent
mortgage asset is recoverable from the proceeds of the liquidation of the same
mortgage asset or otherwise, neither the servicer nor the master servicer must
make the advance because the advance would not be ultimately recoverable to it
from either the pool insurance policy or from any other source. See "Sale and
Servicing of Mortgage Assets -- Advances" in this prospectus.
The original amount of coverage under the pool insurance policy assigned to
your trust also may be reduced or canceled to the extent each rating agency
confirms that the reduction or cancellation will not result in the lowering of
the rating of your securities.
A pool insurance policy may insure against losses on the mortgage assets
assigned to trusts for other series of securities or that secure other mortgage-
backed securities issued by National Mortgage or one of its affiliates.
However, the extension of coverage -- and corresponding assignment of the pool
insurance policy -- to any other series or other securities does not result in
the downgrading of the credit rating of your securities.
Standard Hazard Insurance Policies
The servicer must maintain a standard hazard insurance policy covering each
mortgaged property, to the extent described in the accompanying prospectus
supplement. The coverage amount of each standard hazard insurance policy will be
at least equal to the lesser of the outstanding principal balance of the
mortgage asset, or the full replacement value of the improvements on the
mortgaged property. All amounts collected by the servicer or master servicer
under any standard hazard insurance policy -- less amounts to be applied to the
restoration or repair of the mortgaged property and other amounts necessary to
reimburse the servicer or master servicer for previously incurred advances or
approved expenses, which may be retained by the servicer or master servicer --
will be deposited to the custodial account or the asset proceeds account.
The standard hazard insurance policies will provide for coverage at least
equal to the applicable state standard form of fire insurance policy with
extended coverage. In general, the standard form of fire and extended coverage
policy will cover physical damage to, or destruction of, the improvements on the
mortgaged property caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to customary conditions and
exclusions. Because the mortgage assets' standard hazard insurance policies will
be underwritten by different insurers and will cover mortgaged property located
in various states, these policies will not contain identical terms and
conditions. The basic terms generally will be determined by
<PAGE>
state law and generally will be similar. Most policies typically will not cover
any physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement -- including
earthquakes, landslides and mudflows--, nuclear reaction, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. This list is merely indicative of certain kinds of uninsured risks
and is not intended to be all-inclusive. When mortgaged properties are located
in a flood area identified by HUD pursuant to the National Flood Insurance Act
of 1968 the servicer or master servicer, as the case may be, will cause to be
maintained flood insurance.
The standard hazard insurance policies covering mortgaged properties
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry insurance of a specified percentage -- generally
80% to 90% -- of the full replacement value of the dwellings, structures and
other improvements on the mortgaged property in order to recover the full amount
of any partial loss. If the insured's coverage falls below this percentage, the
clause will provide that the insurer's liability in the event of partial loss
will not exceed the greater of the actual cash value -- the replacement cost
less physical depreciation -- of the dwellings, structures and other
improvements damaged or destroyed or the proportion of the loss, without
deduction for depreciation, as the amount of insurance carried bears to the
specified percentage of the full replacement cost of the dwellings, structures
and other improvements.
Any losses incurred with respect to mortgage assets due to uninsured risks
- -- including earthquakes, mudflows and floods -- or insufficient hazard
insurance proceeds may reduce the value of the assets included in your trust to
the extent these losses are not covered by the special hazard insurance policy
and could affect distributions to you.
The master servicer will not require that a standard hazard or flood
insurance policy be maintained for any cooperative loan. Generally, the
cooperative itself is responsible for maintenance of hazard insurance for the
property owned by the cooperative and the tenant-stockholders of that
cooperative do not maintain individual hazard insurance policies. To the extent,
however, a cooperative and the related borrower on a cooperative note do not
maintain such insurance or do not maintain adequate coverage or any insurance
proceeds are not applied to the restoration of the damaged property, damage to
the obligor's cooperative dwelling or the cooperative's building could
significantly reduce the value of the collateral securing the cooperative note.
Special Hazard Insurance Policy
A special hazard insurance policy may be obtained with respect to the
mortgage assets included in your trust. A special hazard insurance policy
generally will protect you from
. loss by reason of damage to mortgaged property underlying defaulted
mortgage assets included in your trust caused by certain hazards --
including vandalism and earthquakes and, except where the obligor is
required to obtain flood insurance, floods and mudflows -- not covered
by the standard hazard insurance policies, and
<PAGE>
. loss from partial damage to the mortgaged property securing the
defaulted mortgage assets caused by reason of the application of the
coinsurance clause contained in the applicable standard hazard
insurance policies.
Any special hazard insurance policy, however, will not cover losses
occasioned by war, nuclear reaction, nuclear or atomic weapons, insurrection or
normal wear and tear. Coverage under the special hazard insurance policy will
be at least equal to the amount specified in the accompanying prospectus
supplement.
The special hazard insurance policy will provide that when there has been
damage to mortgaged property securing a defaulted mortgage asset and this damage
is not covered by the standard hazard insurance policy maintained by the obligor
or the servicer or master servicer, the special hazard insurer will pay the
lesser of
. the cost of repair of the mortgaged property, or
. upon transfer of the property to it, the unpaid principal balance of
the mortgage asset at the time of the acquisition of the mortgaged
property, plus accrued interest to the date of claim settlement --
excluding late charges and penalty interest --, and certain other
expenses.
No claim may be validly presented under a special hazard insurance policy
unless
. hazard insurance on the mortgaged property securing the defaulted
mortgage asset has been kept in force and other reimbursable
protection, preservation and foreclosure expenses have been paid, all
of which must be approved in advance as necessary by the insurer, and
. the insured has acquired title to the mortgaged property as a result
of default by the obligor.
If the sum of the unpaid principal amount plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by this amount less
any net proceeds from the sale of the mortgaged property. Any amount paid as
the cost of repair of the mortgaged property will reduce coverage by this
amount.
The master servicer will maintain the special hazard insurance policy in
full force and effect. The master servicer also is required to present claims,
on behalf of the trustee, for all losses not otherwise covered by the standard
hazard insurance policies and take all reasonable steps necessary to permit
recoveries on these claims. See "Sale and Servicing of Mortgage Assets" in this
prospectus.
Partially or entirely in lieu of a special hazard insurance policy,
National Mortgage may deposit or cause to be deposited cash, securities, a
certificate of deposit, a letter of credit or any other instrument acceptable to
each rating agency in an amount and for a term acceptable to each
<PAGE>
rating agency. This deposit will be credited to a special hazard fund or similar
fund, including a fund that may also provide coverage for mortgagor bankruptcy
losses, and the trustee will be permitted to draw on the fund to recover losses
that would otherwise be covered by a special hazard insurance policy. A special
hazard insurance policy or special hazard fund may insure against losses on
mortgage loans assigned to trusts for other series of securities or that secure
other mortgage-backed securities obligations issued by National Mortgage or one
of its affiliates. However, the extension of coverage -- and the corresponding
assignment of the special hazard insurance policy -- to any other series or
other securities does not result in the downgrading of the credit rating of any
outstanding securities of your series. National Mortgage may also elect to
insure against special hazard losses by the delivery of additional assets to
your trust rather than through a special hazard insurance policy or special
hazard fund.
Mortgagor Bankruptcy Insurance on the Mortgage Assets
In the event of a personal bankruptcy of an obligor, the bankruptcy court
may establish the value of the mortgaged property of the obligor at an amount
less than the then outstanding principal balance of the mortgage asset secured
by the mortgaged property. The amount of the secured debt could be reduced to
this value, and the holder of the mortgage asset would become an unsecured
creditor to the extent the outstanding principal balance of mortgage asset
exceeds the value so assigned to the mortgaged property by the bankruptcy court.
In addition, other modifications of the terms of a mortgage asset can result
from a bankruptcy proceeding. See "Certain Legal Aspects of Mortgage Assets --
Anti-Deficiency Legislation and Other Limitations on Lenders" in this
prospectus.
Losses resulting from a bankruptcy proceeding affecting mortgage assets may
be covered by mortgagor bankruptcy insurance or any other instrument that will
not result in a down-grading of the credit rating of your securities by any
rating agency. The amount and term of any mortgagor bankruptcy insurance, which
will be specified in the accompanying prospectus supplement, must be acceptable
to each rating agency rating your securities. Subject to the terms of the
mortgagor bankruptcy insurance, the issuer may have the right to purchase any
mortgage asset if a payment or drawing has been made or may be made for an
amount equal to the outstanding principal amount of the mortgage asset plus
accrued and unpaid interest. In the alternative, partially or entirely in lieu
of mortgagor bankruptcy insurance, to the extent specified in the accompanying
prospectus supplement, National Mortgage may deposit or cause to be deposited
cash, securities, a certificate of deposit, a letter of credit or any other
instrument acceptable to each rating agency rating your securities in an initial
amount acceptable to each rating agency. This deposit will be credited to a
mortgagor bankruptcy fund or similar fund or account, including a fund or
account that may also provide coverage for special hazard losses, and the
trustee will be able to draw on the fund or account to recover losses that would
be insured against by mortgagor bankruptcy insurance. The mortgagor bankruptcy
fund or account may or may not constitute a part of your trust. The amount of
the mortgagor bankruptcy insurance or deposit may be reduced as long as any
reduction will not result in a reduction of the credit rating of any securities
in your series. The mortgagor bankruptcy insurance or any mortgagor bankruptcy
fund may insure against losses on mortgage assets assigned to trusts for other
series of securities or that secure other mortgage-backed securities issued by
National
<PAGE>
Mortgage or one of its affiliates. However, the extension of coverage
- -- and corresponding assignment of the mortgagor bankruptcy insurance or
mortgagor bankruptcy fund -- to any other series or securities does not result
in the downgrading of the credit rating of any securities of your series.
National Mortgage may elect to deposit or cause to be deposited additional
assets to your trust in lieu of obtaining mortgagor bankruptcy insurance or
establishing a mortgagor bankruptcy fund.
Other Insurance
If the trust assets for your series include multifamily mortgage loans, the
obligors generally will be required to maintain additional types of insurance,
including but not limited to boiler explosion insurance and business
interruption insurance. These insurance policies, if any, will be described in
the accompanying prospectus supplement.
Delivery of Additional Assets
Rather than providing pool insurance, special hazard insurance, mortgagor
bankruptcy insurance or other insurance, National Mortgage may assign to your
trust non-recourse guaranties of the timely payment of principal and interest on
trust assets included in your trust secured by other assets satisfactory to each
rating agency rating your series. National Mortgage may also assign or
undertake to deliver such other assets to your trust by other means. Other
assets may consist of additional mortgage assets, additional financial assets,
letters of credit or other eligible investments.
Investment of Funds
Funds deposited in or remitted to the asset proceeds account, any reserve
fund and any other funds and accounts for a series are to be invested by the
trustee, as directed by National Mortgage, in certain investments approved by
the rating agencies rating your series. Eligible investments may include
. obligations of the United States or any of its agencies, provided the
obligations are backed by the full faith and credit of the United
States,
. within certain limitations, securities bearing interest or sold at a
discount issued by any corporation, which are rated in the rating
category required to support the then highest rating assigned to any
class of securities in your series,
. commercial paper which is then rated in the commercial paper rating
category required to support the then highest rating assigned to any
class of securities in your series,
. demand and time deposits, certificates of deposit, bankers'
acceptances and federal funds sold by any depository institution or
trust company incorporated under the laws of the United States or of
any state, provided that either the senior debt obligations or
commercial paper of the depository institution or trust company -- or
provided that
<PAGE>
either the senior debt obligations or commercial paper of the parent
company of the depository institution or trust company --are then
rated in the security rating category required to support the then
highest rating assigned to any class of securities in your series,
. demand and time deposits and certificates of deposit issued by any
bank or trust company or savings and loan association and fully
insured by the FDIC,
. guaranteed reinvestment agreements issued by any insurance company,
corporation or other entity acceptable to each rating agency rating
your series, and
. certain repurchase agreements of United States government securities.
Eligible investments will include only obligations or securities that
mature on or before the date when the asset proceeds account, reserve fund and
other funds or accounts for your series are required or may be anticipated to be
required to be applied. Any income, gain or loss from investments for your
series will be credited or charged to the appropriate fund or account for your
series. Reinvestment income from permitted investments may be payable to the
master servicer or the servicers as additional servicing compensation. In that
event, these monies will not accrue for your benefit.
If a reinvestment agreement is obtained, the trustee will invest funds
deposited in the asset proceeds account and the reserve fund, if any, for your
series pursuant to the terms of the reinvestment agreement.
Sale and Servicing of the Mortgage Assets
General
If your series includes mortgage assets, one or more servicers will provide
customary servicing functions pursuant to separate servicing agreements, which
will be assigned to the trustee. The master servicer is deemed to be a servicer
for purposes of this discussion to the extent it is directly servicing mortgage
assets in your trust. The servicers may be entitled to withhold their servicing
fees and other fees and charges from remittances of payments received on the
mortgage assets they service.
Each servicer generally will be approved by Fannie Mae or Freddie Mac as a
servicer of mortgage loans and must be approved by the master servicer, if any.
In determining whether to approve a servicer, the master servicer will review
the credit of the servicer, including capitalization ratios, liquidity,
profitability and other similar items that indicate financial ability to perform
its obligations. In addition, the master servicer's mortgage servicing
personnel will review the servicer's servicing record and will evaluate the
ability of the servicer to conform with required servicing procedures.
Generally, the master servicer will not approve a servicer unless the servicer
has serviced conventional mortgage loans for a minimum of two years and
maintains a loan servicing portfolio of at least $500,000,000. Servicers
approved by the master servicer fall into three general categories: commercial
banks, mortgage banks and thrift institutions. The
<PAGE>
master servicer generally will not approve a commercial bank as a servicer
unless the commercial bank maintains a capitalization ratio of at least 6%. The
master servicer generally will not approve a mortgage bank as a servicer unless
the mortgage bank has stockholders' equity of at least $1,000,000 or at least
.20% of its loan servicing portfolio, whichever is greater. The master servicer
generally will not approve a thrift institution as a servicer unless the thrift
institution maintains a capitalization ratio of at least 3% and a liquidity
ratio of at least 5%. Once a servicer is approved, the master servicer will
continue to monitor on a regular basis the financial position and servicing
performance of the servicer.
The duties to be performed by the servicers include collection and
remittance of principal and interest payments on the mortgage assets,
administration of mortgage escrow accounts, collection of insurance claims,
foreclosure procedures, and, if necessary, the advance of funds to the extent
certain payments are not made by the obligors and are considered to be
recoverable under the applicable insurance policies or from proceeds of
liquidation of the mortgage assets. Each servicer also will provide necessary
accounting and reporting services to enable the master servicer to provide
required information to National Mortgage and the trustee. Each servicer is
entitled to a periodic servicing fee equal to a specified percentage of the
outstanding principal balance of each mortgage asset serviced by it. With the
consent of the master servicer, some servicing obligations of a servicer may be
delegated to another person approved by the master servicer.
The master servicer will administer and supervise the performance by the
servicers of their duties and responsibilities, and maintain special hazard
insurance, mortgagor bankruptcy insurance and pool insurance, if required. The
master servicer will be entitled to receive a portion of the interest payments
on the mortgage assets included in your trust to cover its fees as master
servicer or securities administrator, as the case may be. The master servicer
or the trustee may terminate a servicer who has failed to comply with its
covenants or breached one of its representations. Upon termination of a
servicer by the master servicer, the master servicer will assume certain
servicing obligations of the terminated servicer, or, at its option, may appoint
a substitute servicer acceptable to the trustee to assume the servicing
obligations of the terminated servicer.
If the mortgage assets are covered by a pool insurance policy and a
terminated servicer has failed to comply with its obligation to purchase a
mortgage asset where mortgage insurance coverage has been denied on the grounds
of fraud or misrepresentation, the master servicer is obligated to purchase the
mortgage asset, subject to limitations, if any, described in the accompanying
prospectus supplement. If required by the rating agencies, the master servicer
may secure its performance of this obligation through cash, a letter of credit
or another instrument acceptable to the rating agencies. Alternatively, a pool
insurer may agree to waive its right to deny a claim under its pool insurance
policy resulting from a loss sustained by reason of a default arising from
fraud, dishonesty or misrepresentation in connection with the mortgage asset,
subject to the limitations applicable to the master servicer's obligation to
purchase the mortgage asset. To the extent there are limitations on the master
servicer's obligation to purchase mortgage assets included in your trust upon
which mortgage insurance coverage has
<PAGE>
been denied on the grounds of fraud or misrepresentation, payments to you could
be affected if a servicer and the master servicer fail to honor their
obligations.
Representations and Warranties
National Mortgage generally will acquire mortgage assets from asset
sellers, or will enter into a funding agreement with a finance company
affiliated with an asset seller secured by mortgage assets acquired from this
asset seller. An asset seller or an affiliate may act as a servicer of mortgage
assets included in your trust or an unrelated party may act as servicer. The
asset seller will make or will assign its rights in representations and
warranties concerning the mortgage assets. In addition, the servicer -- which
may be the asset seller -- will make representations and warranties concerning
the mortgage assets serviced by the servicer. An asset seller and the servicer
each will represent and warrant, among other things, as follows:
. that each mortgage asset has been originated in material compliance
with all applicable laws, rules and regulations,
. that no mortgage asset is more than 89 days delinquent as of the cut-
off date,
. that each mortgage insurance policy is the valid and binding
obligation of the mortgage insurer,
. that each mortgage insurance application was complete and accurate in
all material respects when made,
. that each security instrument constitutes a good and valid first lien
or junior lien, as the case may be, on the mortgaged property, and
. that the obligor holds good and marketable title to the mortgaged
property.
The asset seller is required to submit to the trustee with each mortgage
asset a mortgagee title insurance policy, title insurance binder, preliminary
title report, or satisfactory evidence of title insurance. If a preliminary
title report is delivered initially, the asset seller is required to deliver a
final title insurance policy or satisfactory evidence of the existence of a
policy.
In the event the asset seller or the servicer breaches a representation or
warranty made with respect to a mortgage asset or if any principal document
executed by the obligor concerning a mortgage asset is found to be defective in
any material respect and the breaching party cannot cure the breach or defect
within the required time, the trustee may require the breaching party to
purchase the mortgage asset from your trust upon deposit with the trustee of
funds equal to the then unpaid principal balance of the mortgage asset plus
accrued interest at the asset rate through the end of the month in which the
purchase occurs. This sum will be net of any unreimbursed advances of principal
made by the servicer and any outstanding servicing fees owed to the servicer
with respect to this mortgage asset. In the event of a breach by the asset
seller of a representation or warranty with respect to any mortgage asset or the
delivery by the asset seller to the trustee of a materially defective document
with respect to a mortgage asset, the asset seller
<PAGE>
may, under certain circumstances, rather than repurchasing the affected mortgage
asset, substitute a mortgage asset having characteristics substantially similar
to those of the defective one. See "The Trusts -- The Trust Assets --
Substitution of Trust Assets" in this prospectus.
Neither an asset seller's nor a servicer's obligation to purchase a
mortgage asset will be guaranteed by the master servicer or National Mortgage.
If the asset seller or a servicer defaults upon its obligation to purchase a
mortgage asset and no one elects to assume this obligation, distributions to you
could be reduced. See "The Trusts -- Assignment of Trust Assets" in this
prospectus.
Origination of the Mortgage Assets
If the accompanying prospectus supplement states that any class of
securities issued by your trust is SMMEA-eligible, then each mortgage asset
included in your trust will be originated by a savings and loan association,
savings bank, commercial bank, credit union, insurance company, or similar
institution which is supervised and examined by a federal or state authority, or
by a mortgagee approved by HUD. In originating a mortgage asset, the originator
will follow its credit approval process in order to assess the prospective
obligor's ability to repay and the adequacy of the mortgaged property as
collateral. Each originator's mortgage credit approval process for residential
loans follows a standard procedure which is intended to comply with applicable
federal and state laws and regulations. The originator generally will review a
detailed application of the prospective obligor designed to provide pertinent
credit information, including a current balance sheet describing assets and
liabilities and a statement of income and expenses, credit history with
merchants and lenders, any record of bankruptcy, employment history, current and
anticipated salary and deposit verification from financial institutions.
The mortgage assets may have been originated under a "limited
documentation" underwriting program, where the credit approval procedures may be
minimal. Under "limited documentation" programs, income and employment
verifications generally need not be furnished -- other than the year-to-date
paycheck stubs or a W-2 for employed individuals and tax returns for two years
for self-employed individuals -- and deposit verifications are only required for
substantial accounts listed on application forms for such programs.
Participation in a limited documentation program generally is limited to
individuals with no adverse credit history and to loans secured by owner-
occupied residences with original loan-to-value ratios not in excess of 80%.
An appraisal generally will be required to be made on each residence to be
financed. This appraisal generally will be made by an appraiser who, at the
time the appraisal was conducted, met the minimum qualifications of Fannie Mae
or Freddie Mac for appraisers of conventional residential mortgage loans. The
appraisal generally will be based on the appraiser's judgment of value, giving
appropriate weight to both the market value of comparable homes and the cost of
replacing the residence.
Based on the data provided, certain verifications and the appraisal, a
determination is made by the originator whether the prospective obligor has
sufficient monthly income available to meet the obligor's monthly obligations on
the proposed loan and other expenses related to the
<PAGE>
residence -- like property taxes, hazard and, if applicable, primary mortgage
insurance maintenance fees --and other financial obligations and monthly living
expenses. Each originator's lending guidelines for conventional single-family
mortgage loans generally will specify that mortgage payments plus taxes and
insurance and all monthly payments extending beyond 10 months -- including those
mentioned above and other fixed obligations, like car payments -- would equal no
more than specified percentages of the obligor's gross income. These guidelines
will be applied only to the payments to be made during the first year of the
loan. Other credit considerations may cause an originator to depart from these
guidelines. When two individuals co-sign the loan documents, the incomes and
expenses of both individuals may be included in the computation.
The underwriting practices described in the accompanying prospectus
supplement may provide more information than those described in general in this
prospectus. Some originators may permit the obligor's credit standing and
ability to repay the loan to be less stringent than the underwriting standards
generally acceptable to Fannie Mae and Freddie Mac. In these instances, the
underwriting standards are primarily intended to evaluate the value and adequacy
of the mortgaged property as collateral for the mortgage assets.
Payments on Mortgage Assets
Each servicer will be required to establish and maintain one or more
separate, insured custodial accounts into which the servicer will deposit on a
daily basis payments of principal and interest received with respect to mortgage
assets serviced by it. These amounts will include principal prepayments,
insurance proceeds and liquidation proceeds, any advances by the servicer, and
proceeds of any mortgage assets withdrawn from your trust for defects in
documentation, breach of representations or warranties or otherwise.
To the extent deposits in each custodial account are required to be insured
by the FDIC, if at any time the sums in any custodial account exceed the limits
of insurance on the account, the servicer will be required within one business
day to withdraw such excess funds from this account and remit these amounts to a
servicer custodial account, which shall be a custodial account maintained by the
trustee, or to the trustee or the master servicer for deposit in either the
asset proceeds account for your series or the master servicer custodial account,
which shall be a custodial account maintained by the master servicer. The
amount on deposit in any servicer custodial account, master servicer custodial
account or asset proceeds account will be invested in or collateralized by
permitted investments.
On each remittance date, which will be identified in the accompanying
prospectus supplement, each servicer will be required to remit to the servicer
custodial account or the master servicer custodial account amounts representing
scheduled installments of principal and interest on the mortgage assets received
or advanced by the servicer that were due during the applicable due period,
principal prepayments, insurance proceeds or guarantee proceeds, and the
proceeds of liquidations of mortgaged property, including funds paid by the
servicer for any mortgage assets withdrawn from your trust received during the
applicable Prepayment Period, with interest to the date of prepayment or
liquidation -- subject to certain limitations--, less applicable
<PAGE>
servicing fees, insurance premiums and amounts representing reimbursement of
advances made by the servicer. On or before the distribution date, the trustee
will withdraw from the servicer custodial account or the master servicer
custodial account and remit to the asset proceeds account those amounts
allocable to the available distribution for the distribution date. In addition,
there will be deposited in the asset proceeds account for your series advances
of principal and interest made by the servicer, the master servicer or the
trustee and any insurance, guarantee or liquidation proceeds -- including
amounts paid in connection with the withdrawal of defective mortgage assets from
your trust -- to the extent these amounts were not deposited in the custodial
account or received and applied by the servicer.
Prior to each distribution date -- or the next preceding business day if
this day is not a business day--, the master servicer will furnish to the
trustee a statement setting forth required information concerning the mortgage
assets included in you trust.
Advances
Each servicer will be required to advance funds to cover, to the extent
that these amounts are deemed to be recoverable from any subsequent payments
from the same mortgage asset
. delinquent payments of principal and interest on the mortgage assets,
. delinquent payments of taxes, insurance premiums, and other escrowed
items, and
. foreclosure costs, including reasonable attorneys' fees.
The failure of a servicer to make advances constitutes a default for which the
servicer will be terminated. Upon a default by the servicer, the master
servicer or the trustee may be required to make advances to the extent necessary
to make required distributions on your securities, provided that this party
deems the amounts to be recoverable. Alternatively, National Mortgage may
obtain an endorsement to the pool insurance policy that obligates the mortgage
insurer to advance delinquent payments of principal and interest. The pool
insurer would only be obligated under an endorsement to the extent the obligor
fails to make a payment and the servicer and the master servicer fail to make a
required advance. The master servicer may agree to reimburse the pool insurer
for any sums the pool insurer pays under an endorsement.
The advance obligation of the trustee, the master servicer or the pool
insurer may be further limited to an amount specified by the rating agencies
rating your securities. Any advances by the servicers, the master servicer, the
trustee or the pool insurer, as the case may be, must be deposited into the
custodial account or servicer custodial account or into the asset proceeds
account and will be due not later than the distribution date to which the
delinquent payment relates. Amounts advanced by the servicers, the master
servicer or the trustee, as the case may be, will be reimbursable out of future
payments on the mortgage assets, insurance proceeds, additional assets,
liquidation proceeds of the mortgage assets for which these amounts were
advanced. If an advance made by a servicer, the master servicer or the trustee
later proves to be unrecoverable, the servicer, the master servicer or the
trustee, as the case may be, will be
<PAGE>
entitled to reimbursement from funds in the asset proceeds account prior to the
distribution of payments to you.
Any advances made by a servicer, the master servicer or the trustee are
intended to enable the trustee to make timely payment of the scheduled
distributions of principal and interest on your securities. However, neither
the master servicer, the trustee nor any servicer will insure or guarantee your
securities or the mortgage assets included in your trust.
Collection and Other Servicing Procedures
Each servicer must make reasonable efforts to collect all payments called
for under the mortgage assets in your trust and follow the collection procedures
as it normally would follow with respect to mortgage loans serviced for Fannie
Mae or, if applicable, other mortgage loans similar to mortgage assets in your
trust that it owns.
The note or security instrument used in originating a conventional mortgage
asset may contain a "due-on-sale" clause. The servicer will be required to use
reasonable efforts to enforce "due-on-sale" clauses with respect to any note or
security instrument containing this clause, provided that the coverage of any
applicable insurance policy will not be adversely affected. In any case in
which mortgaged properties have been or are about to be conveyed by the obligor
and the due-on-sale clause has not been enforced or the note is by its terms
assumable, the servicer will be authorized, on behalf of the trustee, to enter
into an assumption agreement with the person to whom the mortgaged properties
have been or are about to be conveyed, if the person meets certain loan
underwriting criteria, including the criteria necessary to maintain the coverage
provided by the applicable mortgage insurance policies or otherwise required by
law. In the event that the servicer enters into an assumption agreement in
connection with the conveyance of a mortgaged property, the servicer, on behalf
of the trustee as holder of the note, will release the original obligor from
liability upon the mortgage asset and substitute the new obligor. In no event
can the assumption agreement permit a decrease in the asset rate or an increase
in the term of the mortgage asset. Fees collected for entering into an
assumption agreement will be retained by the servicer as additional servicing
compensation.
Each servicer will, to the extent permitted by law, establish and maintain
a custodial escrow account or accounts into which obligors will deposit amounts
sufficient to pay taxes, assessments, PMI premiums, standard hazard insurance
premiums and other comparable items. Some servicers may provide insurance
coverage acceptable to the master servicer against loss occasioned by the
failure to escrow insurance premiums rather than causing escrows to be made.
Withdrawals from the escrow account maintained for obligors may be made to
effect timely payment of taxes, assessments, PMI premiums, standard hazard
premiums or comparable items, to reimburse the servicer for maintaining PMI and
standard hazard insurance, to refund to obligors amounts determined to be
overages, to pay interest to obligors on balances in the escrow account, if
required, to repair or otherwise protect the mortgaged properties and to clear
and terminate this account. The servicer will be responsible for the
administration of the escrow account and will make advances to this account when
a deficiency exists.
<PAGE>
Maintenance of Insurance Policies; Insurance Claims and Other Realization upon
Defaulted Mortgage Assets
The servicer will maintain a standard hazard insurance policy on each
mortgaged property in full force and effect as long as the coverage is required
and will pay the premium on a timely basis. The servicer will maintain a PMI
policy for each single-family mortgage asset with a loan-to-value ratio in
excess of 80% included in your trust unless insurance is waived by the master
servicer or is otherwise not required.
The master servicer may be required to maintain any special hazard
insurance policy, any mortgagor bankruptcy insurance and any pool insurance
policy in full force and effect throughout the term of your trust, subject to
payment of premiums by the trustee. The master servicer will be required to
notify the trustee to pay from amounts in your trust the premiums for any
special hazard insurance policy, any mortgagor bankruptcy insurance and any pool
insurance policy for your series on a timely basis. Premiums may be payable on
a monthly basis in advance, or on any other payment schedule acceptable to the
insurer. In the event that the special hazard insurance policy, the mortgagor
bankruptcy insurance or the pool insurance policy for your series is canceled or
terminated for any reason -- other than the exhaustion of total policy
coverage --, the master servicer will obtain from another insurer a comparable
replacement policy with a total coverage equal to the then existing
coverage -- or a lesser amount if the master servicer confirms in writing with
the rating agencies that the lesser amount will not impair the rating on your
securities -- of the special hazard insurance policy, the mortgagor bankruptcy
insurance or the pool insurance policy. However, if the cost of a replacement
policy or bond is greater than the cost of the policy or bond that has been
terminated, then the amount of the coverage will be reduced to a level such that
the applicable premium will not exceed the cost of the premium for the policy or
bond that was terminated.
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain this insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to this borrower's cooperative dwelling or this
cooperative's building could significantly reduce the value of the collateral
securing the cooperative loan to the extent not covered by other credit support.
The servicer or the master servicer, as the case may be, will present
claims to the insurer under any insurance policy applicable to the mortgage
assets and to take reasonable steps as are necessary to permit recovery under
the insurance policies.
If any mortgaged property securing a defaulted mortgage asset is damaged
and the proceeds, if any, from the standard hazard insurance policy or any
special hazard insurance policy are insufficient to restore the damaged
mortgaged property to the condition to permit
<PAGE>
recovery under the mortgage insurance policy, the servicer will not be required
to expend its own funds to restore the damaged mortgaged property unless it
determines that these expenses will be recoverable to it through liquidation
proceeds or insurance proceeds.
Each servicer will make representations concerning each mortgage asset that
it services, including, among other things, that the related title insurance,
standard hazard insurance, flood insurance and mortgage insurance policies are
legal and valid obligations of the respective insurers and that the applications
submitted for this insurance, as well as the application for the inclusion of a
mortgage asset under a pool insurance policy, are accurate and complete in all
material respects. If any of these representations proves to be incorrect and
the servicer fails to cure it, the servicer will be obligated to purchase the
affected mortgage asset at a price equal to its unpaid principal balance, plus
accrued and uncollected interest on that unpaid principal balance to the date on
which the purchase is made. For instance, if it is determined that coverage
under a mortgage insurance policy is not available on a defaulted mortgage asset
because of fraud or misrepresentation in the application, a servicer will be
obligated to purchase the defaulted mortgage asset. Upon termination for cause
of a servicer by the master servicer, the master servicer will assume the
servicing obligations of a terminated servicer, or the master servicer, at its
option, may appoint a substitute servicer acceptable to the trustee to assume
the servicing obligations of the terminated servicer.
If a servicer fails to comply with its obligation to purchase a mortgage
asset as to which coverage under a mortgage insurance policy has been denied on
the grounds of fraud or misrepresentation -- or if the servicer has no such
obligation --, the master servicer will purchase the mortgage asset, up to an
aggregate amount and for the time period specified in the accompanying
prospectus supplement. The master servicer may provide a fund, insurance policy
or other security to support its obligation. To the extent that a servicer or
master servicer fails, or is not required to, repurchase mortgage assets with
respect to which coverage under a mortgage insurance policy has been denied on
the grounds of fraud or misrepresentation, distributions to you could be
reduced.
The obligation of the master servicer to assume other unfulfilled past
obligations of a terminated servicer may be limited to the extent this
limitation does not result in a downgrading of the credit rating of any
securities of your series. As and to the extent required by the rating
agencies, some of the obligations of the master servicer will be secured by
cash, letters of credit, insurance policies or other instruments in an amount
acceptable to the rating agencies.
If recovery under a mortgage insurance policy or from additional assets is
not available and the servicer or the master servicer is not obligated to
purchase a defaulted mortgage asset, the servicer or the master servicer
nevertheless will be obligated to follow standard practice and procedures to
realize upon the defaulted mortgage asset. In this regard, the servicer or the
master servicer will sell the mortgaged property pursuant to foreclosure,
trustee's sale or, in the event a deficiency judgment is available against the
obligor or other person, proceed to seek recovery of the deficiency against the
appropriate person. To the extent that the proceeds of any liquidation
proceedings are less than the unpaid principal balance or asset value of the
defaulted mortgage
<PAGE>
asset, there will be a reduction in the value of the assets of your trust such
that you may not receive distributions of principal and interest on your
securities in full.
Evidence as to Servicing Compliance
Within 90 days of the end of each of its fiscal years each servicer must
provide the master servicer or the securities administrator with a copy of its
audited financial statements for the year and a statement from the firm of
independent public accountants that prepared the financial statements to the
effect that, in preparing these statements, it reviewed the results of the
servicer's servicing operations in accordance with the Uniform Single-Audit
Procedures for mortgage banks developed by the Mortgage Bankers Association. In
addition, each servicer will be required to deliver an officer's certificate to
the effect that it has fulfilled its obligations during the preceding fiscal
year or identifying any ways in which it has failed to fulfill its obligations
during the fiscal year and the steps that have been taken to correct such
failure. The master servicer or the securities administrator will be required
to promptly make available to the trustee any compliance reporting that it
receives from a servicer.
Each year the master servicer will review each servicer's performance and
the status of any fidelity bond and errors and omissions policy required to be
maintained by the servicer.
Financial Assets
Financial assets included in your trust will be registered in the name of
the trustee. All distributions on financial assets will be made directly the
trustee, who will deposit these distributions as they are received into a trust
account for the benefit of securityholders.
If the trustee does not receive any distribution on a financial asset,
following a cure period the trustee or securities administrator will request the
issuer or guarantor to make the missing payment promptly. If the issuer or
guarantor does not comply, the trustee or securities administrator may take
legal action, if it is deemed appropriate under the circumstances. Reasonable
legal fees and expenses incurred by these actions will be reimbursable out of
the proceeds of the action prior to any proceeds being distributed to you. If
the result of a legal action of this nature is insufficient to reimburse the
trustee or securities administrator for legal fees and expenses, the trustee may
withdraw an amount equal to unreimbursed legal fees and expenses from the trust
account, which may result in a loss to securityholders.
The Agreements
The following discussion describes the material provisions of the pooling
and master servicing agreement -- with respect to a series of certificates --
and the master servicing agreement and indenture -- with respect to a series of
notes --, including the related standard terms to be incorporated by reference
in these documents. When particular provisions or terms used in the agreement
are referred to, the actual provisions are incorporated by reference as part of
these discussions.
<PAGE>
Master Servicer or Securities Administrator
The pooling and master servicing agreement or master servicing agreement,
as applicable, will designate a person to act as master servicer or securities
administrator with respect to each series. The master servicer or securities
administrator will be responsible under the applicable agreement for providing
general administrative services to a trust including, among other things
. oversight of payments received on mortgage assets,
monitoring the amounts on deposit in various trust accounts,
. calculation of the amounts payable to securityholders on each
distribution
date,
. preparation of periodic reports to the trustee(s) or the
securityholders with respect to the foregoing matters,
. preparation of federal and state tax and information returns, and
. preparation of reports, if any, required under the Securities Exchange
Act.
In addition, with respect to a trust that includes single or multi-family
mortgage loans, the master servicer will be required to supervise and administer
the performance of one or more servicers, to make advances of delinquent
payments of principal and interest on the mortgage loans to the limited extent
described herein under the heading "Sale and Servicing of Mortgage Assets --
Advances," if such amounts are not advanced by a servicer, and to perform the
servicing obligations of a terminated servicer. The master servicer's
obligations to act as a servicer following the termination of a servicing
agreement will not, however, require the master servicer to purchase mortgage
loans from the trust due to a breach by the servicer of a representation or
warranty under its servicing agreement, purchase from the trust any converted
mortgage loan or advance payments of principal and interest on a delinquent
mortgage loan in excess of the master servicer's independent advance obligation
under the pooling and master servicing agreement or master servicing agreement.
The master servicer may delegate its responsibilities under an agreement;
however, it will remain responsible and liable thereunder.
The master servicer or securities administrator for a series may resign
from its obligations and duties under the pooling and master servicing agreement
or master servicing agreement with respect to such series, but no such
resignation will become effective until the trustee or a successor master
servicer or securities administrator has assumed the master servicer's or
securities administrator's obligations and duties. If specified in the
prospectus supplement for a series, National Mortgage may appoint a stand-by
master servicer, which will assume the obligations of the master servicer upon a
default by the master servicer.
The Trustee
The trustee under each pooling and master servicing agreement or indenture
will be named in the related prospectus supplement. The trustee must be a
corporation or a national
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banking association organized under the laws of the United States or any state
and authorized under the laws of the jurisdiction in which it is organized to
have corporate trust powers. It must also have combined capital and surplus of
at least $50,000,000 and be subject to regulation and examination by state or
federal regulatory authorities. Although the trustee may not be an affiliate of
National Mortgage or the master servicer, either National Mortgage or the master
servicer may maintain normal banking relations with the trustee if the trustee
is a depository institution.
The trustee may resign at any time, in which event National Mortgage will
be obligated to appoint a successor trustee. National Mortgage will also remove
the trustee if the trustee ceases to be eligible to continue as such under the
applicable agreement or if the trustee becomes insolvent. The trustee may also
be removed at any time by the holders of securities entitled to at least 51% of
the voting rights of such series. Any resignation or removal of the trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee.
The owner trustee under an owner trust agreement will be named in the
related prospectus supplement.
Amendment
The pooling and master servicing agreement, master servicing agreement
and/or indenture may be amended by the parties thereto with the consent of the
holders of outstanding securities holding at least 66% of the voting rights of a
series unless otherwise specified in the related prospectus supplement. Voting
rights with respect to any series may be allocated to specific classes of
securities without regard to such classes outstanding principal balance. For
example, Strip Securities or Residual Certificates may be allocated a certain
percentage of the voting rights of a series even though such classes may not
have any, or any significant amount of, principal balance outstanding. No
amendment however may
. reduce in any manner or delay the timing of payments on the mortgage
assets or distributions to the securityholders, or
. reduce the percentage of securityholders required to authorize an
amendment to the pooling and master servicing agreement, master
servicing agreement or indenture
unless each holder of a security affected by such amendment consents. The
agreements may also be amended by the parties thereto without the consent of
securityholders, for the purpose of, among other things,
. curing any ambiguity,
. correcting or supplementing any inconsistent provisions,
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. modifying, eliminating or adding to any of its provisions to such
extent as shall be necessary or appropriate to maintain the
qualification of the trust as a REMIC under the Code, if applicable,
or
. adding any other provisions with respect to matters or questions
arising under the agreements or matters arising with respect to the
trust which are not covered by the related agreement and which shall
not be inconsistent with the current provisions of the agreement,
provided that any such action shall not adversely affect in any
material respect the interests of any securityholder.
Any such amendment or supplement shall be deemed not to adversely affect in
any material respect any securityholder if there is delivered to the trustee
written notification from each rating agency that rated the applicable
securities to the effect that such amendment or supplement will not cause that
rating agency to reduce the then current rating assigned to such securities.
Events of Default
Events of default under the pooling and master servicing agreement or
master servicing agreement in respect of a series will include
. any default in the performance or breach of any covenant or warranty of the
master servicer under the pooling and master servicing agreement or master
servicing agreement with respect to such series which continues unremedied
for a specified period after the giving of written notice of such failure
to the master servicer or securities administrator by the trustee or by the
holders of securities entitled to at least 25% of the aggregate voting
rights
. any failure by the master servicer to make required advances with
respect to delinquent mortgage loans in a trust, and
. certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings regarding the master
servicer, if any, and certain actions by or on behalf of the master
servicer or securities administrator indicating its insolvency or
inability to pay its obligations.
In addition, events of default under the indenture for a series will
consist of
. a default for five days or more in the payment of any principal of or
interest on any note of such series,
. failure to perform any other covenant of the issuer or the trust in
the indenture which continues for a period of thirty days after notice
thereof is given in accordance with the procedures described in the
related prospectus supplement, or
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. any representation or warranty made by the issuer or the trust in the
indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such
series having been incorrect in a material respect as of the time
made, and such breach is not cured within thirty days after notice
thereof is given in accordance with the procedures described in the
related prospectus supplement.
Rights Upon Event of Default
So long as an event of default with respect to the pooling and master
servicing agreement or master servicing agreement remains unremedied, the
trustee may, and at the direction of the holders of a series entitled to a
certain percentage of the voting rights, as specified in the pooling and master
servicing agreement or the master servicing agreement, the trustee shall,
terminate all of the rights and obligations of the master servicer under the
applicable agreement except that the trustee may elect not to terminate the
master servicer for its failure to make advances. Upon termination, the trustee
will succeed to all the responsibilities, duties and liabilities of the master
servicer under such agreement (except that if the trustee is to so succeed the
master servicer but is prohibited by law from obligating itself to make advances
regarding delinquent mortgage loans, then the trustee will not be so obligated)
and will be entitled to similar compensation arrangements. In the event that
the trustee would be obligated to succeed the master servicer but is unwilling
or unable so to act, it may appoint or, if the holders of securities
representing a certain percentage of the voting rights, as specified in the
pooling and master servicing agreement or the master servicing agreement, so
request in writing, it shall appoint, or petition a court of competent
jurisdiction for the appointment of, a mortgage loan servicing or other housing
and home finance institution with a net worth of at least $15,000,000 to act as
successor to the master servicer under the applicable agreement or may provide
cash, a letter of credit, a standby master servicing agreement or another
arrangement consistent with the then-current rating of the securities of the
related series. The trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the master servicer under the applicable agreement.
If an event of default with respect to the notes of any series at the time
outstanding occurs and is continuing, the trustee or the holders of a majority
of the then aggregate outstanding amount of the notes of such series may declare
the principal amount (or, if the notes of that series are Accretion Classes, the
portion of the principal amount as may be specified in the terms of that series,
as provided in the accompanying prospectus supplement) of all the notes of such
series to be due and payable immediately. Such declaration may, under certain
circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related notes.
If following an event of default with respect to any series of notes, the
notes of such series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the notes of such series and to continue
to apply payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of such series as they would
have become due if there
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had not been such 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
. the holders of 100% of the then aggregate outstanding amount of the
notes of such series consent to such sale,
. the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the
outstanding notes of such series at the date of such sale or
. the trustee determines that such collateral would not be sufficient on
an ongoing basis to make all payments on such notes as such payments
would have become due if such notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 66 2/3%
of the then aggregate outstanding amount of the notes of such series.
In the event that the trustee liquidates the collateral in connection with
an event of default, the indenture provides that the trustee will have a prior
lien on the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an event of default, the amount available
for 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 such an
event of default.
In the event the principal of the notes of a series is declared due and
payable, as described above, the holders of any such notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount 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 such agreement unless
. such holder previously has given to the trustee written notice of
default and the continuance thereof,
. the holders of notes or equity certificates of any class evidencing
not less than 25% of the aggregate voting rights with respect of such
class have made written request upon the trustee to institute such
proceeding in its own name as trustee thereunder and have offered to
the trustee reasonable indemnity,
. the trustee has neglected or refused to institute any such proceeding
for 60 days after receipt of such request and indemnity and
. no direction inconsistent with such written request has been given to
the trustee during such 60 day period by the holders of a majority of
the outstanding principal balance of such class.
The trustee will be under no obligation to exercise any of the trusts or
powers vested in it by the indenture, pooling and master servicing agreement or
master servicing agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any
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litigation thereunder or in relation thereto at the request, order or direction
of any of the holders of securities covered by such agreement, unless such
securityholders have offered to the trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
Reports to Securityholders
The trustee will furnish the securityholders with monthly statements
containing information with respect to principal and interest distributions,
Realized Losses and the assets of the trust. Any financial information
contained in such reports will not have been examined or reported upon by an
independent public accountant. Copies of such monthly statements and any annual
reports prepared by a servicer or the master servicer or securities
administrator with respect to compliance with the provisions of a servicing
agreement, master servicing agreement or pooling and master servicing agreement,
as applicable, will be furnished to securityholders upon request addressed to
National Mortgage at 909 East Main Street, 7th Floor, Richmond, Virginia 23219-
3002.
Termination
The pooling and master servicing agreement or the indenture, and the
respective obligations and responsibilities created thereby, shall terminate
upon the distribution to securityholders of all amounts required to be paid
pursuant to such agreement following
. the purchase of all the mortgage assets in the trust and the related
mortgaged properties or manufactured homes acquired in respect
thereof, if the related prospectus supplement so provides, or
. the later of the final payment or other liquidation of the last
mortgage asset remaining in the trust or the disposition of all
mortgaged properties acquired in respect thereof.
In no event, however, will the trust created by any agreement continue
beyond the expiration of 21 years from the death of the survivor of certain
persons described in such agreement. Written notice of termination of the
pooling and master servicing agreement or indenture will be given to each
securityholder, and the final distribution will be made only upon surrender and
cancellation of the securities at the corporate trust office of the trustee or
its agent as set forth in the prospectus supplement.
Certain Legal Aspects of Mortgage Assets
General
The following discussion contains the material legal aspects of mortgage
loans that are general in nature. Because these legal aspects are governed by
applicable state law, which laws may differ substantially, these summaries do
not purport to be complete nor to reflect the laws of any particular state, nor
to encompass the laws of all states in which the mortgaged properties securing
the mortgage loans are situated. These summaries are qualified in their
entirety by
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reference to the applicable federal and state laws governing the mortgage loans.
In this regard, the following discussion does not reflect federal regulations
with respect to FHA loans or VA loans.
Mortgage Loans
The mortgage loans will be secured by either first or junior mortgages or
deeds of trust, depending upon the prevailing practice in the state in which the
underlying property is located. A mortgage creates a lien upon the real
property encumbered by the mortgage. It is not prior to the lien for real
estate taxes and assessments. Priority between mortgages depends on their terms
and, generally, on the order of filing with a state or county office. There are
two parties to a mortgage: the mortgagor, who is the obligor and owner of the
property; and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond evidencing the loan and
the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust formally has three parties: the obligor-property owner called the trustor
- -- similar to a mortgagor--; a lender called the beneficiary -- similar to a
mortgagee --; and a third-party grantee called the trustee. Under a deed of
trust, the obligor 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
loan. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by the express provisions of the deed of
trust or mortgage, applicable law, and, in some cases, with respect to the deed
of trust, the directions of the beneficiary.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon the
obligor and any party having a subordinate interest in the real estate including
any holder of a junior encumbrance on the real estate. Delays in completion of
the foreclosure occasionally may result from difficulties in locating necessary
parties defendant. Judicial foreclosure proceedings are often not contested by
any of the parties defendant. However, when the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the mortgaged property. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power of sale
provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by non-judicial power of
sale.
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 that authorizes
the trustee to sell the mortgaged property to a third party upon any default by
the obligor under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, the trustee must record
a notice of default and send a copy to the obligor 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 must provide notice in some states to any other party
having a subordinate interest in the real estate, including any holder of a
junior
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encumbrance on the real estate. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest of
record in the property. When the beneficiary's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be time-
consuming.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the mortgaged property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the mortgaged property
at the foreclosure sale. Rather, it is common for the lender to purchase the
mortgaged property from the trustee or receiver for an amount which may be as
great as the unpaid principal balance of the note, accrued and unpaid interest
and the expenses of foreclosure. Thereafter, subject to the right of the
obligor in some states to remain in possession during the redemption period, the
lender will assume the burdens of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the mortgaged property suitable for sale. The lender commonly will obtain the
services of a real estate broker and pay the broker a commission in connection
with the sale of the mortgaged property. Depending upon market conditions, the
ultimate proceeds of the sale of the mortgaged property may not equal the
lender's investment therein. Any loss may be reduced by the receipt of
insurance proceeds. See "The Trust -- Mortgage Insurance on the Mortgage
Assets" and "The Trust -- Hazard Insurance on the Mortgage Assets" in this
prospectus.
Mortgaged properties that are acquired through foreclosure generally must
be sold by the trustee by the end of the third taxable year beginning after
foreclosure occurs in order to satisfy federal income tax requirements. See
"Federal Income Tax Consequences" in this prospectus.
Junior Mortgages
Some of 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 your trust. Your rights as the holder 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 pursuant to the deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the junior
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of 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
<PAGE>
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 these sums, these sums
generally will have priority over all sums due under the junior mortgage.
Manufactured Housing Installment Sales Contracts
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the
jurisdiction where the home 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. Generally, financing statements are effective for
five years and must be renewed at the end of each five years. The certificate
of title laws 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 organization of the state. In 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, generally is perfected by the recording of this 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 this office, depending on state law.
The master servicer or servicer will be required to make this notation or
deliver 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 located. In the event the master servicer or servicer
fails to effect this 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 contract. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention by the obligor to move them, courts in many states have held
that manufactured homes may, under certain circumstances, 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,
contracts will contain provisions prohibiting the obligor from permanently
attaching the manufactured home to its site. If 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 National Mortgage.
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National Mortgage will assign or cause to be assigned a security interest
in the manufactured homes to the trustee, on behalf of the securityholders.
Neither National Mortgage, the master servicer, the servicer nor the trustee
will amend the certificates of title to identify the trustee, on behalf of the
securityholders, as the new secured party and, accordingly, National Mortgage or
the seller will continue to be named as the secured party on the certificates of
title. In most states, such assignment is an effective conveyance of the
security interest without amendment of any lien noted on the certificate of
title and the new secured party succeeds to the named party's rights as the
secured party. However, in some states there exists a risk that, in the absence
of an amendment to the certificate of title, this assignment of the security
interest might not be held effective against creditors of National Mortgage or
the seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the owner, or administrative error by state
recording officials, the notation of the lien of National Mortgage 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 National
Mortgage has failed to perfect or cause to be perfected the security interest
assigned to the trust, the security interest would be subordinate to, among
others, 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.
In the event that 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, until the
owner re-registers the manufactured home in the new state. If the owner
relocates a manufactured home to another state and re-registers the manufactured
home in the new state, and if National Mortgage 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, National Mortgage must surrender possession if it holds the
certificate of title to a manufactured home or, in the case of manufactured
homes registered in states that provide for notation of lien, National Mortgage
would receive notice of surrender if the security interest in the manufactured
home is noted on the certificate of title. Accordingly, National Mortgage 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 on it and accordingly will have an opportunity to require satisfaction of
the related manufactured housing conditional sales contract before release of
the lien. The master servicer or the servicer will be obligated to take such
steps, at its expense, as are necessary to maintain perfection of security
interests in the manufactured homes.
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Under the laws of most states, liens for repairs performed on a
manufactured home take priority even over a perfected security interest.
National Mortgage will obtain the representation of each seller that it has no
knowledge of any such liens with respect to any manufactured home securing a
contract. However, these liens could arise at any time during the term of a
contract. No notice will be given to the trustee or securityholders in the
event this type of lien arises.
Repossession with Respect to 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 such
home in the event of a default by the obligor will generally be governed by the
UCC, except in Louisiana. 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 certain small particulars, the general repossession
procedure established by the UCC is as follows:
. 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 -- peaceable retaking without court order --,
voluntary repossession or through judicial process, such as
repossession pursuant to court-issued writ of replevin. The self-help
and 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, in the event
that 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.
. 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.
. Sale proceeds are to be applied first to repossession expenses --
expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling --
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and then to satisfaction of the indebtedness. While some states impose
prohibitions or limitations on deficiency judgments if the net
proceeds from 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
these 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.
Louisiana Law
Any contract secured by a manufactured home located in Louisiana will be
governed by Louisiana law rather than Article 9 of the UCC. Louisiana laws
provide similar mechanisms for perfection and enforcement of security interests
in manufactured housing used as collateral for an installment sale contract or
installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed to
real estate will nevertheless remain subject to the motor vehicle registration
laws unless the obligor and any holder of a security interest in the property
execute and file in the real estate records for the parish in which the property
is located a document converting the unit into real property. A manufactured
home that is converted into real property but is then removed from its site can
be converted back to personal property governed by the motor vehicle
registration laws if the obligor executes and files various documents in the
appropriate real estate records and all mortgagees under real estate mortgages
on the property and the land to which it was affixed file releases with the
motor vehicle commission.
As long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process -- repossession proceedings which must be
initiated through the courts but which involve minimal court supervision -- or a
civil suit for possession. In connection with a voluntary surrender, the
obligor must be given a full release from liability for all amounts due under
the contract. In executory process repossessions, a sheriff's sale -- without
court supervision -- is permitted, unless the obligor brings suit to enjoin the
sale, and the lender is prohibited from seeking a deficiency judgment against
the obligor unless the lender obtained an appraisal of the manufactured home
prior to the sale and the property was sold for at least two-thirds of its
appraised value.
Cooperative Loans
The mortgage loans may contain cooperative loans evidenced by promissory
notes secured by security interests in shares issued by private corporations
that are entitled to be treated as housing cooperatives under the Code and in
the related proprietary leases or occupancy
<PAGE>
agreements granting exclusive rights to occupy specific dwelling units in the
corporations' buildings. The security agreement will create a lien upon, or
grant a title interest in, the property which it covers, the priority of which
will depend on the terms of the particular security agreement as well as the
order of recordation of the agreement in the appropriate recording office. This
lien or title interest is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers.
It is expected that all cooperative apartments relating to the cooperative
loans are located in the State of New York. A corporation that is entitled to
be treated as a housing cooperative under the Code owns all the real property or
some interest in the real estate sufficient to permit it to own the building and
all separate dwelling units. The cooperative is directly responsible for
property management and, in most cases, payment of real estate taxes and hazard
and liability insurance. If there is a blanket mortgage or mortgages on the
cooperative apartment building and underlying land, as is generally the case, or
an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, is also responsible for meeting these
mortgage or rental obligations. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord is
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease. If the cooperative is unable to
meet the payment obligations arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements arising under its land
lease, the holder of the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the cooperative to refinance a mortgage and its
consequent inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date, and the inability of
the cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. A foreclosure
by the holder of a blanket mortgage could eliminate or significantly diminish
the value of any collateral held by the lender who financed an individual
tenant-stockholder of cooperative shares or, in the case of the mortgage loans,
the collateral securing the cooperative loans. Similarly, the termination of
the land lease by its holder could eliminate or significantly diminish the value
of any collateral held by the lender who financed an individual tenant-
stockholder of the cooperative shares or, in the case of the mortgage loans, the
collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary 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 such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary
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lease and in the cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder" -- as defined in Section 216(b)(2) of
the Code -- of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Section 216(b)(1) of the Code is allowed a
deduction for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Section 216(a) of the Code to
the corporation under Sections 163 and 164 of the Code. In order for a
corporation to qualify under Section 216(b)(1) of the Code for its taxable year
in which such items are allowable as a deduction to the corporation, this
section requires, among other things, that at least 80% of the gross income of
the corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Code must be determined on a year-to-year basis. Consequently, there can be
no assurance that cooperatives relating to the cooperative loans will qualify
under such section for any particular year. In the event that such a
cooperative fails to qualify for one or more years, the value of the collateral
securing any cooperative loans could be significantly impaired because no
deduction would be allowable to tenant-stockholders under Section 216(a) of the
Code with respect to those years. In view of the significance of the tax
benefits accorded tenant-stockholders of a corporation that qualifies under
Section 216(b)(1) of the Code, the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
Realizing upon Cooperative Loan Security
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. The proprietary lease or occupancy agreement, even while
pledged, may be canceled by the cooperative for failure by the tenant-
stockholder to pay rent or other obligations or charges owed by such tenant-
stockholder, including mechanics' liens against the cooperative apartment
building incurred by the tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
which 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 borrower defaults in the performance of
covenants. Typically, the lender and the cooperative enter into a
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recognition agreement which 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 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 which 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.
Recognition agreements also provide that in the event the lender succeeds
to the tenant-shareholder's shares and proprietary lease or occupancy agreement
as the result of realizing upon its collateral for 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-stockholder.
In New York, lenders generally have realized upon the pledged shares and
proprietary lease or occupancy agreement given to secure a cooperative loan by
public sale in accordance with the provisions of Article 9 of the New York UCC
and the security agreement relating to those shares. Article 9 of the New York
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a 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 sale. Generally, a sale conducted according to the usual
practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the New York 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-stockholder is
generally responsible for the deficiency.
Consumer Protection Laws with respect to Mortgage Assets
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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 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. In some cases, this liability may affect an assignee's
ability to enforce a contract. In particular, the originators' failure to
comply with certain requirements of the Federal Truth-in-Lending Act, as
implemented by Regulation Z, could subject both originators and assignees of
such obligations to monetary penalties and could result in obligors' rescinding
the contracts against either the originators or assignees.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Late charges will be retained by the master servicer or the
servicer as additional servicing compensation, and any inability to collect
these amounts will not affect payments to you.
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.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller -- and certain 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.
The contracts in your trust may be subject to the requirements of the FTC
Rule. Accordingly, the trustee, as holder of the contracts, may be subject to
any claims or defenses that the purchaser of the 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 contract. If an obligor is
successful in asserting this claim or defense, and if the seller had or should
have had knowledge of such claim or defense, the master servicer will have the
right to require the seller to repurchase the contract because of a breach of
its representation and warranty that no claims or defenses exist that would
affect the obligor's obligation to make the required payments under the
contract. The seller would then have the right to require the originating
dealer to repurchase the contract from it and might also have the right to
recover from the dealer for any losses suffered by the seller with respect to
which the dealer would have been primarily liable to the obligor.
Rights of Reinstatement and Redemption
In some states, the obligor, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement or redemption
period, cure the default by paying the entire amount in arrears plus certain of
the costs and expenses incurred in enforcing the obligation. Certain state laws
control the amount of foreclosure expenses and costs, including attorneys'
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fees, which may be recovered by a lender. In some states, the obligor has the
right to reinstate the loan at any time following default until shortly before
the foreclosure sale.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the obligor and certain foreclosed junior encumbrancers are given a
statutory period in which to redeem the mortgaged property from the foreclosure
sale. Depending upon state law, the right of redemption may apply to sale
following judicial foreclosure, or to sale pursuant to a non-judicial power of
sale. Where the right of redemption is available, in some states statutory
redemption may occur only upon payment of the foreclosure purchase price,
accrued interest and taxes and certain of the costs and expenses incurred in
enforcing the obligation. In other states, redemption may be authorized if the
former obligor pays only a portion of the sums due. In some states, the right
to redeem is a statutory right and in others it is a contractual right. The
effect of a right of redemption is to diminish the ability of the lender to sell
the foreclosed mortgaged property, while such right of redemption is
outstanding. The exercise of a right of redemption would defeat the title of
any purchaser at a foreclosure sale, or of any purchaser from the lender
subsequent to judicial foreclosure or sale under a deed of trust. Consequently,
the practical effect of the redemption right is to force the lender to maintain
the property and pay the expenses of ownership until the redemption period has
run.
Leases and Rents
Multifamily mortgage loan transactions often provide for an assignment of
the leases and rents pursuant to which the obligor typically assigns its right,
title and interest, as landlord under each lease and the income derived
therefrom, to the lender while either obtaining a license to collect rents for
so long as there is no default or providing for the direct payment to the
lender. Local law, however, may require that the lender take possession of the
property and appoint a receiver before becoming entitled to collect the rents
under the lease.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the obligor following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
obligor equal in most cases to the difference between the amount due to the
lender and greater of the net amount realized upon the foreclosure sale and the
market value of the mortgaged property.
Statutory provisions may limit any deficiency judgment against the former
obligor following a foreclosure sale to the excess of the outstanding debt over
the fair market value of the mortgaged property at the time of the sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former obligor as a result of
low or no bids at the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt
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before bringing a personal action against the obligor. In other states, the
lender has the option of bringing a personal action against the obligor on the
debt without first exhausting such security; however, in some of these states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the obligor.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the obligor, for example, in the event of waste of the
mortgaged property.
Generally, lenders realize on cooperative shares and the accompanying
proprietary lease given to secure a cooperative loan under Article 9 of the UCC.
Some courts have interpreted Section 9-504 of the UCC to prohibit a deficiency
award unless the creditor establishes that the sale of the collateral -- which,
in the case of a cooperative loan, would be the shares of the cooperative and
the related proprietary lease or occupancy agreement -- was conducted in a
commercially reasonable manner.
In addition to anti-deficiency and related legislation, numerous federal
and state statutory provisions, including the federal bankruptcy laws, the
federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws affording
relief to debtors, may interfere with or affect the ability of a secured
mortgage lender to realize upon its security and 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 for collection of a debt.
In a Chapter 13 proceeding under the United States Bankruptcy Code, as
amended, as set forth in Title 11 of the United States Code (the "Bankruptcy
Code"), when a court determines that the value of a home is less than the
principal balance of the loan, the court may prevent a lender from foreclosing
on the home, and, as part of the rehabilitation plan, reduce the amount of the
secured indebtedness to the value of the home as it exists at the time of the
proceeding, leaving the lender as a general unsecured creditor for the
difference between that value and the amount of outstanding indebtedness. A
bankruptcy court may grant the debtor a reasonable time to cure a payment
default, and in the case of a mortgage loan not secured by the debtor's
principal residence, also may reduce the periodic payments due under the
mortgage loan, change the rate of interest and alter the mortgage loan repayment
schedule. Court decisions have applied this relief to claims secured by the
debtor's principal residence. If a court relieves an obligor's obligation to
repay amounts otherwise due on a mortgage loan, the servicer will not be
required to advance these amounts, and any loss may reduce the amounts available
to be paid to you.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved
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financing. The bankruptcy court can, in effect, invalidate due-on-sale clauses
through confirmed Chapter 11 plans of reorganization.
The Code provides priority to certain tax liens over the lien of the
mortgage or deed of trust. Other federal and state laws provide priority to
certain tax and other liens over the lien of the mortgage or deed of trust.
Numerous federal and some state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and the enforcement of mortgage loans. These laws include the federal Truth in
Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity
Act, Fair Credit Billing Act, Fair Credit Reporting Act, and related statutes
and regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service,
. are entitled to have interest rates reduced and capped at 6% per annum
on obligations -- including mortgage loans -- incurred prior to the
commencement of military service for the duration of military service,
. may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on these obligations entered
into prior to military service and
. may have the maturity of these obligations incurred prior to military
service extended, the payments lowered and the payment schedule
readjusted for a period of time after the completion of military
service.
However, these benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with these obligations
is not materially impaired by military service, the court may apply equitable
principles accordingly. If an obligor's obligation to repay amounts otherwise
due on a mortgage loan included in your trust is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, neither the servicer, the
master servicer nor the trustee will be required to advance these amounts, and
any loss may reduce the amounts available to you. Any shortfalls in interest
collections on mortgage loans included in your trust resulting from application
of the Soldiers' and Sailors' Civil Relief Act of 1940 generally will be
allocated to each class that is entitled to receive interest in proportion to
the interest that each class would have otherwise been entitled to receive in
respect of these mortgage loans had this interest shortfall not occurred.
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Environmental Considerations
The federal Comprehensive Environmental Response Compensation and Liability
Act, as amended, ("CERCLA") imposes strict liability on present and past
"owners" and "operators" of contaminated real property for the costs of clean-
up. A secured lender may be liable as an "owner" or "operator" of a
contaminated mortgaged property if agents or employees of the lender have become
sufficiently involved in the management of such mortgaged property or the
operations of the borrower. This liability may exist even if the lender did not
cause or contribute to the contamination and regardless of whether the lender
has actually taken possession of a mortgaged property through foreclosure, deed
in lieu of foreclosure or otherwise. The magnitude of the CERCLA liability at
any given contaminated site is a function of the actions required to address
adequately the risks to human health and the environment posed by the particular
conditions at the site. As a result, such liability is not constrained by the
value of the property or the amount of the original or unamortized principal
balance of any loans secured by the property. Moreover, under certain
circumstances, liability under CERCLA may be joint and several -- i.e., any
liable party may be obligated to pay the entire cleanup costs regardless of its
relative contribution to the contamination. If a lender is found to be liable,
it is entitled to bring an action for contribution against other liable parties,
such as the present or past owners and operators of the property. The lender
nonetheless may have to bear a disproportionate share of the liability if such
other parties are defunct or without substantial assets.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "1996 Lender Liability Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
1996 Lender Liability Act offers protection to lenders by defining certain
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. A lender will be deemed to have participated in the
management of a mortgaged property, and will lose the secured creditor
exemption, if it actually participates in the operational affairs of the
property of the borrower. The 1996 Lender Liability Act provides that "merely
having the capacity to influence, or unexercised right to control" operations
does not constitute participation in management. A lender will lose the
protection of the secured creditor exemption if it exercises decision-making
control over the borrower's environmental compliance and hazardous substance
handling and disposal practices, or assumes day-to-day management of all
operational functions of the mortgaged property. The 1996 Lender Liability Act
also provides that a lender may continue to have the benefit of the secured
creditor exemption even if it forecloses on a mortgaged property, purchases it
at a foreclosure sale or accepts a deed-in-lieu of foreclosure provided that the
lender seeks to sell the mortgaged property at the earliest practicable
commercially reasonable time on commercially reasonable terms.
Many states have environmental clean-up statutes similar to CERCLA, and not
all those statutes provide for a secured creditor exemption. In addition,
underground storage tanks are commonly found on a wide variety of commercial and
industrial properties. Federal and state laws impose liability on the owners
and operators of underground storage tanks for any cleanup that may be required
as a result of releases from such tanks. These laws also impose certain
compliance obligations on the tank owners and operators, such as regular
monitoring for leaks
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and upgrading of older tanks. A lender may become a tank owner or operator, and
subject to compliance obligations and potential cleanup liabilities, either as a
result of becoming involved in the management of a site at which a tank is
located or, more commonly, by taking title to such a property. Federal and state
laws also obligate property owners and operators to maintain and, under some
circumstances, to remove asbestos-containing building materials and lead based
paint. As a result, the presence of these materials can increase the cost of
operating a property and thus diminish its value. In a few states, transfers of
some types of properties are conditioned upon cleanup of contamination prior to
transfer. In these cases, a lender that becomes the owner of a property through
foreclosure, deed in lieu of foreclosures or otherwise may be required to clean
up the contamination before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action -- for example, actions based on nuisance or on toxic tort resulting
in death, personal injury or damage to property -- related to hazardous
environmental conditions on a property. While it may be more difficult to hold
a lender liable in these cases, unanticipated or uninsured liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
Under the laws of many states, contamination of a property may give rise to
a lien on the property for clean-up costs. In several states, such a lien has
priority over all existing liens, including those of existing security
instruments. In these states, the lien of a security instrument may lose its
priority to such a "superlien."
At the time the mortgage loans were originated, it is possible that no
environmental assessment or a very limited environmental assessment of the
mortgaged property was conducted. No representations or warranties are made by
the asset seller or National Mortgage as to the absence or effect of hazardous
wastes or hazardous substances on any of the mortgaged property. In addition,
the servicers have not made any representations or warranties or assumed any
liability with respect to the absence or effect of hazardous wastes or hazardous
substances on any mortgaged property or any casualty resulting from the presence
or effect of hazardous wastes or hazardous substances and any loss or liability
resulting from the presence or effect of such hazardous wastes or hazardous
substances will reduce the amounts otherwise available to pay to you.
Generally, the servicers are not permitted to foreclose on any mortgaged
property without the approval of the master servicer. The master servicer is
not permitted to approve foreclosure on any property which it knows or has
reason to know is contaminated with or affected by hazardous wastes or hazardous
substances. The master servicer is required to inquire of any servicer
requesting approval of foreclosure whether the property proposed to be
foreclosed upon is so contaminated. If a servicer does not foreclose on
mortgaged property, the amounts otherwise available to pay to you may be
reduced. A servicer will not be liable to the holders of the securities if it
fails to foreclose on mortgaged property that it reasonably believes may be so
contaminated or affected, even if such mortgaged property are, in fact, not so
contaminated or affected. Similarly, a servicer will not be liable to the
holders of the securities if based on its reasonable belief that no such
contamination or effect exists, the servicer forecloses on
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mortgaged property and takes title to the mortgaged property, and then the
mortgaged properties are determined to be contaminated or affected.
"Due-on Sale" Clauses
The forms of note, mortgage and deed of trust relating to conventional
mortgage loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the obligor transfers its interest in the mortgaged
property. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in many
states. However, effective October 15, 1982, Congress enacted the Garn-St
Germain Depository Institutions Act of 1982 (the "Act"), which, after a 3-year
grace period, preempted state laws which prohibit the enforcement of due-on-sale
clauses by providing, among other matters, that "due-on-sale" clauses in certain
loans -- which loans include the conventional mortgage loans -- made after the
effective date of the Act are enforceable within limitations identified in the
Act and its regulations.
By virtue of the Act, the mortgage lender generally may be permitted to
accelerate any conventional mortgage loan which contains a "due-on-sale" clause
upon transfer of an interest in the mortgaged property. With respect to any
mortgage loan secured by a residence occupied or to be occupied by the obligor,
this ability to accelerate will not apply to certain types of transfers,
including
. the granting of a leasehold interest which has a term of three years or
less and which does not contain an option to purchase,
. a transfer to a relative resulting from the death of an obligor, or a
transfer where the spouse or child(ren) becomes an owner of the
mortgaged property in each case where the transferee(s) will occupy the
mortgaged property,
. a transfer resulting from a decree of dissolution of marriage, legal
separation agreement or from an incidental property settlement agreement
by which the spouse becomes an owner of the mortgaged property,
. the creation of a lien or other encumbrance subordinate to the lender's
security instrument which does not relate to a transfer of rights of
occupancy in the mortgaged property, provided that the lien or
encumbrance is not created pursuant to a contract for deed,
. a transfer by devise, descent or operation of law on the death of a
joint tenant or tenant by the entirety, and
. other transfers set forth in the Act and its regulations.
As a result, a lesser number of mortgage loans which contain "due-on-sale"
clauses may extend to full maturity than earlier experience would indicate with
respect to single-family mortgage loans. The extent of the effect of the Act on
the average lives and delinquency rates of the
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mortgage loans, however, cannot be predicted. FHA and VA loans do not contain
due-on-sale clauses. See "Maturity and Prepayment Considerations" in this
prospectus.
Enforceability of Prepayment and Late Payment Fees
The standard form of note, mortgage and deed of trust used by lenders may
contain provisions obligating the obligor to pay a late charge if payments are
not timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from an obligor for delinquent payments. Certain states also limit the amounts
that a lender may collect from an obligor as an additional charge if the loan is
prepaid. The enforceability, under the laws of a number of states of provisions
providing for prepayment fees or penalties upon an involuntary prepayment is
unclear, and no assurance can be given that, at the time a prepayment fee or
penalty is required to be made on a mortgage loan in connection with an
involuntary prepayment, the obligation to make the payment will be enforceable
under applicable state law. The absence of a restraint on prepayment,
particularly with respect to mortgage loans having higher mortgage rates, may
increase the likelihood of refinancing or other early retirements of the
mortgage loans. Generally, late charges and prepayment fees -- to the extent
permitted by law and not waived by the servicers -- will be retained by the
servicers or master servicer as additional servicing compensation.
Equitable Limitations on Remedies
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the obligor from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
obligor's default and the likelihood that the obligor will be able to reinstate
the loan. In some cases, courts have substituted their judgment for the
lender's judgment and have required lenders to reinstate loans or recast payment
schedules to accommodate obligors who are suffering from temporary financial
disability. In other cases, courts have limited the right of lenders to
foreclose if the default under the security instrument is not monetary, like the
obligor failing to adequately maintain the mortgaged property or the obligor
executing a second mortgage or deed of trust affecting the mortgaged property.
Finally, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that obligors under the deeds of trust receive notices in addition to
the statutorily-prescribed minimum requirements. 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
protections to the obligor.
The mortgage loans may include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary default of the obligor, after
the applicable cure period. The courts of all states will enforce clauses
providing for acceleration in the event of a material payment default. However,
courts of any state, exercising equity jurisdiction, may refuse to
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allow a lender to foreclose a mortgage or deed of trust when an acceleration of
the indebtedness would be inequitable or unjust and the circumstances would
render the acceleration unconscionable.
Secondary Financing; Due-on-Encumbrance Provisions
Some of the mortgage loans may not restrict secondary financing, permitting
the obligor to use the mortgaged property as security for one or more additional
loans. Other of the mortgage loans may preclude secondary financing -- by
permitting the first lender to accelerate the maturity of its loan if the
obligor further encumbers the mortgaged property or in some other fashion -- or
may require the consent of the senior lender to any junior or substitute
financing. However, these provisions may be unenforceable in some jurisdictions
under certain circumstances.
Where the obligor encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. For example, the
obligor may have difficulty servicing and repaying multiple loans or acts of the
senior lender which 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 obligor and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior lender is harmed
or the obligor is additionally burdened. In addition, if the obligor defaults
on the senior loan and/or any junior loan or loans, the existence of junior
loans and actions taken by junior lenders can impair the security available to
the senior lender and can interfere with, delay and in certain circumstances
even prevent the taking of action by the senior lender. In addition, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Certain Legal Aspects of the Financial Assets
Financial assets held by your trust will have legal characteristics
different from mortgage assets. Financial assets will represent interests in,
or will be secured by, mortgage loans or other mortgage assets held by another
trust. Each financial asset held by your trust will be registered in the name
of your trustee, or your trustee will be the beneficial owner of the financial
asset, if book-entry. Your interests in the underlying financial assets may
only be exercised through your trustee. The particular entitlements represented
by the financial assets in your trust, and the underlying mortgage assets in
each, will be detailed in your prospectus supplement.
The Depositor
National Mortgage Securities Corporation was incorporated in Virginia on
September 14, 1999, as a wholly owned, limited-purpose financing subsidiary of
National Mortgage Acceptance Corporation. National Mortgage's principal office
is located at 909 East Main Street, Richmond, Virginia 23219-3002, telephone
(804) 649-3952. National Mortgage was formed solely for the purpose of
facilitating the financing and sale of mortgage-related assets. It may not
engage in any business or investment activities other than issuing and selling
securities secured primarily by, or evidencing interests in, mortgage-related
assets and taking certain similar
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actions. National Mortgage's Articles of Incorporation limit National Mortgage's
business to the foregoing and place certain other restrictions on National
Mortgage's activities. National Mortgage has authorized capital stock consisting
of 1,000 shares of Common Stock. All 1,000 of these authorized shares are held
by National Mortgage Acceptance Corporation.
National Mortgage does not have, nor is it expected in the future to have,
any significant assets.
Use of Proceeds
Substantially all of the net proceeds from the sale of each series of
securities will be applied by National Mortgage to purchase the trust assets
assigned to the trust underlying each series or to fund loans to finance
companies secured by the pledge of trust assets to the trust for each series.
Federal Income Tax Consequences
The following is the opinion of Hunton & Williams regarding the material
federal income tax consequences of the purchase, ownership, and disposition of
the securities. This opinion is based upon laws, regulations, rulings, and
decisions now in effect, all of which are subject to change. Because REMIC
status may be elected with respect to certain series, this discussion includes a
summary of the federal income tax consequences to holders of REMIC securities.
This opinion does not purport to deal with the federal income tax
consequences that may affect particular investors in light of their individual
circumstances, or with certain categories of investors that are given special
treatment under the federal income tax laws, such as banks, insurance companies,
thrift institutions, tax-exempt organizations, foreign investors, certain
regulated entities, real estate investment trusts ("REITs"), investment
companies, and certain other organizations that face special rules. This
opinion focuses primarily on investors who will hold the securities as capital
assets -- generally, property held for investment -- within the meaning of
Section 1221 of the Code, although much of this opinion is applicable to other
investors as well. You should note that, although final regulations under the
REMIC provisions of the Code (the "REMIC Regulations") have been issued by the
Treasury Department (the "Treasury"), no currently effective regulations or
other administrative guidance has been issued concerning certain provisions of
the Code that are or may be applicable to you, particularly the provisions
dealing with market discount and stripped debt securities. Although the
Treasury has issued final regulations dealing with original issue discount and
premium, those regulations do not address directly the treatment of REMIC
regular securities and certain other types of securities. Furthermore, the
REMIC regulations do not address many of the issues that arise in connection
with the formation and operation of a REMIC. Hence, definitive guidance cannot
be provided with respect to many aspects of the tax treatment of
securityholders, particularly residual securityholders. Moreover, this opinion
and the opinion referred to below are based on current law, and there can be no
assurance that the Internal Revenue Service (the "IRS") will not take positions
that would be materially adverse to investors. Finally, this opinion does not
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purport to address the anticipated state income tax consequences to investors of
owning and disposing of the securities. Consequently, you should consult your
own tax advisor in determining the federal, state, foreign, and any other tax
consequences to you of the purchase, ownership, and disposition of the
securities.
General
Many aspects of the federal income tax treatment of the securities will
depend upon whether an election is made to treat your trust, or one or more
segregated pools of trust assets, as a REMIC. The accompanying prospectus
supplement will indicate whether a REMIC election or elections will be made with
respect to your trust. For each series in which one or more REMIC elections are
to be made, Hunton & Williams, counsel to National Mortgage, will deliver a
separate opinion generally to the effect that, assuming timely filing of a REMIC
election or elections and compliance with the pooling and master servicing
agreement and certain other documents specified in the opinion, the trust -- or
one or more segregated pools of trust assets -- will qualify as one or more
REMICs (each, a "Series REMIC"). For each series with respect to which a REMIC
election is not to be made, Hunton & Williams will deliver a separate opinion
generally to the effect that the trust will be treated as (i) a FASIT under
Sections 860H through 860L of the Code, (ii) a grantor trust under subpart E,
Part I of subchapter J of the Code that will issue securities (the "Grantor
Trust Securities"), (iii) a trust fund treated as a partnership for federal
income tax purposes that will issue securities (the "Partnership Securities"),
or (iv) a trust fund treated either as a partnership or a disregarded entity for
federal income tax purposes that will issue notes (the "Debt Securities"). Those
opinions will be based on existing law, but there can be no assurance that the
law will not change or that contrary positions will not be taken by the IRS.
REMIC Certificates
Each REMIC certificate will be classified as either a REMIC regular
certificate, which generally is treated as debt for federal income tax purposes,
or a Residual Certificate, which generally is not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the REMIC. The accompanying prospectus supplement
for each series of REMIC certificates will indicate which of the certificates of
the series will be classified as REMIC regular certificates and which will be
classified as Residual Certificates. REMIC certificates held by a thrift
institution taxed as a "domestic building and loan association" will constitute
a "regular or residual interest in a REMIC," as the case may be, within the
meaning of Section 7701(a)(19)(C)(xi) of the Code; REMIC certificates held by a
REIT will constitute "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code; and interest on these certificates will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B), all in the same proportion that the related
REMIC's assets would so qualify. If 95% or more of the assets of a given Series
REMIC constitute qualifying assets for thrift institutions and REITs, the REMIC
certificates and income on them will be treated entirely as qualifying assets
and income for these purposes. REMIC regular and Residual Certificates held by
a financial institution to which Section 585 of the Code applies will be treated
as evidences of indebtedness for purposes of Section 582(c)(1) of the Code. The
REMIC regular certificates
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generally will be "qualified mortgages" within the meaning of Section 860G(a)(3)
of the Code with respect to other REMICs. REMIC regular certificates held by a
financial asset securitization investment trust (a "FASIT") will qualify for
treatment as "permitted assets" within the meaning of Section 860L(c)(1)(G) of
the Code. In the case of a series for which two or more Series REMICs will be
created, all Series REMICs will be treated as a single REMIC for purposes of
determining the extent to which the certificates and the income on them will be
treated as qualifying assets and income for such purposes. However, REMIC
certificates will not qualify as government securities for REITs and regulated
investment companies ("RICs") in any case.
Tax Treatment of REMIC Regular Certificates
Payments received by holders of REMIC regular certificates generally should
be accorded the same tax treatment under the Code as payments received on other
taxable corporate debt instruments. Except as described below for REMIC regular
certificates issued with original issue discount or acquired with market
discount or premium, interest paid or accrued on REMIC regular certificates will
be treated as ordinary income to you and a principal payment on these
certificates will be treated as a return of capital to the extent that your
basis in the certificate is allocable to that payment. Holders of REMIC regular
certificates or Residual Certificates must report income from their certificates
under an accrual method of accounting, even if they otherwise would have used
the cash receipts and disbursements method. The trustee or the master servicer
will report annually to the IRS and to holders of record with respect to
interest paid or accrued and original issue discount, if any, accrued on the
certificates. The trustee or the master servicer will be the party responsible
for computing the amount of original issue discount to be reported to the REMIC
regular certificate holders each taxable year (the "Tax Administrator").
Under temporary Treasury regulations, holders of REMIC regular certificates
issued by "single-class REMICs" who are individuals, trusts, estates, or pass-
through entities in which such investors hold interests may be required to
recognize certain amounts of income in addition to interest and discount income.
A single-class REMIC, in general, is a REMIC that (i) would be classified as an
investment trust in the absence of a REMIC election or (ii) is substantially
similar to an investment trust. Under the temporary Treasury regulations, each
holder of a regular or residual interest in a single-class REMIC is allocated
(i) a share of the REMIC's "allocable investment expenses" -- i.e., expenses
normally allowable under Section 212 of the Code, which may include servicing
and administrative fees and insurance premiums -- and (ii) a corresponding
amount of additional income. Section 67 of the Code permits an individual,
trust or estate to deduct miscellaneous itemized expenses -- including Section
212 expenses -- only to the extent that such expenses, in the aggregate, exceed
2% of its adjusted gross income. Consequently, an individual, trust or estate
that holds a regular interest in a single-class REMIC -- either directly or
through a pass-through entity -- will recognize additional income with respect
to such regular interest to the extent that its share of allocable investment
expenses, when combined with its other miscellaneous itemized deductions for the
taxable year, fails to exceed 2% of its adjusted gross income. Any such
additional income will be treated as interest income. In addition, Code Section
68 provides that the amount of itemized deductions otherwise
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allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount -- $126,600, or $63,300 in the case of a separate
return by a married individual within the meaning of Code Section 7703 for
taxable year 1999 and adjusted for inflation each year thereafter -- will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, and (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The amount of such additional taxable income
recognized by holders who are subject to the limitations of either Section 67 or
Section 68 may be substantial and may reduce or eliminate the after-tax yield to
such holders of an investment in the certificates of an affected series. Where
appropriate, the prospectus supplement for a particular REMIC series will
indicate that the holders of certificates of this series may be required to
recognize additional income as a result of the application of the limitations of
either Section 67 or Section 68 of the Code. Non-corporate holders of REMIC
regular certificates evidencing an interest in a single-class REMIC also should
be aware that miscellaneous itemized deductions, including allocable investment
expenses attributable to such REMIC, are not deductible for purposes of the
alternative minimum tax ("AMT").
Original Issue Discount
Certain classes of REMIC regular certificates may be issued with "original
issue discount" within the meaning of Section 1273(a) of the Code. In general,
such original issue discount, if any, will equal the excess, if any, of the
"stated redemption price at maturity" of the REMIC regular certificate --
generally, its principal amount -- over its "issue price." Holders of REMIC
regular certificates as to which there is original issue discount should be
aware that they generally must include original issue discount in income for
federal income tax purposes on an annual basis under a constant yield accrual
method that reflects compounding. In general, original issue discount is
treated as ordinary income and must be included in income in advance of the
receipt of the cash to which it relates.
The amount of original issue discount required to be included in a REMIC
regular certificateholder's income in any taxable year will be computed in
accordance with Section 1272(a)(6) of the Code, which provides rules for the
accrual of original issue discount under a constant yield method for certain
debt instruments, such as the REMIC regular certificates, that are subject to
prepayment by reason of prepayments of underlying obligations. Under Section
1272(a)(6), the amount and rate of accrual of original issue discount on a REMIC
regular certificate generally is calculated based on (i) a single constant yield
to maturity and (ii) the prepayment rate for the related mortgage collateral and
the reinvestment rate on amounts held pending distribution that were assumed in
pricing the REMIC regular certificate (the "Pricing Prepayment Assumptions").
No regulatory guidance currently exists under Code Section 1272(a)(6).
Accordingly, until the Treasury issues guidance to the contrary, the Tax
Administrator will, except as otherwise provided, base its computations on Code
Section 1272(a)(6), existing final regulations that govern the accrual of
original issue discount on debt instruments, but that do not address directly
the treatment of instruments that are subject to Code Section 1272(a)(6) (the
"OID Regulations"), and certain other guidance, all as described below.
However, there can be no assurance that the methodology described below
represents the correct manner of calculating original issue discount on the
REMIC regular certificates. The Tax
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Administrator will account for income on certain REMIC regular certificates that
provide for one or more contingent payments as described in "Federal Income Tax
Consequences -- REMIC Certificates-- Interest Weighted Certificates and Non-VRDI
Certificates" in this prospectus. Prospective purchasers should be aware that
neither National Mortgage, the trustee, the master servicer, nor any servicer
will make any representation that the mortgage assets underlying a series will
in fact prepay at a rate conforming to the related Pricing Prepayment
Assumptions or at any other rate.
The amount of original issue discount on a REMIC regular certificate is an
amount equal to the excess, if any, of the certificate's "stated redemption
price at maturity" over its "issue price." Under the OID Regulations, a debt
instrument's stated redemption price at maturity is the sum of all payments
provided by the instrument other than "qualified stated interest" (the "Deemed
Principal Payments"). Qualified stated interest, in general, is stated interest
that is unconditionally payable in cash or property -- other than debt
instruments of the issuer -- at least annually at (i) a single fixed rate or
(ii) a variable rate that meets certain requirements set out in the OID
Regulations. See "Federal Income Tax Consequences -- REMIC Certificates --
Variable Rate Certificates" in this prospectus. Thus, in the case of any REMIC
regular certificate, the stated redemption price at maturity will equal the
total amount of all Deemed Principal Payments due on that certificate.
Since a certificate that is part of an Accretion Class generally will not
require unconditional payments of interest at least annually, the stated
redemption price at maturity of this certificate will equal the aggregate of all
payments due, whether designated as principal, accrued interest, or current
interest. The issue price of a REMIC regular certificate generally will equal
the initial price at which a substantial amount of certificates of the same
class is sold to the public.
The OID Regulations contain an aggregation rule (the "Aggregation Rule")
under which two or more debt instruments issued in connection with the same
transaction or related transactions -- determined based on all the facts and
circumstances -- generally are treated as a single debt instrument for federal
income tax accounting purposes if issued by a single issuer to a single holder.
The Aggregation Rule, however, does not apply if the debt instrument is part of
an issue (i) a substantial portion of which is traded on an established market
or (ii) a substantial portion of which is issued for cash -- or property traded
on an established market -- to parties who are not related to the issuer or
holder and who do not purchase other debt instruments of the same issuer in
connection with the same transaction or related transactions. In most cases,
the Aggregation Rule will not apply to REMIC regular certificates of different
classes because one or both of the exceptions to the Aggregation Rule will have
been met. Although the Tax Administrator currently intends to apply the
Aggregation Rule to all REMIC regular interests in a Series REMIC that are held
by a related Series REMIC, it generally will not apply the Aggregation Rule to
REMIC regular certificates for purposes of reporting to certificateholders.
Under a de minimis rule, a REMIC regular certificate will be considered to
have no original issue discount if the amount of original issue discount is less
than 0.25% of the certificate's stated redemption price at maturity
multiplied by the weighted average maturity
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("WAM") of all Deemed Principal Payments. For that purpose, the WAM of a REMIC
regular certificate is the sum of the amounts obtained by multiplying the amount
of each Deemed Principal Payment by a fraction, the numerator of which is the
number of complete years from the certificate's issue date until the payment is
made, and the denominator of which is the certificate's stated redemption price
at maturity. Although no Treasury regulations have been issued under the
relevant provisions of the 1986 Act, it is expected that the WAM of a REMIC
regular certificate will be computed using the Pricing Prepayment Assumptions. A
REMIC regular certificateholder will include de minimis original issue discount
in income on a pro rata basis as stated principal payments on the certificate
are received or, if earlier, upon disposition of the certificate, unless the
certificateholder makes an election to include in gross income all stated
interest, acquisition discount, original issue discount, de minimis original
issue discount, market discount, and de minimis market discount accruing on the
REMIC regular certificate, reduced by any amortizable premium or acquisition
premium accruing on the REMIC regular certificate, under the constant yield
method used to account for original issue discount (an "All OID Election").
REMIC regular certificates may bear interest under terms that provide for a
teaser rate period, interest holiday, or other period during which the rate of
interest payable on the certificates is lower than the rate payable during the
remainder of the life of the certificates ("Teaser Certificates"). Under
certain circumstances, a Teaser Certificate may be considered to have a de
minimis amount of original issue discount even though the amount of original
issue discount on the certificate would be more than de minimis as determined as
described above if the stated interest on a Teaser Certificate would be
qualified stated interest but for the fact that during one or more accrual
periods its interest rate is below the rate applicable for the remainder of its
term, the amount of original issue discount on such certificate that is measured
against the de minimis amount of original issue discount allowable on the
certificate is the greater of (i) the excess of the stated principal amount of
the certificate over its issue price ("True Discount") and (ii) the amount of
interest that would be necessary to be payable on the certificate in order for
all stated interest to be qualified stated interest.
The holder of a REMIC regular certificate generally must include in gross
income the sum, for all days during his taxable year on which he holds the REMIC
regular certificate, of the "daily portions" of the original issue discount on
such certificate. In the case of an original holder of a REMIC regular
certificate, the daily portions of original issue discount with respect to such
certificate generally will be determined by allocating to each day in any
accrual period the certificate's ratable portion of the excess, if any, of (i)
the sum of (a) the present value of all payments under the certificate yet to be
received as of the close of such period plus (b) the amount of any Deemed
Principal Payments received on the certificate during such period over (ii) the
certificate's "adjusted issue price" at the beginning of such period. The
present value of payments yet to be received on a REMIC regular certificate is
computed using the Pricing Prepayment Assumptions and the certificate's original
yield to maturity -- adjusted to take into account the length of the particular
accrual period, and taking into account Deemed Principal Payments actually
received on the certificate prior to the close of the accrual period. The
adjusted issue
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price of a REMIC regular certificate at the beginning of the first period is its
issue price. The adjusted issue price at the beginning of each subsequent period
is the adjusted issue price of the certificate at the beginning of the preceding
period increased by the amount of original issue discount allocable to that
period and reduced by the amount of any Deemed Principal Payments received on
the certificate during that period. Thus, an increased or decreased rate of
prepayments received with respect to a REMIC regular certificate will be
accompanied by a correspondingly increased or decreased rate of recognition of
original issue discount by the holder of such certificate.
The yield to maturity of a REMIC regular certificate is calculated based on
(i) the Pricing Prepayment Assumptions and (ii) any contingencies not already
taken into account under the Pricing Prepayment Assumptions that, considering
all of the facts and circumstances as of the issue date, are more likely than
not to occur. Contingencies, such as the exercise of "mandatory redemptions,"
that are taken into account by the parties in pricing the REMIC regular
certificate typically will be subsumed in the Pricing Prepayment Assumptions and
thus will be reflected in the certificate's yield to maturity. The Tax
Administrator's determination of whether a contingency relating to a class of
REMIC regular certificates is more likely than not to occur is binding on each
holder of a REMIC regular certificate of this class unless the holder explicitly
discloses on its federal income tax return that its determination of the yield
and maturity of the certificate is different from that of the Tax Administrator.
In many cases, REMIC regular certificates will be subject to optional
redemption before their stated maturity dates. Under the OID Regulations,
National Mortgage will be presumed to exercise its option to redeem for purposes
of computing the accrual of original issue discount if, and only if, by using
the optional redemption date as the maturity date and the optional redemption
price as the stated redemption price at maturity, the yield to maturity of the
certificate is lower than it would be if the certificate were not redeemed
early. If National Mortgage is presumed to exercise its option to redeem the
certificates, original issue discount on such certificates will be calculated as
if the redemption date were the maturity date and the optional redemption price
were the stated redemption price at maturity. In cases in which all of the
certificates of a particular series are issued at par or at a discount, National
Mortgage will not be presumed to exercise its option to redeem the certificates
because a redemption by National Mortgage would not lower the yield to maturity
of the certificates. If, however, some certificates of a particular series are
issued at a premium, National Mortgage may be able to lower the yield to
maturity of the certificates by exercising its redemption option. In
determining whether National Mortgage will be presumed to exercise its option to
redeem certificates when one or more classes of the certificates is issued at a
premium, the Tax Administrator will take into account all classes of
certificates that are subject to the optional redemption to the extent that they
are expected to remain outstanding as of the optional redemption date, based on
the Pricing Prepayment Assumptions. If, determined on a combined weighted
average basis, the certificates of such classes were issued at a premium, the
Tax Administrator will presume that National Mortgage will exercise its option.
However, the OID Regulations are unclear as to how the redemption presumption
rules should apply to instruments such as the certificates, and there can be no
assurance that the IRS will agree with the Tax Administrator's position.
A REMIC regular certificate having original issue discount may be acquired
subsequent to its issuance for more than its adjusted issue price. If the
subsequent holder's adjusted basis in
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such a certificate, immediately after its acquisition, exceeds the sum of all
Deemed Principal Payments to be received on the certificate after the
acquisition date, the certificate will no longer have original issue discount,
and the holder may be entitled to reduce the amount of interest income
recognized on the certificate by the amount of amortizable premium. See "Federal
Income Tax Consequences -- REMIC Certificates --Amortizable Premium" in this
prospectus. If the subsequent holder's adjusted basis in the certificate,
immediately after the acquisition, exceeds the adjusted issue price of the
certificate, but is less than or equal to the sum of the Deemed Principal
Payments to be received on the certificate after the acquisition date, the
amount of original issue discount on the certificate will be reduced by a
fraction, the numerator of which is the excess of the certificate's adjusted
basis immediately after its acquisition over the adjusted issue price of the
certificate and the denominator of which is the excess of the sum of all Deemed
Principal Payments to be received on the certificate after the acquisition date
over the adjusted issue price of the certificate. For that purpose, the adjusted
basis of a REMIC regular certificate generally is reduced by the amount of any
qualified stated interest that is accrued but unpaid as of the acquisition date.
Alternatively, the subsequent holder of a REMIC regular certificate having
original issue discount may make an All OID Election with respect to the
certificate.
The OID Regulations provide that a certificateholder generally may make an
All OID Election to include in gross income all stated interest, acquisition
discount, original issue discount, de minimis original issue discount, market
discount, and de minimis market discount that accrues on a REMIC regular
certificate under the constant yield method used to account for original issue
discount. The accrued amount is adjusted to reflect any amortizable premium or
acquisition premium accruing on the REMIC regular certificate. To make the All
OID Election, the holder of the certificate must attach a statement to its
timely filed federal income tax return for the taxable year in which the holder
acquired the certificate. The statement must identify the instruments to which
the election applies. An All OID Election is irrevocable unless the holder
obtains the consent of the IRS. If an All OID Election is made for a debt
instrument with market discount, the holder is deemed to have made an election
to include in income currently the market discount on all of the holder's other
debt instruments with market discount, as described in "Federal Income Tax
Consequences -- REMIC Certificates -- Market Discount" in this prospectus. In
addition, if an All OID Election is made for a debt instrument with amortizable
bond premium, the holder is deemed to have made an election to amortize the
premium on all of the holder's other debt instruments with amortizable premium
under the constant yield method. See "Federal Income Tax Consequences -- REMIC
Certificates -- Amortizable Premium" in this prospectus. You should be aware
that the law is unclear as to whether an All OID Election is effective for a
certificate that is subject to the contingent payment rules. See "Federal
Income Tax Consequences -- REMIC Certificates -- Original Issue Discount --
Interest Weighted Certificates and Non-VRDI Certificates" in this prospectus.
If the interval between the issue date of a current interest certificate
and the first distribution date (the "First Distribution Period") contains more
days than the number of days of stated interest that are payable on the first
distribution date, the effective interest rate received by you during the First
Distribution Period will be less than your certificate's stated interest rate,
making your certificate a Teaser Certificate. If the amount of original issue
discount on the
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certificate measured under the expanded de minimis test exceeds the de minimis
amount of original issue discount allowable on the certificate, the amount by
which the stated interest on the Teaser Certificate exceeds the interest that
would be payable on the certificate at the effective rate of interest for the
First Distribution Period would be treated as part of the certificate's stated
redemption price at maturity. Accordingly, the holder of a Teaser Certificate
may be required to recognize ordinary income arising from original issue
discount in the First Distribution Period in addition to any qualified stated
interest that accrues in that period.
Similarly, if the First Distribution Period is shorter than the interval
between subsequent distribution dates, the effective rate of interest payable on
a certificate during the First Distribution Period will be higher than the
stated rate of interest if a certificateholder receives interest on the first
distribution date based on a full accrual period. Unless the Pre-Issuance
Accrued Interest Rule described below applies, the certificate (a "Rate Bubble
Certificate") would be issued with original issue discount unless the amount of
original issue discount is de minimis. The amount of original issue discount on
a Rate Bubble Certificate attributable to the First Distribution Period would be
the amount by which the interest payment due on the first distribution date
exceeds the amount that would have been payable had the effective rate for that
Period been equal to the stated interest rate. However, under the "Pre-Issuance
Accrued Interest Rule," if, (i) a portion of the initial purchase price of a
Rate Bubble Certificate is allocable to interest that has accrued under the
terms of the certificate prior to its issue date ("Pre-Issuance Accrued
Interest") and (ii) the certificate provides for a payment of stated interest on
the First Distribution Date within one year of the issue date that equals or
exceeds the amount of the Pre-Issuance Accrued Interest, the certificate's issue
price may be computed by subtracting from the issue price the amount of Pre-
Issuance Accrued Interest. If the certificateholder opts to apply the Pre-
Issuance Accrued Interest Rule, the portion of the interest received on the
first distribution date equal to the Pre-Issuance Accrued Interest would be
treated as a return of such interest and would not be treated as a payment on
the certificate. Thus, where the Pre-Issuance Accrued Interest Rule applies, a
Rate Bubble Certificate will not have original issue discount attributable to
the First Distribution Period, provided that the increased effective interest
rate for that period is attributable solely to Pre-Issuance Accrued Interest, as
typically will be the case. The Tax Administrator intends to apply the Pre-
Issuance Accrued Interest Rule to each Rate Bubble Certificate for which it is
available if the certificate's stated interest otherwise would be qualified
stated interest. If, however, the First Distribution Period of a Rate Bubble
Certificate is longer than subsequent payment periods, the application of the
Pre-Issuance Accrued Interest Rule typically will not prevent disqualification
of the certificate's stated interest because its effective interest rate during
the First Distribution Period will be less than its stated interest rate. Thus,
a REMIC regular certificate with a long First Distribution Period typically will
be a Teaser Certificate, as discussed above. The Pre-Issuance Accrued Interest
Rule will not apply to any amount paid at issuance for such a Teaser Certificate
that is nominally allocable to interest accrued under the terms of such
certificate before its issue date. All amounts paid for such a Teaser
Certificate at issuance, regardless of how designated, will be included in the
issue price of such certificate for federal income tax accounting purposes.
It is not entirely clear how income should be accrued with respect to a
REMIC regular certificate, the payments on which consist entirely or primarily
of a specified nonvarying portion
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of the interest payable on one or more of the qualified mortgages held by the
REMIC (an "Interest Weighted Certificate"). Unless and until the IRS provides
contrary administrative guidance on the income tax treatment of an Interest
Weighted Certificate, the Tax Administrator will take the position that an
Interest Weighted Certificate does not bear qualified stated interest, and will
account for the income thereon as described in "Federal Income Tax
Consequences -- REMIC Certificates -- Interest Weighted Certificates and Non-
VRDI Certificates," in this prospectus. Some Interest Weighted Certificates may
provide for a relatively small amount of principal and for interest that can be
expressed as qualified stated interest at a very high fixed rate with respect to
that principal ("Superpremium Certificates"). Superpremium Certificates
technically are issued with amortizable premium. However, because of their close
similarity to other Interest Weighted Certificates it appears more appropriate
to account for Superpremium Certificates in the same manner as for other
Interest Weighted Certificates. Consequently, in the absence of further
administrative guidance, the Tax Administrator intends to account for
Superpremium Certificates in the same manner as other Interest Weighted
Certificates. However, there can be no assurance that the IRS will not assert a
position contrary to that taken by the Tax Administrator, and, therefore,
holders of Superpremium Certificates should consider making a protective
election to amortize premium on such certificates.
In view of the complexities and current uncertainties as to the manner of
inclusion in income of original issue discount on the REMIC regular
certificates, you should consult your tax advisor to determine the appropriate
amount and method of inclusion in income of original issue discount on your
certificates for federal income tax purposes.
Variable Rate Certificates
A REMIC regular certificate may pay interest at a variable rate (a
"Variable Rate Certificate"). A Variable Rate Certificate that qualifies as a
"variable rate debt instrument" as that term is defined in the OID Regulations
(a "VRDI") will be governed by the rules applicable to VRDIs in the OID
Regulations, which are described below. A Variable Rate Certificate qualifies as
a VRDI under the OID Regulations if (i) the certificate is not issued at a
premium to its noncontingent principal amount in excess of the lesser of (a)
.015 multiplied by the product of such noncontingent principal amount and the
WAM of the certificate or (b) 15% of such noncontingent principal amount (an
"Excess Premium"); (ii) stated interest on the certificate compounds or is
payable unconditionally at least annually at (a) one or more "qualified floating
rates," (b) a single fixed rate and one or more qualified floating rates, (c) a
single "objective rate," or (d) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate"; (iii) the qualified floating rate
or the objective rate in effect during an accrual period is set at a current
value of that rate -- i.e., the value of the rate on any day occurring during
the interval that begins three months prior to the first day on which that value
is in effect under the certificate and ends one year following that day; and
(iv) the certificate does not provide for contingent principal payments.
Under the OID Regulations a rate is a qualified floating rate if variations
in the rate reasonably can be expected to measure contemporaneous variations in
the cost of newly borrowed funds in the currency in which the debt instrument is
denominated. A qualified
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floating rate may measure contemporaneous variations in borrowing costs for the
issuer of the debt instrument or for issuers in general. A multiple of a
qualified floating rate is considered a qualified floating rate only if the rate
is equal to either (a) the product of a qualified floating rate and a fixed
multiple that is greater than .65 but not more than 1.35 or (b) the product of a
qualified floating rate and a fixed multiple that is greater than .65 but not
more than 1.35, increased or decreased by a fixed rate. If a REMIC regular
certificate provides for two or more qualified floating rates that reasonably
can be expected to have approximately the same values throughout the term of the
certificate, the qualified floating rates together will constitute a single
qualified floating rate. Two or more qualified floating rates conclusively will
be presumed to have approximately the same values throughout the term of a
certificate if the values of all rates on the issue date of the certificate are
within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is
subject to a restriction or restrictions on the maximum stated interest rate (a
"Cap"), a restriction or restrictions on the minimum stated interest rate (a
"Floor"), a restriction or restrictions on the amount of increase or decrease in
the stated interest rate (a "Governor"), or other similar restriction only if:
(a) the Cap, Floor, Governor, or similar restriction is fixed throughout the
term of the related certificate or (b) the Cap, Floor, Governor, or similar
restriction is not reasonably expected, as of the issue date, to cause the yield
on the certificate to be significantly less or significantly more than the
expected yield on the certificate determined without such Cap, Floor, Governor,
or similar restriction, as the case may be. Although the OID Regulations are
unclear, it appears that a VRDI, the principal rate on which is subject to a
Cap, Floor, or Governor that itself is a qualified floating rate, bears interest
at an objective rate.
An objective rate is a rate -- other than a qualified floating rate -- that
(i) is determined using a single fixed formula, (ii) is based on objective
financial or economic information, and (iii) is not based on information that
either is within the control of the issuer -- or a related party -- or is unique
to the circumstances of the issuer or related party, such as dividends, profits,
or the value of the issuer's or related party's stock. That definition would
include, in addition to a rate that is based on one or more qualified floating
rates or on the yield of actively traded personal property, a rate that is based
on changes in a general inflation index. In addition, a rate would not fail to
be an objective rate merely because it is based on the credit quality of the
issuer. An objective rate is a qualified inverse floating rate if (i) the rate
is equal to a fixed rate minus a qualified floating rate and (ii) the variations
in the rate can reasonably be expected to inversely reflect contemporaneous
variations in the qualified floating rate (disregarding certain Caps, Floors,
and Governors).
If interest on a Variable Rate Certificate is stated at a fixed rate for an
initial period of less than one year followed by a variable rate that is either
a qualified floating rate or an objective rate for a subsequent period, and the
value of the variable rate on the issue date is intended to approximate the
fixed rate, the fixed rate and the variable rate together constitute a single
qualified floating rate or objective rate. A variable rate conclusively will be
presumed to approximate an initial fixed rate if the value of the variable rate
on the issue date does not differ from the value of the fixed rate by more than
25 basis points.
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All interest payable on a Variable Rate Certificate that qualifies as a
VRDI and provides for stated interest unconditionally payable in cash or
property at least annually at a single qualified floating rate or a single
objective rate (a "Single Rate VRDI Certificate") is treated as qualified stated
interest. The amount and accrual of original issue discount on a Single Rate
VRDI Certificate is determined, in general, by converting such certificate into
a hypothetical fixed rate certificate and applying the rules applicable to fixed
rate certificates described under "Federal Income Tax Consequences -- REMIC
Certificates -- Original Issue Discount" in this prospectus to such hypothetical
fixed rate certificate. Qualified stated interest or original issue discount
allocable to an accrual period with respect to a Single Rate VRDI Certificate
also must be increased or decreased if the interest actually accrued or paid
during such accrual period exceeds or is less than the interest assumed to be
accrued or paid during such accrual period under the related hypothetical fixed
rate certificate.
Except as provided below, the amount and accrual of original issue discount
on a Variable Rate Certificate that qualifies as a VRDI but is not a Single Rate
VRDI Certificate (a "Multiple Rate VRDI Certificate") is determined by
converting such certificate into a hypothetical equivalent fixed rate
certificate that has terms that are identical to those provided under the
Multiple Rate VRDI Certificate, except that such hypothetical equivalent fixed
rate certificate will provide for fixed rate substitutes in lieu of the
qualified floating rates or objective rate provided for under the Multiple Rate
VRDI Certificate. A Multiple Rate VRDI Certificate that provides for a qualified
floating rate or rates or a qualified inverse floating rate is converted to a
hypothetical equivalent fixed rate certificate by assuming that each qualified
floating rate or the qualified inverse floating rate will remain at its value as
of the issue date. A Multiple Rate VRDI Certificate that provides for an
objective rate or rates is converted to a hypothetical equivalent fixed rate
certificate by assuming that each objective rate will equal a fixed rate that
reflects the yield that reasonably is expected for the Multiple Rate VRDI
Certificate. Qualified stated interest or original issue discount allocable to
an accrual period with respect to a Multiple Rate VRDI Certificate must be
increased or decreased if the interest actually accrued or paid during such
accrual period exceeds or is less than the interest assumed to be accrued or
paid during such accrual period under the hypothetical equivalent fixed rate
certificate.
The amount and accrual of original issue discount on a Multiple Rate VRDI
Certificate that provides for stated interest at either one or more qualified
floating rates or at a qualified inverse floating rate and in addition provides
for stated interest at a single fixed rate -- other than an initial fixed rate
that is intended to approximate the subsequent variable rate -- is determined
using the method described above for all other Multiple Rate VRDI Certificates
except that prior to its conversion to a hypothetical equivalent fixed rate
certificate, such Multiple Rate VRDI Certificate is treated as if it provided
for a qualified floating rate -- or a qualified inverse floating rate, rather
than the fixed rate. The qualified floating rate or qualified inverse floating
rate replacing the fixed rate must be such that the fair market value of the
Multiple Rate VRDI Certificate as of its issue date would be approximately the
same as the fair market value of an otherwise identical debt instrument that
provides for the qualified floating rate or qualified inverse floating rate,
rather than the fixed rate.
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REMIC regular certificates of certain series may provide for interest based
on a weighted average of the interest rates on some or all of the mortgage
assets or regular interests in a second REMIC held subject to the related
pooling and master servicing agreement ("Weighted Average Certificates"). Under
the OID Regulations, it appears that Weighted Average Certificates relating to a
REMIC whose assets consist exclusively of adjustable-rate loans bear interest at
an "objective rate," provided the adjustable-rate loans themselves bear interest
at qualified floating rates. However, under the OID Regulations, Weighted
Average Certificates relating to a REMIC whose assets do not bear interest at
qualified floating rates ("NOWA Certificates") do not bear interest at an
objective or a qualified floating rate and, consequently, do not qualify as
VRDIs. Accordingly, unless and until the IRS provides contrary administrative
guidance on the income tax treatment of NOWA Certificates, the Tax Administrator
intends to treat such certificates as debt obligations that provide for one or
more contingent payments, and will account for the income thereon as described
in "Federal Income Tax Consequences -- REMIC Certificates -- Interest Weighted
Certificates and Non-VRDI Certificates" in this prospectus.
REMIC regular certificates of certain series may provide for the payment of
interest at a rate determined as the difference between two interest rate
parameters, one of which is a variable rate and the other of which is a fixed
rate or a different variable rate ("Inverse Floater Certificates"). Under the
OID Regulations, Inverse Floater Certificates generally bear interest at
objective rates, because their rates either constitute "qualified inverse
floating rates" under those Regulations or, although not qualified floating
rates themselves, are based on one or more qualified floating rates.
Consequently, if such certificates are not issued at an Excess Premium and their
interest rates otherwise meet the test for qualified stated interest, the income
on such certificates will be accounted for under the rules applicable to VRDIs
described above. However, an Inverse Floater Certificate may have an interest
rate parameter equal to the weighted average of the interest rates on some or
all of the mortgage assets -- or other interest bearing assets -- held by the
related REMIC in a case where one or more of those rates is a fixed rate or
otherwise may not qualify as a VRDI. Unless and until the IRS provides contrary
administrative guidance on the income tax treatment of such Inverse Floater
Certificates, the Tax Administrator intends to treat such certificates as debt
obligations that provide for one or more contingent payments, and will account
for the income thereon as described in "Federal Income Tax Consequences -- REMIC
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates" in
this prospectus.
Interest Weighted Certificates and Non-VRDI Certificates
The treatment of a NOWA Certificate, a Variable Rate Certificate that is
issued at an Excess Premium, any other Variable Rate Certificate that does not
qualify as a VRDI (each a "Non-VRDI Certificate") or an Interest Weighted
Certificate is unclear under current law. The OID Regulations contain provisions
(the "Contingent Payment Regulations") that address the federal income tax
treatment of debt obligations that provide for one or more contingent payments
("Contingent Payment Obligations"). Under the Contingent Payment Regulations,
any variable rate debt instrument that is not a VRDI is classified as a
Contingent Payment Obligation. However, the Contingent Payment Regulations, by
their terms, do not apply to REMIC regular interests and other instruments that
are subject to Section 1272(a)(6) of the Code. In the absence
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of further guidance, the Tax Administrator will account for Non-VRDI
Certificates, Interest Weighted Certificates, and other REMIC regular
certificates that are Contingent Payment Obligations in accordance with Code
Section 1272(a)(6) and the accounting methodology described in this paragraph.
Income will be accrued on such certificates based on a constant yield that is
derived from a projected payment schedule as of the settlement date. The
projected payment schedule will take into account the related Pricing Prepayment
Assumptions and the interest payments that are expected to be made on such
certificates based on the value of any relevant indices on the issue date. To
the extent that actual payments differ from projected payments for a particular
taxable year, appropriate adjustments to interest income and expense accruals
will be made for that year. In the case of a Weighted Average Certificate, the
projected payments schedule will be derived based on the assumption that the
principal balances of the mortgage assets that collateralize the certificate pay
down pro rata.
The method described in the foregoing paragraph for accounting for Interest
Weighted Certificates, Non-VRDI Certificates and any other REMIC regular
certificates that are Contingent Payment Obligations is consistent with Code
Section 1272(a)(6) and its legislative history. Because of the uncertainty with
respect to the treatment of such certificates under the OID Regulations,
however, there can be no assurance that the IRS will not assert successfully
that a method less favorable to certificateholders will apply. In view of the
complexities and the current uncertainties as to income inclusions with respect
to Non-VRDI Certificates, Interest Weighted Certificates, particularly with
respect to the method that should be used to account for the income on such
certificates, and any other REMIC regular certificates that are Contingent
Payment Obligations you should consult your tax advisor to determine the
appropriate amount and method of income inclusion on such certificates for
federal income tax purposes.
Anti-Abuse Rule
Because of concerns that taxpayers might be able to structure debt
instruments or transactions, or to apply the bright-line or mechanical rules of
the OID Regulations, in a way that produce unreasonable tax results, the OID
Regulations contain an anti-abuse rule. The anti-abuse rule provides that if a
principal purpose in structuring a debt instrument, engaging in a transaction,
or applying the OID Regulations is to achieve a result that is unreasonable in
light of the purposes of the applicable statutes, the IRS can apply or depart
from the OID Regulations as necessary or appropriate to achieve a reasonable
result. A result is not considered unreasonable under the regulations, however,
in the absence of a substantial effect on the present value of a taxpayer's tax
liability.
Market Discount
A subsequent purchaser of a REMIC regular certificate at a discount from
its outstanding principal amount -- or, in the case of a REMIC regular
certificate having original issue discount, its adjusted issue price -- will
acquire such certificate with "market discount." The purchaser generally will be
required to recognize the market discount -- in addition to any original issue
discount remaining with respect to the certificate -- as ordinary income. A
person who purchases a REMIC regular certificate at a price lower than the
remaining outstanding Deemed Principal
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Payments but higher than its adjusted issue price does not acquire the
certificate with market discount, but will be required to report original issue
discount, appropriately adjusted to reflect the excess of the price paid over
the adjusted issue price. See "Federal Income Tax Consequences -- REMIC
Certificates -- Original Issue Discount" in this prospectus. A REMIC regular
certificate will not be considered to have market discount if the amount of such
market discount is de minimis, i.e., less than the product of (i) 0.25% of the
remaining principal amount of the certificate --or in the case of a REMIC
regular certificate having original issue discount, the adjusted issue price of
such certificate-- multiplied by (ii) the WAM of the certificate determined as
for original issue discount remaining after the date of purchase. Regardless of
whether the subsequent purchaser of a REMIC regular certificate with more than a
de minimis amount of market discount is a cash-basis or accrual-basis taxpayer,
market discount generally will be taken into income as principal payments,
including, in the case of a REMIC regular certificate having original issue
discount, any Deemed Principal Payments, are received, in an amount equal to the
lesser of (i) the amount of the principal payment received or (ii) the amount of
market discount that has "accrued," but that has not yet been included in
income. The purchaser may make a special election, which generally applies to
all market discount instruments held or acquired by the purchaser in the taxable
year of election or thereafter, to recognize market discount currently on an
uncapped accrual basis (the "Current Recognition Election"). The IRS has set
forth in Revenue Procedure 92-67 the manner in which a Current Recognition
Election may be made. In addition, a purchaser may make an All OID Election with
respect to a REMIC regular certificate purchased with market discount. See
"Federal Income Tax Consequences -- REMIC Certificates -- Original Issue
Discount" in this prospectus.
Until the Treasury promulgates applicable regulations, the purchaser of a
REMIC regular certificate with market discount generally may elect to accrue the
market discount either: (i) on the basis of a constant interest rate; (ii) in
the case of a REMIC regular certificate not issued with original issue discount,
in the ratio of stated interest payable in the relevant period to the total
stated interest remaining to be paid from the beginning of such period; or (iii)
in the case of a REMIC regular certificate issued with original issue discount,
in the ratio of original issue discount accrued for the relevant period to the
total remaining original issue discount at the beginning of such period. The IRS
indicated in Revenue Procedure 92-67 the manner in which an election may be made
to accrue market discount on a REMIC regular certificate on the basis of a
constant interest rate. Regardless of which computation method is elected, the
Pricing Prepayment Assumptions must be used to calculate the accrual of market
discount.
A certificateholder who has acquired any REMIC regular certificate with
market discount generally will be required to treat a portion of any gain on a
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 the foregoing
methods, less any accrued market discount previously reported as ordinary income
as partial principal payments were received. Moreover, such certificateholder
generally must defer interest deductions attributable to any indebtedness
incurred or continued to purchase or carry the certificate to the extent they
exceed income on the certificate. Any such deferred interest expense, in
general, is allowed as a deduction not later than the year in which the related
market discount income is recognized. If a REMIC regular certificateholder makes
a Current Recognition Election or an All OID Election, the interest deferral
rule will not apply. Under the
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Contingent Payment Regulations, a secondary market purchaser of a Non-VRDI
Certificate or an Interest Weighted Certificate at a discount generally would
continue to accrue interest and determine adjustments on such certificate based
on the original projected payment schedule devised by the issuer of such
certificate. See "Federal Income Tax Consequences -- REMIC Certificates --
Interest Weighted Certificates and Non-VRDI Certificates" in this prospectus.
The holder of such a certificate would be required, however, to allocate the
difference between the adjusted issue price of the certificate and its basis in
the certificate as positive adjustments to the accruals or projected payments on
the certificate over the remaining term of the certificate in a manner that is
reasonable -- e.g., based on a constant yield to maturity.
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
For example, the treatment of a REMIC regular certificate subject to optional
redemption by National Mortgage that is acquired at a market discount is
unclear. It appears likely, however, that the market discount rules applicable
in such a case would be similar to the rules pertaining to original issue
discount. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a given class of REMIC regular certificates.
Prospective investors in REMIC regular certificates should consult their own tax
advisors as to the application of the market discount rules to those
certificates.
Amortizable Premium
A purchaser of a REMIC regular certificate who purchases the certificate at
a premium over the total of its Deemed Principal Payments may elect to amortize
such premium under a constant yield method that reflects compounding based on
the interval between payments on the certificates. The legislative history of
the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a REMIC
regular certificate will be calculated using the Pricing Prepayment Assumptions.
Under Treasury regulations, amortized premium generally would be treated as an
offset to interest income on a REMIC regular certificate and not as a separate
deduction item. If a holder makes an election to amortize premium on a REMIC
regular certificate, such election will apply to all taxable debt instruments,
including all REMIC regular interests, held by the holder at the beginning of
the taxable year in which the election is made, and to all taxable debt
instruments acquired thereafter by such holder, and will be irrevocable without
the consent of the IRS. Purchasers who pay a premium for the REMIC regular
certificates should consult their tax advisors regarding the election to
amortize premium and the method to be employed.
Amortizable premium on a REMIC regular certificate that is subject to
redemption at the option of the trust generally must be amortized as if the
optional redemption price and date were the certificate's principal amount and
maturity date if doing so would result in a smaller amount of premium
amortization during the period ending with the optional redemption date. Thus, a
certificateholder would not be able to amortize any premium on a REMIC regular
certificate that is subject to optional redemption at a price equal to or
greater than the certificateholder's acquisition price unless and until the
redemption option expires. In cases where premium must be amortized on the basis
of the price and date of an optional redemption, the certificate will be
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treated as having matured on the redemption date for the redemption price and
then having been reissued on that date for that price. Any premium remaining on
the certificate at the time of the deemed reissuance will be amortized on the
basis of (i) the original principal amount and maturity date or (ii) the price
and date of any succeeding optional redemption, under the principles described
above.
Under the Contingent Payment Regulations, a secondary market purchaser of a
Non-VRDI Certificate or an Interest Weighted Certificate at a premium generally
would continue to accrue interest and determine adjustments on such certificate
based on the original projected payment schedule devised by the issuer of such
certificate. See "Federal Income Tax Consequences -- REMIC Certificates --
Interest Weighted Certificates and Non-VRDI Certificates" in this prospectus.
The holder of such a certificate would allocate the difference between its basis
in the certificate and the adjusted issue price of the certificate as negative
adjustments to the accruals or projected payments on the certificate over the
remaining term of the certificate in a manner that is reasonable -- e.g., based
on a constant yield to maturity.
Consequences of Realized Losses
Under Section 166 of the Code, both corporate holders of REMIC regular
certificates and noncorporate holders that acquire REMIC regular 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 REMIC regular
certificates become wholly or partially worthless as the result of one or more
Realized Losses on the underlying assets. However, a noncorporate holder that
does not acquire a REMIC regular certificate in connection with its trade or
business will not be entitled to deduct a loss under Code Section 166 until its
REMIC regular certificate becomes wholly worthless -- i.e., until its
outstanding principal balance has been reduced to zero, and the loss will be
characterized as short-term capital loss.
Each holder of a REMIC regular certificate will be required to accrue
original issue discount income with respect to such certificate without giving
effect to any reduction in distributions attributable to a default or
delinquency on the underlying assets until a Realized Loss is allocated to such
certificate or until such earlier time as it can be established that any such
reduction ultimately will not be recoverable. As a result, the amount of
original issue discount reported in any period by the holder of a REMIC regular
certificate could exceed significantly the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC regular
certificate eventually will recognize a loss or a reduction in income
attributable to previously included original issue discount that, as a result of
a realized loss, ultimately will not be realized, the law is unclear with
respect to the timing and character of such loss or reduction in income.
Accordingly, you should consult with your tax advisor with respect to the
federal income tax consequences of Realized Losses on original issue discount.
The Tax Administrator will adjust the accrual of original issue discount on
REMIC regular certificates in a manner that it believes to be appropriate to
reflect Realized Losses. However, there can be no assurance that the IRS will
not contend successfully that a different
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method of accounting for the effect of realized losses is correct and that such
method will not have an adverse effect upon the holders of REMIC regular
certificates.
Gain or Loss on Disposition
If a REMIC regular certificate is sold, the certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and his adjusted basis in the certificate. The adjusted basis of a
REMIC regular certificate generally will equal the cost of the certificate to
the certificateholder, increased by any original issue discount or market
discount previously includable in the certificateholder's gross income with
respect to the certificate, and reduced by the portion of the basis of the
certificate allocable to payments on the certificate, other than qualified
stated interest, previously received by the certificateholder and by any
amortized premium. Similarly, a certificateholder who receives a scheduled or
prepaid principal payment with respect to a REMIC regular certificate will
recognize gain or loss equal to the difference between the amount of the payment
and the allocable portion of his adjusted basis in the certificate. Except to
the extent that the market discount rules apply and except as provided below,
any gain or loss on the sale or other disposition of a REMIC regular certificate
generally will be capital gain or loss. Such gain or loss will be long-term gain
or loss if the certificate is held as a capital asset for more than 12 months.
If the holder of a REMIC regular certificate is a bank, thrift, or similar
institution described in Section 582 of the Code, any gain or loss on the sale
or exchange of the REMIC regular certificate will be treated as ordinary income
or loss. In the case of other types of holders, gain from the disposition of a
REMIC regular certificate that otherwise would be capital gain will be treated
as ordinary income to the extent that the amount actually includable in income
with respect to the certificate by the certificateholder during his holding
period is less than the amount that would have been includable in income if the
yield on that certificate during the holding period had been 110% of a specified
United States Treasury borrowing rate as of the date that the certificateholder
acquired the certificate. Although the legislative history to the 1986 Act
indicates that the portion of the gain from disposition of a REMIC regular
certificate that will be recharacterized as ordinary income is limited to the
amount of original issue discount, if any, on the certificate that was not
previously includable in income, the applicable Code provision contains no such
limitation.
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 such 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 certificates 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 such 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," which rate is computed and
published monthly by the IRS, at the time the taxpayer entered into the
conversion transaction,
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subject to appropriate reduction for prior inclusion of interest and other
ordinary income from the transaction.
Currently, the highest marginal individual income tax bracket is 39.6%. The
AMT rate for individuals is 26% with respect to AMT income up to $175,000 and
28% with respect to AMT income over $175,000. Because the highest marginal
federal tax rate on net capital gains for individuals is 28%, there is a
significant marginal tax rate differential between net capital gains and
ordinary income for individuals. The highest marginal corporate tax rate is 35%
for corporate taxable income over $10 million, and the marginal tax rate on
corporate net capital gains also is 35%.
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Tax Treatment of Residual Certificates
Overview. Residual Certificates will be considered residual interests in
the Series REMIC to which they relate. A REMIC is an entity for federal income
tax purposes consisting of a fixed pool of mortgages or other mortgage-backed
assets in which investors hold multiple classes of interests. To be treated as a
REMIC, the trust or one or more segregated pools of trust assets underlying a
series must meet certain continuing qualification requirements, and a REMIC
election must be in effect. See "Federal Income Tax Consequences -- REMIC
Certificates REMIC Qualification" in this prospectus. A Series REMIC generally
will be treated as a pass-through entity for federal income tax purposes --i.e.,
not subject to entity-level tax. All interests in a Series REMIC other than the
Residual Certificates must be regular interests -- i.e., REMIC regular
certificates. As described in "Federal Income Tax Consequences -- REMIC
Certificates -- Tax Treatment of REMIC Regular Certificates," a regular interest
generally is an interest whose terms are analogous to those of a debt instrument
and it generally is treated as such an instrument for federal income tax
purposes. REMIC regular certificates will generate interest and original issue
discount deductions for the REMIC. Each trust for which there is a REMIC
election must have one, and only one class of residual interests. As a residual
interest, a Residual Certificate represents the right to (i) stated principal
and interest on such certificate, if any, and (ii) its pro rata share of the
income generated by the REMIC assets in excess of the amount necessary to
service the regular interests and pay the REMIC's expenses. In a manner similar
to that employed in the taxation of partnerships, REMIC taxable income or loss
will be determined at the REMIC level, but passed through to the Residual
Certificateholders. Thus, REMIC taxable income or loss will be allocated pro
rata to the Residual Certificateholders, and each Residual Certificateholder
will report his share of REMIC taxable income or loss on his own federal income
tax return. Prospective investors in Residual Certificates should be aware that
the obligation to account for the REMIC's income or loss will continue until all
of the REMIC regular certificates have been retired, which may not occur until
well beyond the date on which the last payments on Residual Certificates are
made. In addition, because of the way in which REMIC taxable income is
calculated, a Residual Certificateholder may recognize "phantom" income -- i.e.,
income recognized for tax purposes in excess of income as determined under
financial accounting or economic principles -- which will be matched in later
years by a corresponding tax loss or reduction in taxable income, but which
could lower the yield to Residual Certificateholders due to the lower present
value of such loss or reduction.
A portion of the income of Residual Certificateholders in certain Series
REMICs will be treated unfavorably in three contexts: (i) it may not be offset
by current or net operating loss deductions; (ii) it will be considered
unrelated business taxable income ("UBTI") to tax-exempt entities; and (iii) it
is ineligible for any statutory or treaty reduction in the 30 % withholding tax
that may otherwise available to a foreign Residual Certificateholder.
Taxation of Residual Certificateholders. A Residual Certificateholder will
recognize his share of the related REMIC's taxable income or loss for each day
during his taxable year on which he holds the Residual Certificate. The amount
so recognized will be characterized as ordinary income or loss and generally
will not be taxed separately to the REMIC. If a Residual
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Certificate is transferred during a calendar quarter, REMIC taxable income or
loss for that quarter will be prorated between the transferor and the transferee
on a daily basis.
A REMIC generally determines its taxable income or loss in a manner similar
to that of an individual using a calendar year and the accrual method of
accounting. REMIC taxable income or loss will be characterized as ordinary
income or loss and will consist of the REMIC's gross income, including interest,
original issue discount, and market discount income, if any, on the REMIC's
assets, including temporary cash flow investments, premium amortization on the
REMIC regular certificates, income from foreclosure property, and any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC regular certificates, reduced by the REMIC's deductions, including
deductions for interest and original issue discount expense on the REMIC regular
certificates, premium amortization and servicing fees on such assets, the
administration expenses of the REMIC and the REMIC regular certificates, any tax
imposed on the REMIC's income from foreclosure property, and any bad debt
deductions with respect to the mortgage assets. However, the REMIC may not take
into account any items allocable to a "prohibited transaction." See "Federal
Income Tax Consequences -- REMIC Certificates -- REMIC-Level Taxes" in this
prospectus. The deduction of REMIC expenses by Residual Certificateholders who
are individuals is subject to certain limitations as described in "Federal
Income Tax Consequences -- REMIC Certificates -- Special Considerations for
Certain Types of Investors -- Individuals and Pass-Through Entities" in this
prospectus.
The amount of the REMIC's net loss with respect to a calendar quarter that
may be deducted by a Residual Certificateholder is limited to such
certificateholder's adjusted basis in the Residual Certificate as of the end of
that quarter -- or time of disposition of the Residual Certificate, if earlier,
determined without taking into account the net loss for that quarter. A Residual
Certificateholder's basis in its Residual Certificate initially is equal to the
price paid for such Certificate. This basis is increased by the amount of
taxable income recognized with respect to the Residual Certificate and
decreased, but not below zero, by the amount of distributions made and the
amount of net losses recognized with respect to that certificate. The amount of
the REMIC's net loss allocable to a Residual Certificateholder that is
disallowed under the basis limitation may be carried forward indefinitely, but
may be used only to offset income with respect to the related Residual
Certificate. The ability of Residual Certificateholders to deduct net losses
with respect to a Residual Certificate may be subject to additional limitations
under the Code, as to which certificateholders should consult their tax
advisors. A distribution with respect to a Residual Certificate is treated as a
non-taxable return of capital up to the amount of the Residual
Certificateholder's adjusted basis in his Residual Certificate. If a
distribution exceeds the adjusted basis of the Residual Certificate, the excess
is treated as gain from the sale of such Residual Certificate.
Although the law is unclear in certain respects, a Residual
Certificateholder effectively should be able to recover some or all of the basis
in his Residual Certificate as the REMIC recovers the basis of its assets
through either the amortization of premium on such assets or the allocation of
basis to principal payments received on such assets. The REMIC's initial
aggregate basis in its assets will equal the sum of the issue prices of all
Residual Certificates and REMIC regular certificates. In general, the issue
price of a REMIC regular certificate of a particular class
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is the initial price at which a substantial amount of the certificates of such
class is sold to the public. In the case of a REMIC regular certificate of a
class not offered to the public, the issue price is either the price paid by the
first purchaser of such certificate or the fair market value of the property
received in exchange for such certificate, as appropriate. The REMIC's aggregate
basis will be allocated among its assets in proportion to their respective fair
market values.
The assets of certain Series REMICs may have bases that exceed their
principal amounts. Except as indicated in "Federal Income Tax Consequences --
REMIC Certificates -- Treatment by the REMIC of Original Issue Discount, Market
Discount, and Amortizable Premium," the premium on such assets will be
amortizable under the constant yield method and the same prepayment assumptions
used in pricing the certificates. The amortized premium will reduce the REMIC's
taxable income or increase its tax loss for each year which will offset a
corresponding amount of the stated interest or other residual cash flow, if any,
allocable to the Residual Certificateholders. It should be noted, however, that
the law concerning the amortization of premium on trust assets is unclear in
certain respects. If the IRS were to contend successfully that part or all of
the premium on the REMIC's assets underlying certain Series REMICs is not
amortizable, the Residual Certificateholders would recover the basis
attributable to the unamortizable premium only as principal payments are
received on such assets or upon the disposition or worthlessness of their
Residual Certificates. The inability to amortize part or all of the premium
could give rise to timing differences between the REMIC's income and deductions,
creating phantom income. Because phantom income arises from timing differences,
it will be matched by a corresponding loss or reduction in taxable income in
later years, during which economic or financial income will exceed REMIC taxable
income. Any acceleration of taxable income, however, could lower the yield to a
Residual Certificateholder, since the present value of the tax paid on that
income will exceed the present value of the corresponding tax reduction in the
later years. The amount and timing of any phantom income are dependent upon (i)
the structure of the particular Series REMIC and (ii) the rate of prepayment on
the mortgage loans comprising or underlying the REMIC's assets and, therefore,
cannot be predicted without reference to a particular Series REMIC.
The assets of certain Series REMICs may have bases that are less than their
principal amounts. In such a case, a Residual Certificateholder will recover the
basis in his Residual Certificate as the REMIC recovers the portion of its basis
in the assets that is attributable to the residual interest. The REMIC's basis
in the assets is recovered as it is allocated to principal payments received by
the REMIC.
A portion of the REMIC's taxable income may be subject to special
treatment. That portion ("excess inclusion income") generally is any taxable
income beyond that which the Residual Certificateholder would have recognized
had the Residual Certificate been a conventional debt instrument bearing
interest at 120 % of the applicable long-term federal rate, based on quarterly
compounding, as of the date on which the Residual Certificate was issued. Excess
inclusion income generally is intended to approximate phantom income and may
result in unfavorable tax consequences for certain investors. See "Federal
Income Tax Consequences -- REMIC Certificates -- Taxation of Residual
Certificateholders -- Limitations on Offset or
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Exemption of REMIC Income" and "Federal Income Tax Consequences -- REMIC
Certificates -- Special Considerations for Certain Types of Investors" in this
prospectus.
Limitations on Offset or Exemption of REMIC Income. Generally, a Residual
Certificateholder's taxable income for any taxable year may not be less than
such Certificateholder's excess inclusion income for that taxable year. Excess
inclusion income is equal to the excess of REMIC taxable income for the
quarterly period for the Residual Certificates over the product of (i) 120% of
the long-term applicable federal rate that would have applied to the Residual
Certificates if they were debt instruments for federal income tax purposes on
the closing date and (ii) the adjusted issue price of such Residual Certificates
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Certificate at the beginning of a quarter is the issue price
of the Residual Certificate, increased by the amount of the daily accruals of
REMIC income for all prior quarters, decreased by any distributions made with
respect to such Residual Certificate prior to the beginning of such quarterly
period. If the Residual Certificateholder is an organization subject to the tax
on UBTI imposed by Code Section 511, the Residual Certificateholder's excess
inclusion income will be treated as UBTI. In addition, under Treasury
regulations yet to be issued, if a REIT or a RIC owns a Residual Certificate
that generates excess inclusion income, a pro rata portion of the dividends paid
by the REIT or the RIC generally will constitute excess inclusion income for its
shareholders. Finally, Residual Certificateholders that are foreign persons will
not be entitled to any exemption from the 30% withholding tax or a reduced
treaty rate with respect to their excess inclusion income from the REMIC. See
"Federal Income Tax Consequences -- REMIC Certificates -- Taxation of Certain
Foreign Holders of REMIC Certificates -- Residual Certificates" in this
prospectus.
Non-Recognition of Certain Transfers for Federal Income Tax Purposes. The
transfer of a "noneconomic residual interest" to a United States person will be
disregarded for tax purposes if a significant purpose of the transfer was to
impede the assessment or collection of tax. A Residual Certificate will
constitute a noneconomic residual interest unless, at the time the interest is
transferred, (i) the present value of the expected future distributions with
respect to the Residual Certificate equals or exceeds the product of the present
value of the anticipated excess inclusion income and the highest corporate tax
rate for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
in amounts sufficient to satisfy the taxes on excess inclusion income as they
accrue. If a transfer of a residual interest is disregarded, the transferor
would continue to be treated as the owner of the Residual Certificate and thus
would continue to be subject to tax on its allocable portion of the net income
of the related REMIC. A significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC, -- i.e., the
transferor has "improper knowledge." A transferor is presumed not to have such
improper knowledge if (i) the transferor conducted, at the time of the transfer,
a reasonable investigation of the financial condition of the transferee and, as
a result of the investigation, the transferor found that the transferee had
historically paid its debts as they came due and found no significant evidence
to indicate that the transferee would not continue to pay its debts as they come
due and (ii) the transferee represents to the transferor that it understands
that, as the holder of a noneconomic residual interest, it may incur tax
liabilities in
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excess of any cash flows generated by the interest and that it intends to pay
the taxes associated with holding the residual interest as they become due. A
similar limitation exists with respect to transfers of certain residual
interests to foreign investors. See "Federal Income Tax Consequences -- REMIC
Certificates -- Taxation of Certain Foreign Holders of REMIC Certificates --
Residual Certificates" in this prospectus.
Ownership of Residual Certificates by Disqualified Organizations. The Code
contains three sanctions that are designed to prevent or discourage the direct
or indirect ownership of a REMIC residual interest, such as a Residual
Certificate, by the United States, any state or political subdivision, any
foreign government, any international organization, any agency or
instrumentality of any of the foregoing, any tax-exempt organization -- other
than a farmers' cooperative described in Section 521 of the Code -- that is not
subject to the tax on UBTI, or any rural electrical or telephone cooperative
(each a "Disqualified Organization"). A corporation is not treated as an
instrumentality of the United States or any state or political subdivision
thereof if all of its activities are subject to tax and, with the exception of
Freddie Mac, a majority of its board of directors is not selected by such
governmental unit.
First, REMIC status is dependent upon the presence of reasonable
arrangements designed to prevent a Disqualified Organization from acquiring
record ownership of a residual interest. Residual interests in Series REMICs are
not offered for sale to Disqualified Organizations. Furthermore, (i) residual
interests in Series REMICs will be registered as to both principal and any
stated interest with the trustee (or its agent) and transfer of a residual
interest may be effected only (A) by surrender of the old residual interest
instrument and reissuance by the trustee of a new residual interest instrument
to the new holder or (B) through a book entry system maintained by the trustee,
(ii) the applicable pooling and master servicing agreement will prohibit the
ownership of residual interests by Disqualified Organizations, and (iii) each
residual interest instrument will contain a legend providing notice of that
prohibition. Consequently, each Series REMIC should be considered to have made
reasonable arrangements designed to prevent the ownership of residual interests
by Disqualified Organizations.
Second, the Code imposes a one-time tax on the transferor of a residual
interest, including a Residual Certificate or interest in a Residual
Certificate, to a Disqualified Organization. The one-time tax equals the product
of (i) the present value of the total anticipated excess inclusions with respect
to the transferred residual interest for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
anticipated excess inclusions with respect to a transferred residual interest
must be based on (i) both actual prior prepayment experience and the prepayment
assumptions used in pricing the related REMIC's interests and (ii) any required
or permitted clean up calls or required qualified liquidation provided for in
the REMIC's organizational documents. The present value of anticipated excess
inclusions is determined using a discount rate equal to the applicable federal
rate that would apply to a debt instrument that was issued on the date the
Disqualified Organization acquired the residual interest and whose term ends on
the close of the last quarter in which excess inclusions are expected to accrue
with respect to the residual interest. Where a transferee is acting as an agent
for a Disqualified Organization, the transferee is subject to the one-time tax.
For that purpose, the term "agent" includes a broker, nominee, or other
middleman. Upon the request of such
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transferee or the transferor, the REMIC must furnish to the requesting party and
to the IRS information sufficient to permit the computation of the present value
of the anticipated excess inclusions. The transferor of a residual interest will
not be liable for the one-time tax if the transferee furnishes to the transferor
an affidavit that states, under penalties of perjury, that the transferee is not
a Disqualified Organization, and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The one-time tax
must be paid by April 15th of the year following the calendar year in which the
residual interest is transferred to a Disqualified Organization. The one-time
tax may be waived by the Secretary of the Treasury if, upon discovery that a
transfer is subject to the one-time tax, the Disqualified Organization promptly
disposes of the residual interest and the transferor pays such amounts as the
Secretary may require.
Third, the Code imposes an annual tax on any pass-through entity -- i.e.,
RIC, REIT, common trust, partnership, trust, estate or cooperative described in
Code Section 1381 -- that owns a direct or indirect interest in a residual
interest, if record ownership of an interest in the pass-through entity is held
by one or more Disqualified Organizations. The tax imposed equals the highest
corporate income tax rate multiplied by the share of any excess inclusion income
of the pass-through entity for the taxable year that is allocable to the
interests in the pass-through entity held by Disqualified Organizations. The
same tax applies to a nominee who acquires an interest in a residual interest on
behalf of a Disqualified Organization. For example, a broker that holds an
interest in a Residual Certificate in "street name" for a Disqualified
Organization is subject to the tax. The tax due must be paid by the fifteenth
day of the fourth month following the close of the taxable year of the pass-
through entity in which the Disqualified Organization is a record holder. Any
such tax imposed on a pass-through entity would be deductible against that
entity's ordinary income in determining the amount of its required
distributions. In addition, dividends paid by a RIC or a REIT are not considered
preferential dividends within the meaning of Section 562(c) of the Code solely
because the RIC or REIT allocates such tax expense only to the shares held by
Disqualified Organizations. A pass-through entity will not be liable for the
annual tax if the record holder of the interest in the pass-through entity
furnishes to the pass-through entity an affidavit that states, under penalties
of perjury, that the record holder is not a Disqualified Organization, and the
pass-through entity does not have actual knowledge that such affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a pass-through entity by Section 860E(c) of the Code.
The exception to this tax, otherwise available to a pass-through entity that is
furnished certain affidavits as described above, is not available to an electing
large partnership.
The pooling and master servicing agreement will provide that no record or
beneficial ownership interest in a Residual Certificate may be purchased,
transferred or sold, directly or indirectly, without the express written consent
of the master servicer. The master servicer will grant such consent to a
proposed transfer only if it receives the following: (i) an affidavit from the
proposed transferee to the effect that it is not a Disqualified Organization and
is not acquiring
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the Residual Certificate as a nominee or agent for a disqualified organization
and (ii) a covenant by the proposed transferee to the effect that the proposed
transferee agrees to be bound by and to abide by the transfer restrictions
applicable to the Residual Certificate.
The Code and the REMIC Regulations also require that reasonable
arrangements be made with respect to each REMIC to enable the REMIC to provide
the Treasury and the transferor with information necessary for the application
of the one-time tax described above. Consequently, the applicable pooling and
master servicing agreement will provide for an affiliate to perform such
information services as may be required for the application of the one-time tax.
If a Residual Certificateholder transfers an interest in a Residual Certificate
in violation of the relevant transfer restrictions and triggers the information
requirement, the affiliate may charge such Residual Certificateholder a
reasonable fee for providing the information.
Special Considerations for Certain Types of Investors
Dealers in Securities. Residual Certificateholders that are dealers in
securities should be aware that under Treasury regulations (the "Mark-to-Market
Regulations") relating to the requirement under Section 475 of the Code that
dealers in securities use mark-to-market accounting for federal income tax
purposes, dealers in securities are not permitted to mark to market any Residual
Certificates acquired on or after January 4, 1995. Prospective purchasers of
Residual Certificates should consult with their tax advisors regarding the
possible application of the Mark-to-Market Regulations.
Tax-Exempt Entities. Any excess inclusion income with respect to a Residual
Certificate held by a tax-exempt entity, including a qualified profit-sharing,
pension, or other employee benefit plan, will be treated as UBTI. Although the
legislative history and statutory provisions imply otherwise, the Treasury
conceivably could take the position that, under pre-existing Code provisions,
substantially all income on a Residual Certificate, including non-excess
inclusion income, is to be treated as UBTI. See "Federal Income Tax
Consequences -- REMIC Certificates -- Taxation of Residual Certificateholders"
in this prospectus.
Individuals and Pass-Through Entities. A Residual Certificateholder who is
an individual, trust, or estate will be able to deduct its allocable share of
the fees or expenses relating to servicing the assets assigned to a trust or
administering the Series REMIC under Section 212 of the Code only to the extent
that the amount of such fees or expenses, when combined with the
certificateholder's other miscellaneous itemized deductions for the taxable
year, exceeds 2% of the holder's adjusted gross income. That same limitation
will apply to individuals, trusts, or estates that hold Residual Certificates
indirectly through a grantor trust, a partnership, an S corporation, a common
trust fund, a REMIC, or a nonpublicly offered RIC. A nonpublicly offered RIC is
a RIC other than one whose shares are (i) continuously offered pursuant to a
public offering, (ii) regularly traded on an established securities market, or
(iii) held by no fewer than 500 persons at all times during the taxable year. In
addition, that limitation will apply to individuals, trusts, or estates that
hold Residual Certificates through any other person (i) that is not generally
subject to federal income tax and (ii) the character of whose income may affect
the character of the income generated by that person for its owners or
beneficiaries. In
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addition, Code Section 68 provides that the amount of itemized deductions
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds the applicable amount -- $126,600, or $63,300 in the case of a
separate return by a married individual within the meaning of Code Section 7703
for taxable year 1999 and adjusted for inflation each year thereafter -- will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. In some cases, the amount of additional income
that would be recognized as a result of the foregoing limitations by a Residual
Certificateholder who is an individual, trust, or estate could be substantial.
Non-corporate holders of REMIC Residual Certificates also should be aware that
miscellaneous itemized deductions, including allocable investment expenses
attributable to the related REMIC, are not deductible for purposes of the AMT.
Finally, persons holding an interest in a Residual Certificate indirectly
through an interest in a RIC, common trust fund or one of certain corporations
doing business as a cooperative generally will recognize a share of any excess
inclusion allocable to that Residual Certificate.
Employee Benefit Plans. See "Federal Income Tax Consequences -- Residual
Certificates -- Special Considerations for Certain Types of Investors -- Tax-
exempt Entities" and "ERISA Considerations" in this prospectus.
REITs and RICs. If the Residual Certificateholder is a REIT and the related
REMIC generates excess inclusion income, a portion of REIT dividends will be
treated as excess inclusion income for the REIT's shareholders, in a manner to
be provided by regulations. Thus, shareholders in a REIT that invests in
Residual Certificates could face unfavorable treatment of a portion of their
REIT dividend income for purposes of (i) using current deductions or net
operating loss carryovers or carrybacks, (ii) UBTI in the case of tax-exempt
shareholders, and (iii) withholding tax in the case of foreign shareholders.
Moreover, because Residual Certificateholders may recognize phantom income, a
REIT contemplating an investment in Residual Certificates should consider
carefully the effect of any phantom income upon its ability to meet its income
distribution requirements under the Code. The same rules regarding excess
inclusion will apply to a Residual Certificateholder that is a RIC, common trust
fund, or one of certain corporations doing business as a cooperative. See
"Federal Income Tax Consequences -- Residual Certificates -- Special
Considerations for Certain Types of Investors -- Foreign Residual
Certificateholders" and "Federal Income Tax Consequences -- REMIC
Certificates -- Taxation of Residual Certificateholders" in this prospectus.
A Residual Certificate held by a REIT will be treated as a real estate
asset for purposes of the REIT qualification requirements in the same proportion
that the REMIC's assets would be treated as real estate assets if held directly
by the REIT, and interest income derived from such Residual Certificate will be
treated as qualifying interest income for REIT purposes ("Qualifying REIT
Interest") to the same extent. If 95% or more of a REMIC's assets qualify as
real estate assets for REIT purposes, 100% of that REMIC's regular and residual
interests will be treated as real estate assets for REIT purposes, and all of
the income derived from such interests will be treated as Qualifying REIT
Interest. The REMIC Regulations provide that payments of principal and interest
on mortgage loans that are reinvested pending distribution to the holders of the
REMIC certificates constitute real estate assets for REIT purposes. Two REMICs
that are part of
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a tiered structure will be treated as one REMIC for purposes of determining the
percentage of assets of each REMIC that constitutes real estate assets. It is
expected that at least 95% of the assets of a Series REMIC will be real estate
assets throughout the REMIC's life. The amount treated as a real estate asset in
the case of a Residual Certificate apparently is limited to the REIT's adjusted
basis in the certificate. REITs should be aware that 100% of the interest income
derived by a REIT from a residual interest in such REMIC may not be treated as
Qualifying REIT Interest if the REMIC holds mortgage loans that provide for
interest that is contingent on mortgagor profits or property appreciation.
Significant uncertainty exists with respect to the treatment of a Residual
Certificate for purposes of the various asset composition requirements
applicable to RICs. A Residual Certificate should be treated as a "security,"
but will not be considered a "government security" for purposes of Section
851(b)(4) of the Code. Moreover, it is unclear whether a Residual Certificate
will be treated as a "voting security" under that Code section. Finally, because
the REMIC will be treated as the "issuer" of the Residual Certificate for
purposes of that Section, a RIC would be unable to invest more than 25% of the
value of its total assets in Residual Certificates of the same REMIC.
Partnerships. Partners in a partnership (other than an "electing large
partnership") that acquire a Residual Certificate generally must take into
account their allocable share of any income, including excess inclusion income,
that is produced by the Residual Certificate. The partnership itself is not
subject to tax on income from the Residual Certificate other than excess
inclusion income that is allocable to partnership interests owned by
Disqualified Organizations. For the treatment of an "electing large
partnership'" see "Federal Income Tax Consequences -- REMIC Certificates -- Tax
Treatment of Residual Certificates -- Ownership of Residual Certificates by
Disqualified Organizations" in this prospectus.
Foreign Residual Certificateholders. Certain adverse tax consequences may
be associated with the holding of certain Residual Certificates by a foreign
person or with the transfer of such Certificates to or from a foreign person.
See "Federal Income Tax Consequences -- REMIC Certificates -- Taxation of
Certain Foreign Holders of REMIC Certificates -- Residual Certificates" in this
prospectus.
Thrift Institutions, banks, and certain other financial institutions.
Residual Certificates will be treated as qualifying assets for thrift
institutions in the same proportion that the assets of the REMIC would be so
treated. However, if 95% or more of the assets of a given Series REMIC are
qualifying assets for thrift institutions, 100% of that REMIC's regular and
residual interests would be treated as qualifying assets. In addition, the REMIC
Regulations provide that payments of principal and interest on mortgage assets
that are reinvested pending their distribution to the holders of the REMIC
Certificates will be treated as qualifying assets for thrift institutions.
Moreover, two REMICs that are part of a tiered structure will be treated as one
REMIC for purposes of determining the percentage of assets of each REMIC that
constitutes qualifying assets for thrift institution purposes. It is expected
that at least 95% of the assets of any Series REMIC will be qualifying assets
for thrift institutions throughout the REMIC's life.
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The amount of a Residual Certificate treated as a qualifying asset for thrift
institutions, however, cannot exceed the holder's adjusted basis in that
Residual Certificate.
Generally, gain or loss arising from the sale or exchange of Residual
Certificates held by certain financial institutions will give rise to ordinary
income or loss, regardless of the length of the holding period for the Residual
Certificates. Those financial institutions include banks, mutual savings banks,
cooperative banks, domestic building and loan institutions, savings and loan
institutions, and similar institutions. See "Federal Income Tax Consequences --
REMIC Certificates -- Disposition of Residual Certificates" in this prospectus.
Disposition of Residual Certificates
A Residual Certificateholder will recognize gain or loss on the disposition
of his Residual Certificate equal to the difference between the amount
realized -- or the fair market value of any property -- received and his
adjusted basis in the Residual Certificate. If the holder has held the Residual
Certificate for more than 12 months, such gain or loss generally will be
characterized as long-term capital gain or loss. In the case of banks, thrifts,
and certain other financial institutions, however, gain or loss on the
disposition of a Residual Certificate will be treated as ordinary gain or loss,
regardless of the length of the holding period. See "Federal Income Tax
Consequences -- REMIC Certificates -- Special Considerations for Certain Types
of Investors" in this prospectus.
A special version of the wash sale rules will apply to dispositions of
Residual Certificates. Under that version, losses on dispositions of Residual
Certificates generally will be disallowed where, within six months before or
after the disposition, the seller of such a certificate acquires any residual
interest in a REMIC or any interest in a taxable mortgage pool that is
economically comparable to a Residual Certificate. Regulations providing for
appropriate exceptions to the application of the wash sale rules have been
authorized, but have not yet been promulgated.
Liquidation of the REMIC
A REMIC may liquidate without the imposition of entity-level tax only in a
qualified liquidation. A liquidation is considered qualified if the REMIC (i)
adopts a plan of complete liquidation, (ii) sells all of its non-cash assets
within 90 days of the date on which it adopts the plan, and (iii) distributes in
liquidation all sale proceeds plus its cash (other than amounts retained to meet
claims against it) to certificateholders within the 90-day period. Under the
REMIC Regulations, a plan of liquidation need not be in any special form.
Furthermore, if a REMIC specifies the first day in the 90-day liquidation period
in a statement attached to its final tax return, the REMIC will be considered to
have adopted a plan of liquidation on that date.
Treatment by the REMIC of Original Issue Discount, Market Discount, and
Amortizable Premium
Original Issue Discount. Generally, the REMIC's deductions for original
issue discount expense on its REMIC regular certificates will be determined in
the same manner as for
<PAGE>
determining the original issue discount income of the holders of such
certificates, as described in "Federal Income Tax Consequences -- REMIC
Certificates -- Original Issue Discount" in this prospectus, without regard to
the de minimis rule described therein.
Market Discount. In general, the REMIC will have market discount income
with respect to its qualified mortgages if the basis of the REMIC in such
mortgages is less than the adjusted issue prices of such mortgages. The REMIC's
aggregate initial basis in its qualified mortgages, and any other assets
transferred to the REMIC on the startup day, equals the aggregate of the issue
prices of the regular and residual interests in the REMIC. That basis is
allocated among the REMIC's qualified mortgages based on their relative fair
market values. Any market discount that accrues on the REMIC's qualified
mortgages will be recognized currently as an item of REMIC ordinary income. The
amount of market discount income to be recognized in any period is determined in
a manner generally similar to that used in the determination of original issue
discount, as if the qualified mortgages had been issued (i) on the date they
were acquired by the REMIC and (ii) for a price equal to the REMIC's initial
basis in the qualified mortgages. The Pricing Prepayment Assumptions are used to
compute the yield to maturity of the REMIC's qualified mortgages.
Premium. Generally, if the basis of the REMIC in its qualified mortgages
exceeds the unpaid principal balances of those mortgages the REMIC will be
considered to have acquired such mortgages at a premium equal to the amount of
such excess. As stated above, the REMIC's initial basis in its qualified
mortgages equals the aggregate of the issue prices of the regular and residual
interests in the REMIC. As described under "Federal Income Tax Consequences --
REMIC Certificates - Amortizable Premium," a REMIC that holds a qualified
mortgage as a capital asset generally may elect under Code Section 171 to
amortize premium on such mortgage under a constant interest method, to the
extent such mortgages were originated, or treated as originated, after September
27, 1985. The legislative history to the 1986 Act indicates that, while the
deduction for amortization of premium will not be subject to the limitations on
miscellaneous itemized deductions of individuals, it will be treated as interest
expense for purposes of other provisions in the 1986 Act limiting the
deductibility of interest for non-corporate taxpayers. Because substantially all
of the mortgagors on the mortgage loans that comprise or underlie the qualified
mortgages are expected to be individuals, Section 171 will not be available for
the amortization of premium on such mortgage loans to the extent they were
originated on or prior to September 27, 1985. Such premium may be amortizable
under more general provisions and principles of federal income tax law in
accordance with a reasonable method regularly employed by the holder of such
mortgage loans. The allocation of such premium pro rata among principal payments
should be considered a reasonable method; however, the IRS may argue that such
premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
REMIC-Level Taxes
Income from certain transactions by the REMIC, called prohibited
transactions, will not be part of the calculation of the REMIC's income or loss
that is includable in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC at a
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100% rate. In addition, net income from one prohibited transaction may not be
offset by losses from other prohibited transactions. Prohibited transactions
generally include: (i) the disposition of qualified mortgages other than
pursuant to (a) the repurchase of a defective mortgage, (b) the substitution for
a defective mortgage within two years of the closing date, (c) a substitution
for any qualified mortgage within three months of the closing date, (d) the
foreclosure, default, or imminent default of a qualified mortgage, (e) the
bankruptcy or insolvency of the REMIC, (f) the sale of an adjustable rate
mortgage loan the interest rate on which is convertible to a fixed rate of
interest upon such conversion for an amount equal to the mortgage loan's current
principal balance plus accrued but unpaid interest (and provided that certain
other requirements are met) or (g) a qualified liquidation of the REMIC; (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC is permitted to hold; (iii) the receipt of
compensation for services by the REMIC; and (iv) the receipt of gain from
disposition of cash-flow investments other than pursuant to a qualified
liquidation of the REMIC. A disposition of a qualified mortgage or cash flow
investment will not give rise to a prohibited transaction, however, if the
disposition was (i) required to prevent default on a regular interest resulting
from a default on one or more of the REMIC's qualified mortgages or (ii) made to
facilitate a clean-up call. The REMIC Regulations define a clean-up call as the
redemption of a class of regular interests when, by reason of prior payments
with respect to those interests, the administrative costs associated with
servicing the class outweigh the benefits of maintaining the class. Under those
regulations, the redemption of a class of regular interests with an outstanding
principal balance of no more than 10% of the original principal balance
qualifies as a clean-up call. The REMIC Regulations also provide that the
modification of a mortgage loan generally will not be treated as a disposition
of that loan if it is occasioned by a default or a reasonably foreseeable
default, an assumption of the mortgage loan, the waiver of a due-on-sale or
encumbrance clause, or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate mortgage loan.
In addition, a REMIC generally will be taxed at a 100% rate on any
contribution to the REMIC after the closing date unless such contribution is a
cash contribution that (i) takes place within the three-month period beginning
on the closing date, (ii) is made to facilitate a clean-up call or a qualified
liquidation, (iii) is a payment in the nature of a guarantee, (iv) constitutes a
contribution by the holder of the Residual Certificates in the REMIC to a
qualified reserve fund, or (v) is otherwise permitted by Treasury regulations
yet to be issued. The structure and operation of each Series REMIC generally
will be designed to avoid the imposition of both the 100% tax on contributions
and the 100% tax on prohibited transactions.
To the extent that a REMIC derives certain types of income from foreclosure
property -- generally, income relating to dealer activities of the REMIC, it
will be taxed on such income at the highest corporate income tax rate. It is not
anticipated that any Series REMIC will receive significant amounts of such
income, although the relevant law is unclear.
The organizational documents governing the REMIC regular certificates and
Residual Certificates will be designed to prevent the imposition of the
foregoing taxes on the related Series REMIC in any material amounts. If any of
the foregoing taxes is imposed on a Series REMIC, the trustee will seek to place
the burden thereof on the person whose action or inaction
<PAGE>
gave rise to such taxes. To the extent that the trustee is unsuccessful in doing
so, the burden of such taxes will be borne by any outstanding subordinated class
of certificates before it is borne by a more senior class of certificates.
REMIC Qualification
The trust underlying a series, or one or more designated pools of assets
held by the trust, will qualify under the Code as a REMIC in which the REMIC
regular certificates and Residual Certificates will constitute the "regular
interests" and "residual interests," respectively, if a REMIC election is in
effect and certain tests concerning (i) the composition of the REMIC's assets
and (ii) the nature of the certificateholders' interests in the REMIC are met on
a continuing basis.
Asset Composition
In order for a trust, or one or more designated pools of assets held by a
trust, to be eligible for REMIC status, substantially all of the assets of the
trust must consist of "qualified mortgages" and "permitted investments" as of
the close of the third month beginning after the closing date and at all times
thereafter (the "Asset Qualification Test"). A REMIC will be deemed to satisfy
the Asset Qualification Test if no more than a de minimis amount of its assets
(i.e., assets with an aggregate adjusted basis that is less than 1% of the
aggregate adjusted basis of all the REMIC's assets) are assets other than
qualified mortgages and permitted investments. A qualified mortgage is any
obligation that is principally secured by an interest in real property,
including a regular interest in another REMIC, that is either transferred to the
REMIC on the closing date or purchased by the REMIC pursuant to a fixed price
contract within a three-month period thereafter. Under the REMIC regulations, a
qualified mortgage includes any obligation secured by manufactured housing that
qualifies as a single family residence under Section 25(e)(10) of the Code,
which requires that the housing (i) be used as a single family residence, (ii)
have a minimum of 400 square feet of living space and a minimum width in excess
of 102 inches, and (iii) be customarily used at a fixed location. A qualified
mortgage also includes a qualified replacement mortgage, which is any property
that would have been treated as a qualified mortgage if it were transferred to
the REMIC on the closing date and that is received either in exchange for a
defective mortgage within a two-year period beginning on the closing date or in
exchange for any qualified mortgage within a three-month period beginning on
that date. The trust assets of each Series REMIC will be treated as qualified
mortgages.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. Cash flow investments are investments of
amounts received with respect to qualified mortgages for a temporary period not
to exceed thirteen months before distribution to holders of regular or residual
interests in the REMIC. Qualified reserve assets are intangible investment
assets other than REMIC residual interests that are part of a reasonably
required reserve (a "Qualified Reserve Fund") maintained by the REMIC to provide
for full payment of expenses of the REMIC or amounts due on the regular
interests in the event of defaults or delinquencies on qualified mortgages,
lower than expected returns on cash-flow investments, interest shortfalls on
qualified mortgages caused by prepayments of those mortgages or
<PAGE>
unanticipated losses or expenses incurred by the REMIC. A Qualified Reserve Fund
will be disqualified if more than 30% of the gross income from the assets in
such fund for the year is derived from the sale of property held for less than
three months, unless such sale was required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. To the extent
that the amount in a Qualified Reserve Fund exceeds a reasonably required
amount, it must be reduced "promptly and appropriately." Foreclosure property
generally is property acquired by the REMIC in connection with the default or
imminent default of a qualified mortgage. Property so acquired by the REMIC,
however, will not be qualifying foreclosure property if the foreclosure was
anticipated at the time that the related qualified mortgage was transferred to
the REMIC. Furthermore, foreclosure property may not be held beyond the end of
the third taxable year beginning after foreclosure occurs, unless it is
established to the satisfaction of the Secretary of the Treasury that an
extension of the three-year period is necessary for the orderly liquidation of
the foreclosure property. The Secretary of the Treasury may grant one or more
extensions, but any such extension shall not extend the grace period beyond the
end of the sixth taxable year beginning after the date such foreclosure property
is acquired.
Investors' Interests
In addition to the requirements of the Asset Qualification Test, the
various interests in a REMIC also must meet certain requirements. All of the
interests in a REMIC must be issued on the closing date, or within a specified
10-day period and belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of residual interests on which
distributions are made pro rata. For each series REMIC with respect to which
REMIC certificates are issued, the REMIC regular certificates will constitute
one or more classes of regular interests in that REMIC, and the Residual
Certificates will constitute the single class of residual interests in that
REMIC.
If the interest payable on any REMIC regular interest is disproportionately
high relative to the specified principal amount of the interest, that interest
may be treated, in whole or in part, as a second residual interest, which could
result in the disqualification of the REMIC. Under the REMIC Regulations,
interest payments, or similar amounts, are considered disproportionately high if
the issue price of the REMIC regular interest exceeds 125% of its specified
principal amount. Under the REMIC Regulations, however, interest payable at a
disproportionately high rate will not cause a REMIC regular certificate to be
recharacterized as a residual interest if interest payments on the certificate
consist of a specified portion of the interest payments on qualified mortgages
and such portion does not vary during the period that the certificate is
outstanding. None of the REMIC regular certificates, will have an issue price
that exceeds 125% of their respective specified principal amounts unless
interest payments on those certificates consist of a specified nonvarying
portion of the interest payments on one or more of the REMIC's qualified
mortgages.
A REMIC interest qualifies as a regular interest if (i) it is issued on the
startup day with fixed terms, (ii) it is designated as a regular interest, (iii)
it entitles its holder to a specified principal amount, and (iv) if it pays
interest, such interest either (a) constitutes a specified
<PAGE>
nonvarying portion of the interest payable on one or more of the REMIC's
qualified mortgages, (b) is payable at a fixed rate with respect to the
principal amount of the regular interest, or (c) to the extent permitted under
the REMIC Regulations, is payable at a variable rate with respect to such
principal amount. Pursuant to the REMIC Regulations, the following rates are
permissible variable rates for REMIC regular interests: (i) a qualified floating
rate set at a current value as described in "Federal Income Tax Consequences --
REMIC Certificates -- Variable Rate Certificates" in this prospectus, without
regard to the rules in the OID Regulations limiting the use of Caps, Floors, and
Governors with respect to such a rate, (ii) a rate equal to the highest, lowest,
or average of two or more qualified floating rates -- e.g., a rate based on the
average cost of funds of one or more financial institutions, or (iii) a rate
equal to the weighted average of the interest rates on some or all of the
qualified mortgages held by the REMIC; provided, however, that the qualified
mortgages taken into account in determining the weighted average rate bear
interest at a fixed rate or a rate that would be a permissible variable rate for
a REMIC regular interest as described in this sentence. Under the REMIC
Regulations, the presence of a ceiling or Floor on the interest payable on a
variable rate interest will not prevent such interest from qualifying as a
regular interest. In addition, a qualifying variable rate may be expressed as a
multiple of, or a constant number of basis points more or less than, one of the
permissible types of variable rates described above. Finally, a limitation on
the amount of interest to be paid on a variable rate regular interest based on
the total amount available for distribution is permissible, provided that it is
not designed to avoid the restrictions on qualifying variable rates. The REMIC
Regulations also provide that the specified principal amount of a REMIC regular
interest may be zero if the interest associated with such regular interest
constitutes a specified nonvarying portion of the interest on one or more of the
REMIC's qualified mortgages.
The Code requires that certain arrangements be made with respect to all
REMICs. Those arrangements, which are intended to prevent acquisitions of REMIC
residual interests by certain organizations that are not subject to federal
income tax, are described in "Federal Income Tax Consequences -- REMIC
Certificates -- Taxation of Residual Certificateholders -- Ownership of Residual
Interests by Disqualified Organizations" in this prospectus. Series REMICs will
be structured to provide for such arrangements.
Consequences of Disqualification
If a Series REMIC fails to comply with one or more of the Code's ongoing
requirements for REMIC status during any taxable year, the Code provides that
its REMIC status may be lost for that year and thereafter. If REMIC status is
lost, the treatment of the former REMIC and the interests therein for federal
income tax purposes is uncertain. The former REMIC might be entitled to
treatment as a grantor trust under Subpart E, Part 1 of Subchapter J of the
Code, in which case no entity-level tax would be imposed on the former REMIC.
Alternatively, the REMIC regular certificates may continue to be treated as debt
instruments for federal income tax purposes, but the arrangement could be
treated as a Taxable Mortgage Pool, as described in "Federal Income Tax
Consequences -- REMIC Certificates -- Taxable Mortgage Pools" in this
prospectus. If a Series REMIC were treated as a Taxable Mortgage Pool, any
residual income of the REMIC -- i.e., interest and discount income from the
mortgage loans less interest and original issue discount expense allocable to
the REMIC regular certificates and any
<PAGE>
administrative expenses of the REMIC -- would be subject to corporate income tax
at the Taxable Mortgage Pool level. On the other hand, the arrangement could be
treated under Treasury regulations as a separate association taxable as a
corporation and the REMIC regular certificates would be treated as stock
interests therein, rather than debt instruments. In that case, none of the
payments made with respect to the REMIC regular certificates would be deductible
by the former REMIC. In the latter two cases, the Residual Certificates also
would be treated as stock interests in such Taxable Mortgage Pool or
association, respectively. The Code authorizes the Treasury to issue regulations
that address situations where a failure to meet the requirements for REMIC
status occurs inadvertently and in good faith. Such regulations have not yet
been issued. The conference report accompanying the 1986 Act indicates that
disqualification relief may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period of
time in which the requirements for REMIC status are not satisfied.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC, a FASIT, or a REIT will be
considered to be a Taxable Mortgage Pool if (i) substantially all of the assets
of the entity consist of debt obligations and more than 50% of such obligations
consist of real estate mortgages, (ii) such entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the debt
obligations on which the entity is the obligor, payments on such obligations
bear a relationship to payment on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
National Mortgage generally will structure offerings of Debt Securities to avoid
the application of the Taxable Mortgage Pool rules.
<PAGE>
Taxation of Certain Foreign Holders of REMIC Certificates
REMIC Regular Certificates. Interest, including original issue discount,
paid on a REMIC regular certificate to a nonresident alien individual, foreign
corporation, or other non-United States person (a "foreign person") generally
will be treated as "portfolio interest" and, therefore, will not be subject to
any United States withholding tax, provided that (i) such interest is not
effectively connected with a trade or business in the United States of the
certificateholder, (ii) the trustee or other person who would otherwise be
required to withhold tax is provided with appropriate certification that the
beneficial owner of the certificate is a foreign person ("foreign person
certification") (iii) the foreign person is not a 10% shareholder within the
meaning of Section 871(h)(3)(B) of the Code or a controlled foreign corporation
as described under Section 881(c)(3)(C) of the Code, and (iv) the foreign person
is not a bank receiving interest on a loan made in the ordinary course of
business. If the certificateholder fails to meet the conditions listed above,
interest, including original issue discount, paid on the holders, certificates
may be subject to either a 30% withholding tax or 31% backup withholding. See
"Federal Income Tax Consequences -- REMIC Certificates -- Backup Withholding" in
this prospectus.
Residual Certificates. Amounts paid to Residual Certificateholders who are
foreign persons are treated as interest for purposes of the 30%, or lower treaty
rate, United States withholding tax. Under Treasury regulations, non-excess
inclusion income received by Residual Certificateholders who are foreign persons
generally qualifies as "portfolio interest" exempt from the 30% withholding tax
only to the extent that (i) the assets of the Series REMIC are mortgage
certificates that are issued in registered form, (ii) the mortgage assets
underlying the mortgage certificates were originated after July 18, 1984 and
(iii) the certificateholder meets the requirements listed under "Federal Income
Tax Consequences -- REMIC Certificates --Taxation of Certain Foreign Holders of
REMIC Certificates -- REMIC Regular Certificates" in this prospectus. Because
mortgage loans are not issued in registered form, amounts received by Residual
Certificateholders who are foreign persons will not be exempt from the 30%
withholding tax to the extent such amounts relate to mortgage loans held
directly, rather than indirectly through mortgage certificates, by the related
REMIC. If the portfolio interest exemption is unavailable, such amounts
generally will be subject to United States withholding tax when paid or
otherwise distributed, or when the Residual Certificate is disposed of, under
rules similar to those for withholding on debt instruments that have original
issue discount. However, the Code grants the Treasury authority to issue
regulations requiring that those amounts be taken into account earlier than
otherwise provided where necessary to prevent avoidance of tax -- i.e., where
the Residual Certificates, as a class, do not have significant value. Further, a
Residual Certificateholder will not be entitled to any exemption from the 30%
withholding tax or a reduced treaty rate on excess inclusion income.
Under the REMIC Regulations, a transfer of a Residual Certificate that has
"tax avoidance potential" will be disregarded for federal income tax purposes if
the transferee is a foreign person. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each accrual of excess inclusion, the REMIC will
distribute to the transferee an amount that will equal at least 30% of the
excess inclusion, and that each such amount will be distributed no later than
the close of the calendar
<PAGE>
year following the calendar year of accrual (the "30% Test"). A transferor of a
Residual Certificate to a foreign person will be presumed to have had a
reasonable expectation that the Residual Certificate satisfies the 30% Test if
that test would be satisfied for all mortgage asset prepayment rates between 50%
and 200% of the Pricing Prepayment Assumption. See "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount," in this
prospectus. If a foreign person transfers a Residual Certificate to a United
States person and the transfer, if respected, would permit avoidance of
withholding tax on accrued excess inclusion income, the transfer will be
disregarded for federal income tax purposes and distributions with respect to
the Residual Certificate will continue to be subject to 30% withholding as
though the foreign person still owned the Residual Certificate. Investors who
are foreign persons should consult their own tax advisors regarding the specific
tax consequences to them of owning and disposing of a Residual Certificate.
Effective for payments made after December 31, 2000, any foreign investor that
invokes the protection of an income tax treaty with respect to United States
withholding tax generally will be required to obtain a taxpayer identification
number from the IRS in advance and provide verification that such investor is
entitled to the protection of the relevant income tax treaty. Foreign tax-exempt
investors generally will be required to provide verification of their tax-exempt
status. Foreign investors are urged to consult with their tax advisors with
respect to these new withholding rules.
Backup Withholding
Under federal income tax law, a certificateholder may be subject to "backup
withholding" under certain circumstances. Backup withholding may apply to a
certificateholder who is a United States person if the certificateholder, among
other things, (i) fails to furnish his social certificate number or other
taxpayer identification number ("TIN") to the trustee, (ii) furnishes the
trustee an incorrect TIN, (iii) fails to report properly interest and dividends,
or (iv) under certain circumstances, fails to provide the trustee or the
certificateholder's certificates broker with a certified statement, signed under
penalties of perjury, that the TIN provided to the trustee is correct and that
the certificateholder is not subject to backup withholding. Backup withholding
may apply, under certain circumstances, to a certificateholder who is a foreign
person if the certificateholder fails to provide the trustee or the
certificateholder's certificates broker with a foreign person certification.
Backup withholding applies to "reportable payments," which include interest
payments and principal payments to the extent of accrued original issue
discount, as well as distributions of proceeds from the sale of REMIC regular
certificates or REMIC Residual Certificates. The backup withholding rate is 31%.
Backup withholding, however, does not apply to payments on a certificate made to
certain exempt recipients, such as tax-exempt organizations, and to certain
foreign persons. You should consult your tax advisors for additional information
concerning the potential application of backup withholding to payments received
by you with respect to a certificate.
Reporting and Tax Administration
REMIC Regular Certificates. Reports will be made at least annually to
holders of record of REMIC regular certificates, other than those with respect
to whom reporting is not required, and to the IRS as may be required by statute,
regulation, or administrative ruling with respect to
<PAGE>
(i) interest paid or accrued on the certificates, (ii) original issue discount,
if any, accrued on the certificates, and (iii) information necessary to compute
the accrual of any market discount or the amortization of any premium on the
certificates.
Residual Certificates. For purposes of federal income tax reporting and
administration, a Series REMIC generally will be treated as a partnership, and
the related Residual Certificateholders as its partners. A Series REMIC will
file an annual return on Form 1066 and will be responsible for providing
information to Residual Certificateholders sufficient to enable them to report
properly their shares of the REMIC's taxable income or loss, although it is
anticipated that such information actually will be supplied by the trustee or
the master servicer. The REMIC Regulations require reports to be made by a REMIC
to its Residual Certificateholders each calendar quarter in order to permit such
certificateholders to compute their taxable income accurately. A person that
holds a Residual Certificate as a nominee for another person is required to
furnish those quarterly reports to the person for whom it is a nominee within 30
days of receiving such reports. A REMIC is required to file all such quarterly
reports for a taxable year with the IRS as an attachment to the REMIC's income
tax return for that year. As required by the Code, a Series REMIC's taxable year
will be the calendar year.
Residual Certificateholders should be aware that their responsibilities as
holders of the residual interest in a REMIC, including the duty to account for
their shares of the REMIC's income or loss on their returns, continue for the
life of the REMIC, even after the principal and interest on their Residual
Certificates have been paid in full.
A Residual Certificateholder will be designated as the REMIC's tax matters
person ("TMP"). The TMP generally has responsibility for overseeing and
providing notice to the other Residual Certificateholders of certain
administrative and judicial proceedings regarding the REMIC's tax affairs,
although other holders of the Residual Certificates of the same series would be
able to participate in such proceedings in appropriate circumstances. National
Mortgage, the master servicer or an affiliate of either will acquire a portion
of the residual interest in each Series REMIC in order to permit it to be
designated as TMP for the REMIC or will obtain from the Residual
Certificateholders an irrevocable appointment to perform the functions of the
REMIC's TMP and will prepare and file the REMIC's federal and state income tax
and information returns.
Treasury regulations provide that a holder of a Residual Certificate is not
required to treat items on its return consistently with their treatment on the
REMIC's return if a holder owns 100% of the Residual Certificates for the entire
calendar year. Otherwise, each holder of a Residual Certificate is required to
treat items on its returns consistently with their treatment on the REMIC's
return, unless the holder of a Residual Certificate either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC. The IRS may assess a
deficiency resulting from a failure to comply with the consistency requirement
without instituting an administrative proceeding at the REMIC level. A Series
REMIC typically will not register as a tax shelter pursuant to Code Section 6111
because it generally will not have a net loss for any of the first five taxable
years of its existence. Any person that holds a Residual Certificate as a
nominee for another person may
<PAGE>
be required to furnish the REMIC, in a manner to be provided in Treasury
regulations, with the name and address of such person and other specified
information.
New Withholding Regulations
The Treasury Department has issued new regulations which make certain
modifications to the withholding, backup withholding, and information reporting
rules described above. The new withholding regulations attempt to unify
certification requirements and modify reliance standards. The new withholding
regulations generally will be effective for payments made after December 31,
2000, subject to certain transition rules. You are urged to consult your tax
advisors regarding the new withholding regulations.
FASIT Securities
Treatment of the Trust for Federal Income Tax Purposes
Many aspects of the federal income tax treatment of the securities will
depend upon whether an election is made to treat your trust, or one or more
segregated pools of trust assets, as a FASIT. The accompanying prospectus
supplement will indicate whether a FASIT election or elections will be made with
respect to your trust. For each series in which one or more FASIT elections are
to be made, Hunton & Williams, counsel to National Mortgage, will deliver a
separate opinion generally to the effect that, assuming timely filing of a FASIT
election or elections and compliance with the documents specified in the
opinion, the trust -- or one or more segregated pools of trust assets -- will
qualify as one or more FASITs.
The FASIT provisions of the Code became effective on September 1, 1997.
However, no Treasury regulations or other administrative guidance have been
issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of FASIT
securityholders. Investors should also note that the FASIT discussion contained
herein constitutes only a summary of the United States federal income tax
consequences to holders of FASIT securities. With respect to each series of
FASIT regular interests, the related prospectus supplement will provide a
detailed discussion regarding the federal income tax consequences associated
with the particular transaction.
FASIT interests will be classified as either FASIT regular interests, which
generally will be treated as debt for federal income tax purposes, or FASIT
ownership interests, which generally are not treated as debt for such purposes,
but rather as representing rights and responsibilities with respect to the
taxable income or loss of the related FASIT. The prospectus supplement for each
series of securities will indicate which securities of such series will be
designated as regular interests, and which, if any, will be designated as the
ownership interest.
Characterization of Investments in FASIT Securities
FASIT securities will not constitute "government securities" within the
meaning of Code Section 856(c)(5)(A) or Code Section 851(b)(4)(A)(i). The
prospectus supplement will provide further information regarding the tax status
of the securities for other purposes, which will depend on the particular assets
held by the FASIT.
FASIT Qualification
A trust fund will qualify as a FASIT if (i) a FASIT election is in effect,
(ii) certain tests concerning the composition of the FASITs assets (the "asset
test") and the nature of
<PAGE>
the investors' interests in the FASIT (the "interests test") are met on a
continuing basis, and (iii) the trust fund is not a RIC as described in Section
851(a) of the Code.
The Interest Test. All interests in a FASIT must be designated as either
regular interests or as the ownership interest. A FASIT can have only one
ownership interest and it must be held directly at all times by an "eligible
corporation" (i.e., a domestic "C" corporation that is subject to tax and that
----
is not a RIC, a REIT, a REMIC, or a subchapter T cooperative).
A FASIT regular interest generally qualifies as a regular interest if (i)
it is designated as a regular interest, (ii) it has a stated maturity of no
greater than 30 years, (iii) it entitles its holder to a specified principal
amount, (iv) the issue price of the interest does not exceed 125% of its stated
principal amount, (v) the yield to maturity of the interest is less than the
applicable federal rate published by the IRS for the month of issue plus 5%, and
(vi) if it pays interest, such interest is payable at either (a) a fixed rate
with respect to the principal amount of the regular interest or (b) a
permissible variable rate with respect to such principal amount. Permissible
variable rates for a FASIT regular interest are the same as those for REMIC
regular interests (certain qualified floating rates and weighted average rates).
See "Federal Income Tax Consequences -- REMIC Certificates --REMIC
Qualification --Investors' Interests" in this prospectus.
If an interest in a FASIT fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "high-yield interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (vi) above, but
the interest payable on the interest consists of a specified portion of the
interest payments on permitted assets and that portion does not vary over the
life of the security, the interest will also qualify as high-yield interest. A
high-yield interest may only be held by domestic C corporations that are fully
subject to corporate income tax, other FASITs, and dealers in securities who
acquire such interests as inventory, rather than for investment. In addition,
holders of high-yield interests are subject to limitations on offsetting income
derived from such interest. See "FASIT Security Holders -- Tax Treatment of
FASIT Securityholders -- Taxation of Holders of High-Yield Interests" in this
prospectus.
One class of securities will be designated as the sole ownership interest
in the FASIT. The ownership class may not be owned by any entity other than an
eligible corporation. The ownership interest need not have any particular
economic characteristics.
The Asset Test. If the trust is to qualify as a FASIT, then as of the
close of the third month following the date of its formation, and at all times
thereafter, substantially all of its assets must be "permitted assets."
"Permitted assets" include (i) cash and cash equivalents, (ii) any debt
instrument that provides for interest at a rate that would be a qualifying rate
for a REMIC regular interest, (iii) foreclosure property, (iv) certain hedging
instruments (i.e., swap contracts, futures contracts, and guarantee
----
arrangements)
<PAGE>
intended to hedge against the risks associated with being the obligor on FASIT
regular interests, (v) contract rights to acquire debt instruments described in
(ii) above or hedges described in (iv) above, and (vi) any regular interest in a
REMIC or in another FASIT. The term "permitted asset" does not, however, include
any debt instrument issued by the holder of the ownership interest or any person
related to such holder.
Consequences of Disqualification
If a trust or segregated pool of trust assets fails to comply with one or
more ongoing requirements for FASIT status during any taxable year, the Code
provides that its FASIT status may be lost for that year and thereafter. If
FASIT status is lost, the federal income tax treatment of the former FASIT and
the related securities is uncertain. Although the Code authorizes the Treasury
to issue regulations that address situations where a failure to meet the
requirements for FASIT status occurs inadvertently and in good faith, such
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Securityholders
FASIT regular securities generally will be subject to the same rules of
taxation as REMIC regular certificates, including the requirement that holders
of FASIT regular securities report income from their securities under the
accrual method of accounting, even if they otherwise would have used the cash
receipts and disbursement method. See "Federal Income Tax Consequence -- REMIC
Certificates -- Original Issue Discount," "--Market Discount" and "--
Amortizable Premium" in this Prospectus. The sale or other disposition of a
FASIT regular security generally will be subject to the same rules as a REMIC
regular certificate. See "Federal Income Tax Consequence -- REMIC Certificates
- --Gain or Loss on Disposition" in this Prospectus.
Taxation of Holders of High-yield Interests. High-yield interests are
subject to special rules regarding the eligibility of holders of such interests,
and the ability of such holders to offset income derived from those interests
with losses. High-yield interests only may be held by eligible corporations,
other FASITs, and dealers in securities which acquire such interests as
inventory. If a securities dealer (other than an eligible corporation)
initially acquires a high-yield interest as inventory, but later begins to hold
it for investment, the dealer will be subject to an excise tax equal to the
income from the high-yield interest multiplied by the highest corporate tax
rate. In addition, transfers of high-yield interests to disqualified holders
will be disregarded for federal income tax purposes, and the transferor will
continue to be treated as the holder of the high-yield interest.
The holder of a high-yield interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the high-yield interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes
<PAGE>
corporate income tax on income derived from a FASIT regular interest that is
held by a pass-through entity (other than another FASIT) that issues debt or
equity securities backed by the FASIT regular interest and that have the same
features as high-yield interests.
Taxation of Holders of FASIT Ownership Interests. A FASIT ownership
interest represents the residual equity interest in a FASIT. As such, the
holder of a FASIT ownership interest determines its taxable income by taking
into account all assets, liabilities, and items of income, gain, deduction, loss
and credit of the related FASIT. In general the character of the income to the
holder of a FASIT ownership interest will be the same as the character of such
income to the FASIT, except that any tax-exempt interest income taken into
account by the holder of a FASIT ownership interest is treated as ordinary
income. In determining that taxable income, the holder of a FASIT ownership
interest must use a constant yield methodology and an accrual method of
accounting and generally will be subject to the same rules of taxation for
original issue discount, market discount, and amortizable premium as a REMIC
would. See "Federal Income Tax Consequence -- REMIC Certificates -- Treatment
by the REMIC of Original Issue Discount, Market Discount, and Amortizable
Premium" in this Prospectus. In addition, a holder of a FASIT ownership interest
is subject to the same limitations on its ability to use non-FASIT losses to
offset income from the FASIT ownership interest as are holders of high-yield
interests.
Rules similar to the wash sale rules applicable to REMIC residual interests
will also apply to FASIT ownership interests. Accordingly, losses on
dispositions of a FASIT ownership interest generally will be disallowed where
within six months before or after the disposition, the seller of such interest
acquires any other FASIT ownership interest that is economically comparable to
the disposed FASIT ownership interest. In addition, if any security that is
sold or contributed to a FASIT by the holders of the related FASIT ownership
interest was required to be marked to market under section 475 of the Code by
such holder, then section 475 of the Code generally will continue to apply to
such security.
The holder of a FASIT ownership interest will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT, and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any series of securities for which a FASIT election is made
generally will be structured to avoid application of the prohibited transaction
tax.
Tax Consequences to Foreign Securityholders
Interest or original issue discount paid to or accrued by a FASIT regular
interest holder who is a foreign person generally will be considered "portfolio
interest" and will not be subject to United States federal income or withholding
tax if the holder meets the same requirements that are applicable to foreign
holders of REMIC regular interests. See
<PAGE>
"Federal Income Tax Consequence -- REMIC Certificates -- Taxation of Certain
Foreign Holders of REMIC Certificates --REMIC Regular Certificates" in this
Prospectus.
The 30% withholding tax will apply, however, in certain situations where
"contingent interest" is paid or the IRS determines that withholding is required
in order to prevent tax evasion by United States persons. If the 30% withholding
tax is applicable, interest payments made to FASIT regular interest holders who
are foreign persons will be subject to withholding. In addition, a tax equal to
30% of the original issue discount accrued with respect to a security since the
last payment of interest thereon will be withheld from each interest payment
made to a foreign person. The Code provides, for purposes of determining the
amount of original issue discount subject to the withholding tax on foreign
persons, that original issue discount shall accrue at a constant interest rate
pursuant to the rules applicable to United States persons. Securityholders to
whom withholding with respect to foreign persons applies will also be subject to
a 30% tax on the portion of any accrued original issue discount that has not
previously been subject to withholding upon the payment by the issuer of
principal on a security or upon the sale or exchange of a security.
The 30% withholding tax imposed on a foreign person may be subject to
reduction or elimination under applicable tax treaties and does not apply if the
interest, original issue discount or gain treated as ordinary income, as the
case may be, is effectively connected with the conduct by such foreign person of
a trade or business within the United States.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of FASIT securities by a foreign person will be exempt from
United States income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual, the
individual is not present in the United States for 183 days or more in the
taxable year.
Backup Withholding
A holder of a FASIT regular interest will be subject to the same backup
withholding rules as holders of REMIC regular certificates. See ""Federal
Income Tax Consequence -- REMIC Certificates -- Taxation of Certain Foreign
Holders of REMIC Certificates" -- "Backup Withholding" in this supplement.
The New Withholding Regulations
The Treasury Department has enacted new withholding regulations that
generally will be effective after December 31, 2000. See "Federal Income Tax
Consequences -- REMIC Certificates -- New Withholding Regulations" in this
prospectus. Please consult your tax advisor concerning these new regulations.
Tax Information Reporting
The securities will represent collateralized debt obligations for purposes
of the information reporting requirements set out in the Treasury regulations.
As required by those regulations, the trustee will provide to securityholders
information concerning the interest paid and original issue discount accrued on
the securities as specified in the prospectus supplement.
<PAGE>
The securities will represent collateralized debt obligations for purposes of
the information reporting requirements set out in the Treasury regulations. As
required by those regulations, the trustee will provide to securityholders
information concerning the interest paid and original issue discount accrued on
the securities as specified in the prospectus supplement.
Grantor Trust Funds
Treatment of the Trust for Federal Income Tax Purposes
With respect to each series of Grantor Trust Securities, assuming
compliance with all applicable provisions of the Code, the related Grantor Trust
Fund (the "Grantor Trust") will be classified as a grantor trust under Subpart
E, Part I of subchapter J of the Code and not as an association taxable as a
corporation. For federal income tax purposes, the owner of a Grantor Trust
Security will be treated as the beneficial owner of an appropriate portion of
the principal and interest payments, according to the characteristics of the
security in question, to be received on the trust assets assigned to your trust
for federal income tax purposes.
Tax Treatment of the Grantor Trust Security
The types of Grantor Trust Securities offered in a series may include:
. Grantor Trust Securities evidencing ownership interests only in the
interest payments on the trust assets, net of certain fees, ("IO
Securities"),
. Grantor Trust Securities evidencing ownership interests in the
principal, but not the interest, payments on the trust assets ("PO
Securities"),
. Grantor Trust Securities evidencing ownership interests in differing
percentages of both the interest payments and the principal payments on
the trust assets ("Ratio Securities"), and
. Grantor Trust Securities evidencing ownership in equal percentages of
the principal and interest payments on the trust assets ("Pass-Through
Securities").
The federal income tax treatment of Grantor Trust Securities other than Pass-
Through Securities ("Strip Securities") will be determined in part by Section
1286 of the Code. Little administrative guidance has been issued under that
Section and, thus, many aspects of its operation are unclear, particularly the
interaction between that Section and the rules pertaining to discount and
premium. Hence, significant uncertainty exists with respect to the federal
income tax treatment of the Strip Securities, and potential investors should
consult their own tax advisors concerning such treatment.
Several Code Sections provide beneficial treatment to certain taxpayers
that invest in certain types of mortgage assets. For purposes of those Code
Sections, Pass-Through Securities
<PAGE>
will be characterized with reference to the trust assets, but it is not clear
whether the Strip Securities will be so characterized. The IRS could take the
position that the character of the trust assets is not attributable to the Strip
Securities for purposes of those Sections. However, because the Strip Securities
represent sole ownership rights in the principal and interest payments on the
trust assets, the Strip Securities, like the Pass-Through Securities, should be
considered to represent "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code, and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code, and interest income
attributable to the securities should be considered to represent "interest on
obligations secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, to the extent that the trust assets would qualify for
such treatment.
One or more classes of Grantor Trust Securities may be subordinated to one
or more other classes of Grantor Trust Securities of the same series. In
general, such subordination should not affect the federal income tax treatment
of either the subordinated or senior Grantor Trust Securities. However, holders
of the subordinated Grantor Trust Securities will be allocated losses that
otherwise would have been borne by the holders of the more senior Grantor Trust
Securities. Holders of the subordinated Grantor Trust Securities should be able
to recognize any such losses no later than the taxable year in which they become
Realized Losses. Employee benefit plans subject to ERISA should consult their
own tax advisors before purchasing any subordinated Grantor Trust Security. See
"ERISA Considerations" in this prospectus and in the accompanying prospectus
supplement.
Treatment of Pass-Through Securities
The holder of a Pass-Through Security ("Pass-Through Securityholder")
generally will be treated as owning a pro rata undivided interest in each of the
trust assets. Accordingly, each Pass-Through Securityholder will be required to
include in income its pro rata share of the entire income from the trust assets,
including interest and discount income, if any. Such securityholder generally
will be able to deduct from its income its pro rata share of the administrative
fees and expenses incurred with respect to the trust assets, provided that these
fees and expenses represent reasonable compensation for the services rendered.
An individual, trust, or estate that holds a Pass-Through Security directly or
through a pass-through entity will be entitled to deduct such fees and expenses
under Section 212 of the Code only to the extent that the amount of the fees and
expenses, when combined with its other miscellaneous itemized deductions for the
taxable year in question, exceeds 2% of its adjusted gross income. In addition,
Code Section 68 provides that the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount -- $126,600, or $63,300 in the case of a separate
return by a married individual within the meaning of Code Section 7703, for
taxable year 1999 and adjusted for inflation each year thereafter -- will be
reduced by the lesser of
. the excess of adjusted gross income over the applicable amount, or
. 80% of the amount of itemized deductions otherwise allowable for such
taxable year.
<PAGE>
Non-corporate holders of Pass-Through Securities also should be aware that
miscellaneous itemized deductions are not deductible for purposes of the AMT.
Each Pass-Through Securityholder generally will determine its net income or loss
with respect to the Grantor Trust in accordance with its own method of
accounting, although income arising from original issue discount must be taken
into account under the accrual method even though the securityholder otherwise
would use the cash receipts and disbursements method.
The Code provisions concerning original issue discount, market discount,
and amortizable premium will apply to the trust assets. The rules regarding
discount and premium that are applicable to Grantor Trust Securities generally
are the same as those that apply to REMIC regular certificates. See "Federal
Income Tax Consequences -- REMIC Certificates -- Original Issue Discount,"
" -- Variable Rate Certificates," " -- Market Discount" and " -- Amortizable
Premium" in this prospectus.
For instruments to which it applies, Code Section 1272(a)(6) requires the
use of an income tax accounting methodology that utilizes
. a single constant yield to maturity, and
. the Pricing Prepayment Assumptions.
As in the case of REMIC regular certificates, Code Section 1272(a)(6) applies to
Grantor Trust Securities, but no regulations have been issued describing the
application of that Section to such securities. Nonetheless, unless and until
administrative guidance to the contrary is released, the Tax Administrator
intends to account for a class of Grantor Trust Securities in the same manner as
it would account for a class of REMIC regular certificates with the same terms.
There can be no assurance, however, that the IRS ultimately will sanction the
Tax Administrator's position.
It is anticipated that most or all of the trust assets securing your series
will be subject to the original issue discount, market discount, and amortizable
premium rules. Although most mortgage loans nominally are issued at their
original principal amounts, original issue discount could arise from the payment
of points or certain other origination charges by the obligor if the discount
attributable to such payments exceeds the de minimis amount. If the Grantor
Trust contains trust assets purchased for a price below their outstanding
principal amount, Pass-Through securityholders generally will be required to
take into account original issue discount not previously accrued to the prior
holder of such trust assets. Moreover, if trust assets were purchased for less
than their adjusted issue prices, Pass-Through Securityholders generally will be
required to take into account market discount, unless the amount of such market
discount is de minimis under the market discount rules. Finally, Pass-Through
Securityholders generally may elect to amortize any premium paid for trust
assets over their adjusted issue prices. See "Federal Income Tax Consequences--
REMIC Certificates -- Original Issue Discount," "-- Market Discount" and "--
Amortizable Premium" in this prospectus.
<PAGE>
Treatment of Strip Securities
Many aspects of the federal income tax treatment of the Strip Securities
are uncertain. The discussion below describes the treatment that Hunton &
Williams believes is appropriate, but there can be no assurance that the IRS
will not take a contrary position. You should consult your tax advisor with
respect to the federal income tax treatment of the Strip Securities.
Under Section 1286 of the Code, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments on such obligation
results in the creation of "stripped coupons" with respect to the separated
rights to interest payments and "stripped bonds" with respect to the principal
and any unseparated interest payments associated with that principal. The
issuance of IO Securities or PO Securities effects a separation of the ownership
of the interest and principal payments on some or all of the trust assets. In
addition, the issuance of Ratio Securities effectively separates and reallocates
the proportionate ownership of the interest and principal payments on the trust
assets. Therefore, Strip Securities will be subject to Section 1286. For federal
income tax accounting purposes, Section 1286 of the Code treats a stripped bond
or a stripped coupon as a new debt instrument issued on the date that the
stripped interest is purchased, and at a price equal to its purchase price or,
if more than one stripped interest is purchased, the share of the purchase price
allocable to such stripped interest.
Each stripped bond or coupon generally will have original issue discount equal
to the excess of its stated redemption price at maturity -- or, in the case of a
stripped coupon, the amount payable on the due date of such coupon -- over its
issue price. Treasury regulations under Section 1286 of the Code (the "Stripping
Regulations"), however, provide that the original issue discount on a stripped
bond or stripped coupon is zero if the amount of the original issue discount
would be de minimis under rules generally applicable to debt instruments. For
purposes of determining whether such amount would be de minimis,
. the number of complete years to maturity is measured from the date the
stripped bond or stripped coupon is purchased,
. an aggregation approach similar to the Aggregation Rule may be applied,
and
. unstripped coupons may be treated as stated interest with respect to the
related bonds and, therefore, may be excluded from stated redemption
price at maturity in appropriate circumstances.
In addition, the Stripping Regulations provide that, in certain circumstances,
the excess of a stripped bond's stated redemption price at maturity over its
issue price is treated as market discount, rather than as original issue
discount. See "Federal Income Tax Consequences -- Grantor Trust Funds --
Determination of Income With Respect to Strip Securities" in this prospectus.
The application of Section 1286 of the Code to the Strip Securities is not
entirely clear under current law. That Section could be interpreted as causing
any or all of the following:
<PAGE>
. in the case of an IO Security, each interest payment due on the trust
assets to be treated as a separate debt instrument,
. in the case of a Ratio Security entitled to a disproportionately high
share of principal, each excess principal amount -- i.e., the portion of
each principal payment on such assets that exceeds the amount to which
the Ratio Securityholder would have been entitled if he had held an
undivided interest in the trust assets -- to be treated as a separate
debt instrument, and
. in the case of a Ratio Security entitled to a disproportionately high
share of interest, each excess interest amount to be treated as a
separate debt instrument.
In addition, Section 1286 of the Code requires the purchase price of a Strip
Security to be allocated among each of the rights to payment on the trust assets
to which the securityholder is entitled that are treated as separate debt
instruments. Despite the foregoing, it may be appropriate to treat stripped
coupons and stripped bonds issued to the same holder in connection with the same
transaction as a single debt instrument, depending on the facts and
circumstances surrounding the issuance. Facts and circumstances considered
relevant for this purpose should include the likelihood of the debt instruments
trading as a unit and the difficulty of allocating the purchase price of the
unit among the individual payments. Strip Securities are designed to trade as
whole investment units and, to the extent that the underwriter develops a
secondary market for the Strip Securities, it anticipates that the Strip
Securities would trade in such market as whole units. In addition, because no
market exists for individual payments on trust assets, the proper allocation of
the security's purchase price to each separate payment on the trust assets would
be difficult and burdensome to determine. Based on those facts and
circumstances, it appears that all payments of principal and interest to which
the holder of a Strip Security is entitled should be treated as a single
installment obligation. Although the OID Regulations do not refer directly to
debt instruments that are governed by Section 1286 of the Code, the application
of the OID Regulations to such instruments is consistent with the overall
statutory and regulatory scheme. Therefore, the Tax Administrator intends to
treat each Strip Security as a single debt instrument for federal income tax
accounting purposes.
Determination of Income with Respect to Strip Securities
For purposes of determining the amount of income on a Strip Security that
accrues in any period, the rules described in this prospectus under "Federal
Income Tax Consequences -- REMIC Certificates -- Original Issue Discount,"
" -- Variable Rate Certificates," " -- Interest Weighted Certificates and Non-
VRDI Securities," " -- Anti-Abuse Rule," " -- Market Discount" and " --
Amortizable Premium" in this prospectus will apply. PO Securities, and certain
classes of Ratio Securities, will be issued at a price that is less than their
stated principal amount and thus generally will be issued with original issue
discount. A Strip Security that would meet the definition of an Interest
Weighted Certificate or a Weighted Average Certificate if it were a REMIC
regular certificate is subject to the same tax accounting considerations
applicable to the REMIC regular certificate to which it corresponds. As
described in "Federal Income Tax Consequences -- REMIC Certificates -- Interest
Weighted Certificates and Non-VRDI Certificates" in this
<PAGE>
prospectus, certain aspects of the tax accounting treatment of such a Strip
Security are unclear. Unless and until the IRS provides administrative guidance
to the contrary, the Tax Administrator will account for such a Strip Security in
the manner described for the corresponding REMIC regular certificate. See
"Federal Income Tax Consequences -- REMIC Certificates -- Interest Weighted
Certificates and Non-VRDI Certificates" in this prospectus.
If a PO Security or a Ratio Security that is not considered a Contingent
Payment Obligation (an "Ordinary Ratio Security") subsequently is sold, the
purchaser apparently would be required to treat the difference between the
purchase price and the stated redemption price at maturity as original issue
discount. The holders of such securities generally will be required to include
such original issue discount in income as described in "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount" in this
prospectus. PO Securities and Ordinary Ratio Securities issued at a price less
than their stated principal amount will be treated as issued with market
discount rather than with original issue discount if, after the most recent
disposition of the related Grantor Trust Security, either (i) the amount of
original issue discount on the Grantor Trust Security is considered to be de
minimis under the Stripping Regulations or (ii) the annual stated rate of
interest payable on the Grantor Trust Security is no more than 1% lower than the
annual stated rate of interest payable on the trust assets from which the
Grantor Trust Security was stripped. The holders of such Grantor Trust
Securities generally would be required to include market discount in income in
the manner described in "Federal Income Tax Consequences -- REMIC Certificates
- -- Market Discount" in this prospectus. Some classes of Ordinary Ratio
Securities may be issued at prices that exceed their stated principal amounts.
Subject to the discussion of Superpremium Securities in "Federal Income Tax
Consequences --REMIC Certificates -- Original Issue Discount," holders of
Ordinary Ratio Securities generally will be able to amortize that premium as
described in "Federal Income Tax Consequences -- REMIC Securities -- Amortizable
Premium" in this prospectus.
Purchase of Complementary Classes of Strip Securities
Strip Securities of certain classes of the same series ("Complementary
Securities"), when held in combination, may provide an aggregate economic effect
equivalent to that of a Pass-Through Security based upon the same trust assets.
When an investor purchases Complementary Securities, it appears that, for
federal income tax purposes, each security should be treated separately and
should be subject to the rules described above. The IRS could assert, however,
that Complementary Securities held in combination should be treated as a single
pass-through type instrument, with the result that the rules governing stripped
bonds and stripped coupons under Section 1286 of the Code would not be applied.
Consequently, investors who acquire Complementary Securities should consult
their own tax advisors as to the proper treatment of such securities.
Possible Alternative Characterizations
The IRS could assert that the Strip Securities should be characterized for
tax purposes in a manner different from that described above. For example, the
IRS could contend that each Ratio Security whose interest rate is higher than
the net interest rate distributed from the trust
<PAGE>
taking into account all of the securities of that series (the "Net Series Rate")
is to be treated as being composed of two securities: (i) a Pass-Through
Security of the same principal amount as the Ratio Security but generating
interest at the Net Series Rate; and (ii) an IO Security representing the excess
of the rate on the Ratio Security over the Net Series Rate. Similarly, a Ratio
Security whose interest rate is lower than the Net Series Rate could be treated
as composed of a Pass-Through Security with an interest rate equal to the Net
Series Rate and a PO Security. Alternatively, the IRS could interpret Section
1286 of the Code to require that each individual interest payment with respect
to an IO Security or a Ratio Security be treated as a separate debt instrument
for original issue discount purposes. The IRS also might challenge the manner in
which original issue discount is calculated, contending that
. the stated maturity should be used to calculate yield on the Grantor
Trust Securities,
. the Contingent Payment Regulations should not apply to the IO
Securities, or
. the Contingent Payment Regulations should apply to the Ordinary Ratio
Securities.
Given the variety of alternative treatments of the Grantor Trust Securities and
the different federal income tax consequences that could result from each
alternative, your are urged to consult your tax advisor regarding the proper
treatment of the Grantor Trust Securities for federal income tax purposes.
Limitations on Deductions With Respect to Strip Securities
The holder of a Strip Security will be treated as owning an interest in
each of the trust assets and will recognize an appropriate share of the income
and expenses associated with those trust assets. Accordingly, an individual,
trust, or estate that holds a Strip Security directly or through a pass-through
entity will be subject to the same limitations on deductions with respect to
such security as are applicable to holders of Pass-Through Securities. See
"Federal Income Tax Consequences -- Grantor Trust Funds -- Treatment of Pass-
Through Securities" in this prospectus.
Sale of a Grantor Trust Security
A sale of a Grantor Trust Security prior to its maturity will result in
gain or loss equal to the difference, if any, between the amount received and
the holder's adjusted basis in such security. The rules for computing the
adjusted basis of a Grantor Trust Security are the same as in the case of a
REMIC regular certificate. See "Federal Income Tax Consequences -- REMIC
Certificates -- Gain or Loss on Disposition" in this prospectus. Gain or loss
from the sale or other disposition of a Grantor Trust Security generally will be
capital gain or loss to a securityholder if the security is held as a "capital
asset" within the meaning of Section 1221 of the Code, and will be long-term or
short-term depending on whether the security has been held for more than one
year. Ordinary income treatment, however, will apply to the extent mandated by
the original issue discount and market discount rules or if the Securityholder
is a financial institution described in Section 582 of the Code. See "Federal
Income Tax Consequences -- REMIC Certificates -- Gain or Loss on Disposition" in
this prospectus.
<PAGE>
Taxation of Certain Foreign Holders of Grantor Trust Securities
Interest, including original issue discount, paid on a Grantor Trust
Security to a foreign person generally is treated as "portfolio interest" and,
therefore, is not subject to any United States tax, provided that
. such interest is not effectively connected with a trade or business in
the United States of the securityholder,
. the trustee or other person who would otherwise be required to withhold
tax is provided with foreign person certification,
. the foreign person is not a 10% shareholder within the meaning of Code
Section 871(h)(3)(B) or a controlled foreign corporation as described
under Code Section 881(c)(3)(C), and
. the foreign person is not a bank receiving interest on a loan made
during the ordinary course of business.
If the foregoing conditions are not met, interest -- including original issue
discount -- paid on a Grantor Trust Security may be subject to either a 30%
withholding tax or 31% backup withholding.
In the case of certain series, portfolio interest treatment will not be
available for interest paid with respect to certain classes of Grantor Trust
Securities. Interest on debt instruments issued on or before July 18, 1984 does
not qualify as "portfolio interest" and, therefore, is subject to United States
withholding tax at a 30% rate -- or lower treaty rate, if applicable. IO
Securities and PO Securities generally are treated, and Ratio Securities
generally should be treated, as having been issued when they are sold to an
investor. In the case of Pass-Through Securities, however, the issuance date of
the security is determined by the issuance date of the mortgage loans underlying
the trust. Thus, to the extent that the interest received by a holder of a Pass-
Through Security is attributable to mortgage loans issued on or before July 18,
1984, such interest will be subject to the 30% withholding tax. Moreover, to the
extent that a Ratio Security is characterized as a pass-through type security
and the underlying mortgage loans were issued on or before July 18, 1984,
interest generated by the security may be subject to the withholding tax. See
"Federal Income Tax Consequences -- Grantor Trust Funds -- Possible Alternative
Characterizations" in this prospectus. Although Code Sections 871(h)(4) and
881(c)(4) deny portfolio interest treatment to certain types of contingent
interest, those provisions generally apply only to interest based on the income,
profits, or property values of the debtor. Accordingly, it is not anticipated
that those provisions will apply to deny portfolio interest to Securityholders
who are foreign persons. However, because the scope of those provisions is not
entirely clear, investors who are foreign persons should consult their own tax
advisors regarding the potential application of those provisions before
purchasing a security.
<PAGE>
Backup Withholding
The application of backup withholding to Grantor Trust Securities generally
is the same as in the case of REMIC regular certificates. See "Federal Income
Tax Consequences -- REMIC Certificates -- Backup Withholding" and "-- New
Withholding Regulations" in this prospectus.
Reporting and Tax Administration
For purposes of reporting and tax administration, the holders of Grantor
Trust Securities will be treated in the same fashion as the holders of REMIC
regular certificates. See "Federal Income Tax Consequences -- REMIC
Certificates -- Reporting and Tax Administration" in this prospectus.
Debt Securities and Partnership Trust Funds
Classification of Debt Securities and Partnership Trust Funds
With respect to each series of Partnership Securities and Debt Securities,
Hunton & Williams will deliver its opinion that the Partnership Trust Fund (the
"Partnership Trust") will not be a taxable mortgage pool or an association (or
publicly traded partnership) taxable as a corporation for federal income tax
purposes. With respect to the Debt Securities, Hunton & Williams will deliver
its opinion that for federal income tax purposes the Debt Securities will be
classified as debt. Each Debt Securityholder, by acceptance of a Debt Security,
will agree to treat the Debt Securities as indebtedness for federal income tax
purposes. The opinions will be based on the assumption that the terms of the
related documents will be complied with, and on counsel's conclusion that either
the Trust Fund is not a publicly traded partnership or the nature of the income
of the Trust Fund will be exempt it from the rule that certain publicly traded
partnerships are taxable as corporations.
Characterization of Investments in Partnership Securities and Debt
Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans...secured by an interest in real property
which is...residential real property" within the meaning of Code Section
7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real estate
investment trust will not 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), and (iii) Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will represent a proportionate interest in the assets of the
Partnership Trust based on the real estate investment trust's capital interest
in the Partnership Trust.
<PAGE>
Taxation of Debt Securityholders
Treatment of the Debt Securities as Indebtedness
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each series of Debt Securities, Hunton & Williams will deliver
its opinion that the Debt Securities will be classified as indebtedness for
federal income tax purposes. The discussion below assumes this characterization
of the Debt Securities is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities may
be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
REMIC regular certificates issued by a REMIC except that (i) stated interest
reportable on Debt Securities generally is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (ii) the
special rule treating a portion of the gain on the sale or exchange of a REMIC
regular certificate as ordinary income is inapplicable to Debt Securities. See
"Federal Income Tax Consequences -- REMIC Certificates -- Tax Treatment of REMIC
Regular Certificates" and "-- Gain or Loss on Disposition."
Taxation of Owners of Partnership Securities
Treatment of the Partnership Trust as a Partnership
If so specified in the applicable Prospectus Supplement, the depositor will
agree, and the securityholders will agree by their purchase of Partnership
Securities, to treat the Partnership Trust 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, the partners of the partnership being the
securityholders (including the depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust, the Partnership Securities, the
Debt Securities, and the depositor is not entirely clear, because there is not
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the depositor or the Partnership Trust. Any such characterization would
not result in materially adverse tax consequences to securityholders as compared
to the consequences from treatment of the Partnership Securities as equity in a
partnership, described below. The following discussion assumes that the
Partnership Securities represent equity interests in a partnership.
<PAGE>
Partnership Taxation
As a partnership, the Partnership Trust will not be subject to federal
income tax. Rather, each securityholder will be required to separately take into
account such holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust. It is anticipated that the Partnership Trust'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 "Federal Income Tax Consequences --
REMIC Certificates -- Original Issue Discount," " -- Market Discount" and
"-- Amortizable Premium" in this prospectus, and any gain upon collection or
disposition of Mortgage Loans. The Partnership Trust's deductions will consist
primarily of interest expense accruing with respect to the Debt Securities,
servicing and other fees, and losses or deductions upon collection or
disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement. The
partnership agreement will provide, in general, that the securityholders will be
allocated taxable income of the Partnership Trust for each Collection Period
equal to the sum of (i) the interest that accrues on the Partnership Securities
in accordance with their terms for such Collection Period, including interest
accruing at the applicable pass-through rate for such Collection Period and
interest on amounts previously due on the Partnership Securities but not yet
distributed; (ii) any Partnership Trust income attributable to discount on the
mortgage loans that corresponds to any excess of the principal amount of the
Partnership Securities over their initial issue price; and (iii) any other
amounts of income payable to a securityholder for such Collection Period. Such
allocation will be reduced by any amortization by the Partnership Trust of
premium on mortgage loans that corresponds to any excess of the issue price of
Partnership Securities over their principal amount. All remaining taxable income
of the Partnership Trust will be allocated to the depositor. Based on the
economic arrangement of the parties, this approach for allocating Partnership
Trust 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 securityholders. Moreover, even under the
foregoing method of allocation, securityholders may be allocated interest income
at the applicable pass-through rate plus the other income items described above,
even though the Partnership Trust may not have sufficient cash to make current
cash distributions of such amounts. Thus, cash basis holders will in effect be
required to report income from the Partnership Securities on the accrual basis
and securityholders may become liable for taxes on Partnership Trust income even
if they have not received cash from the Partnership Trust to pay such taxes.
Part or all of the taxable income allocated to a securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute UBTI generally
taxable to such a holder under the Code.
A share of expenses of the Partnership Trust (including fees of the master
servicer but not interest expense) allocable to an individual, estate or trust
securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "Federal Income Tax
<PAGE>
Consequences -- REMIC Certificates -- Tax Treatment of REMIC Regular
Certificates" in this prospectus. Accordingly, such deductions might be
disallowed to the individual, estate or trust in whole or in part and might
result in such holder being taxed on an amount of income that exceeds the amount
of cash actually distributed to such holder over the life of the Partnership
Trust.
Discount income or premium amortization with respect to each mortgage loan
would be calculated in a manner similar to the description under "Federal Income
Tax Consequences -- REMIC Certificates -- Original Issue Discount, " " -- Market
Discount" and " -- Amortizable Premium" in this prospectus. Notwithstanding such
description, it is intended that the Partnership Trust will make all tax
calculations relating to income and allocations to securityholders on an
aggregate basis with respect to all mortgage loans held by the Partnership Trust
rather than on a mortgage loan-by-mortgage loan basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Partnership Trust might be required to incur additional expense, but it is
believed that there would be no material adverse effect on securityholders.
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 should not have original
issue discount income. However, the purchase price paid by the Partnership Trust
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
"Federal Income Tax Consequences -- REMIC Certificates -- Original Issue
Discount," " -- Market Discount" and " -- Amortizable Premium" in this
prospectus. (As indicated above, the Partnership Trust will make this
calculation on an aggregate basis, but might be required to recompute it on a
mortgage loan-by-mortgage loan basis).
If the Partnership Trust acquires the mortgage loans at a market discount
or premium, the Partnership Trust will elect to include any such discount in
income currently as it accrues over the life of the mortgage loans or to offset
any such premium against interest income on the mortgage loans. As indicated
above, a portion of such market discount income or premium deduction may be
allocated to securityholders.
Section 708 Termination
Under Section 708 of the Code, the Partnership Trust will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust are sold or exchanged within a twelve
month period. If such termination occurs, it would cause a deemed contribution
of the assets of a Partnership Trust (the "old partnership") to a new
Partnership Trust (the "new partnership") in exchange for interests in the new
partnership. Such interests would be deemed distributed to the partners of the
old partnership in liquidation thereof, which would not constitute a sale or
exchange. The Partnership Trust will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As
<PAGE>
a result, the Partnership Trust may be subject to certain tax penalties and may
incur additional expenses if it is required to comply with those requirements.
Furthermore, the Partnership Trust might not be able to comply due to lack of
data.
Gain or Loss on Disposition of Partnership Securities
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
your tax basis in the Partnership Securities sold. A securityholder's tax basis
in a Partnership Security will generally equal the holder's cost increased by
the holder's share of Partnership Trust income (includible in income) and
decreased by any distributions received with respect to such Partnership
Security. In addition, both the tax basis in the Partnership Securities and the
amount realized on a sale of a Partnership Security would include the holder's
share of the Debt Securities and other liabilities of the Partnership Trust. A
holder acquiring Partnership Securities at different prices will be required to
maintain a single aggregate adjusted tax basis in such Partnership Securities,
and, upon sale or other disposition of some of the Partnership Securities,
allocate a portion of such aggregate tax basis to the Partnership Securities
sold (rather than maintaining a separate tax basis in each Partnership Security
for purposes of computing gain or loss on a sale of that Partnership Security).
Any gain on the sale of a Partnership Security 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 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 will elect to include market discount in income as it accrues.
If a securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Partnership Securities.
Allocations Between Transferors and Transferees
In general, the Partnership Trust's taxable income and losses will be
determined each Collection Period and the tax items for a particular Collection
Period will be apportioned among the securityholders in proportion to the
principal amount of Partnership Securities owned by them as of the close of the
last day of such Collection Period. As a result, a holder purchasing Partnership
Securities may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a Collection Period convention may not be permitted by
existing regulations. If a Collection 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 might be reallocated among the
securityholders. The depositor will be authorized to revise the Partnership
<PAGE>
Trust's method of allocation between transferors and transferees to conform to a
method permitted by future regulations.
Section 731 Distributions
In the case of any distribution to a securityholder, no gain will be
recognized to that securityholder except to the extent that the amount of any
money distributed with respect to such security does not exceed the adjusted
basis of such securityholder's interest in the security. To the extent that the
amount of money distributed exceeds such securityholder's adjusted basis, gain
will be currently recognized. In the case of any distribution to a
securityholder, no loss will be recognized except upon a distribution in
liquidation of a securityholder's interest. Any gain or loss recognized by a
securityholder will be capital gain or loss.
Section 754 Election
In the event that a securityholder sells its Partnership Securities at a
profit (loss), the purchasing securityholder will have a higher (lower) basis in
the Partnership Securities than the selling securityholder had. The tax basis of
the Partnership Trust's assets would not be adjusted to reflect the higher (or
lower) basis unless the Partnership Trust 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 will not make such an
election. As a result, a securityholder might be allocated a greater or lesser
amount of Partnership Trust income than would be appropriate based on its own
purchase price for Partnership Securities.
Administrative Matters
The trustee is required to keep or have kept complete and accurate books of
the Partnership Trust. Such books will be maintained for financial reporting and
tax purposes on an accrual basis and the fiscal year of the Partnership Trust
will be the calendar year. The trustee will file a partnership information
return (IRS Form 1065) with the IRS for each taxable year of the Partnership
Trust and will report each securityholder's allocable share of the items of
Partnership Trust 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 with the information statement described below and
such nominees will be required to forward such information to the beneficial
owners of the Partnership Securities. Generally, holders must file tax returns
that are consistent with the information return filed by the Partnership Trust
or be subject to penalties unless the holder notifies the IRS of all such
consistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust with a statement containing certain information on
the nominee, the beneficial owners and the Partnership Securities so held. Such
information includes the (i) name, address and taxpayer identification number of
the nominee and (ii) as to each beneficial owner (x) the name, address and
taxpayer identification number of such person, (y) whether such person is a
United States Person, a tax-exempt entity or a foreign government, an
international organization, or any
<PAGE>
wholly-owned agency or instrumentality of either of the foregoing, and (z)
certain information on Partnership Securities that were held, bought or sold on
behalf of such persons throughout the year. In addition, brokers and financial
institutions that hold Partnership Securities through a nominee are required to
furnish directly to the trustee information as to themselves and their ownership
of Partnership Securities. A clearing agency registered under Section 17A of the
Securities Exchange Act of 1934, as amended is not required to furnish any such
information statement to the Partnership Trust. The information referred to
above for any calendar year must be furnished to the Partnership Trust on or
before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Partnership Trust with the information described above
may be subject to penalties.
The depositor will be designated as the TMP in the pooling and master
servicing agreement and as such, will be responsible for representing the
securityholders 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 a
partnership item 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 by the appropriate taxing
authorities could result in an adjustment of the returns of the securityholders,
and, under certain circumstances, a securityholder may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust. An adjustment could also result in an audit of a securityholder's returns
and adjustments of items not related to the income and losses of the Partnership
Trust.
Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust would be considered to be
engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to foreign persons because there is no clear
authority dealing with that issue under facts substantially similar to those
applicable here. Although it is not expected that the Partnership Trust would be
engaged in a trade or business in the United States for such purposes, if so
specified in the applicable prospectus supplement, the Partnership Trust may
withhold as if it were so engaged in order to protect the Partnership Trust from
possible adverse consequences of a failure to withhold. The Partnership Trust
may withhold on the portion of its taxable income that is allocable to
securityholders that are foreign persons pursuant to Section 1446 of the Code,
as if such income were effectively connected to a United States trade or
business, at a rate of 35% for foreign persons taxable as corporations and 39.6%
for all other foreign securityholders. Amounts withheld will be deemed to be
distributed to the Foreign securityholder. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Partnership Trust to change its withholding procedures. In determining a
holder's withholding status, the Partnership Trust may rely on IRS Form W-8, IRS
Form W-9 or the holder's certification of non-foreign status signed under
penalties of perjury.
To the extent specified in the applicable prospectus supplement, (i) each
foreign securityholder might be required to file an individual or corporate
United States income tax return (including in the case of a corporation, the
branch profits tax) on its share of the
<PAGE>
Partnership Trust's income, (ii) each foreign securityholder must obtain a
taxpayer identification number from the IRS and submit that number to the
Partnership Trust on Form W-8 in order to ensure appropriate crediting of the
taxes withheld, and (iii) a foreign securityholder generally would be entitled
to file with the IRS a claim for refund with respect to taxes withheld by the
Partnership Trust, taking the position that no taxes were due because the
Partnership Trust was not engaged in a United States trade or business.
Notwithstanding the foregoing, interest payments made (or accrued) to a foreign
securityholder may be considered guaranteed payments to the extent such payments
are determined without regard to the income of the Partnership Trust. If these
interest payments are properly characterized as guaranteed payments, then the
interest may not be considered "portfolio interest." As a result, a foreign
securityholder may be subject to United States federal income tax and
withholding at a rate of 30%, unless reduced or eliminated pursuant to an
applicable treaty. In such case, a foreign securityholder would be entitled to
claim a refund for that portion of the taxes in excess of the taxes that should
be paid with respect to the guaranteed payments.
The Treasury Department has enacted new withholding regulations that
generally will be effective after December 31, 2000. See "Federal Income Tax
Consequences -- REMIC Certificates -- New Withholding Regulations" in this
prospectus. Please consult your tax advisor concerning these new regulations.
Backup Withholding
Distributions made on the Partnership Securities and proceeds from the sale
of the Partnership Securities will be subject to a "backup" withholding tax of
31% if, in general, the securityholder fails to comply with certain
identification and certification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
State Tax Considerations
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," you should consider the state income tax consequences
of the acquisition, ownership, and disposition of the securities. State income
tax law may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of any
state. Therefore, you should consult your tax advisor with respect to the
various state tax consequences of an investment in the securities.
ERISA Considerations
In considering an investment in a security of the assets of an employee
benefit plan or retirement arrangement, including individual retirement accounts
and annuities, Keogh plans, and collective investment funds in which these
plans, accounts, annuities or arrangements are invested, that are described in
or must follow the requirements of the United States Department of Labor ("DOL")
regulations set forth in 29 C.F.R. 2510.3-101, as amended from time to time (the
"Plan Asset Regulations"), the Employee Retirement Income Security Act of 1974
("ERISA"), or corresponding, provisions of the Code (a "Plan"), a fiduciary
should consider, among other things,
<PAGE>
. the purposes, requirements, and liquidity needs of the Plan,
. the definition of plan assets under ERISA, and the DOL's regulations
regarding the definition of plan assets,
. whether the investment satisfies the diversification requirements of
Section 404(a)(1)(C) of ERISA, and
. whether the investment is prudent, considering the nature of an
investment in a security and the fact that no market in which the
fiduciary can sell or otherwise dispose of securities is expected to
arise.
The prudence of a particular investment must be determined by the responsible
fiduciary, usually the trustee or investment manager, with respect to each
employee benefit plan taking into account all of the facts and circumstances of
the investment.
Section 403 of ERISA requires that all plan assets be held in trust.
However, under regulations that became effective on June 17, 1982, even if the
underlying assets of an issuer of securities are deemed to be plan assets of an
employee benefit plan investing in the securities, the "holding in trust"
requirement of Section 403 of ERISA will be satisfied if the securities are held
in trust on behalf of the plan.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions that involve
. a Plan and any party in interest or disqualified person with respect to
the Plan, and
. plan assets.
The Plan Asset Regulations define "plan assets" to include not only securities
- -- like the securities -- held by a Plan but also the underlying assets of the
issuer of any equity securities, unless one or more exceptions specified in the
regulations are satisfied. Under the Plan Asset Regulations, a Plan that
acquires a security could be treated for ERISA purposes as having acquired a
direct interest in some or all of the assets in your trust. This treatment could
cause certain transactions concerning the trust assets to be deemed prohibited
transactions under ERISA and, in addition, could result in a finding of an
improper delegation by the plan fiduciary of its duty to manage plan assets. The
Plan Asset Regulations will not apply, however, if
. the security is registered under the Securities Exchange Act of 1934, is
freely transferable and is part of a class of securities that is held by
more than 100 unrelated investors (the "publicly offered exception") or
. immediately after the most recent acquisition of an equity interest,
benefit plan investors do not own 25% or more of the value of any class
of equity interests in the trust (the "insignificant participation
exception").
<PAGE>
Prior to purchasing a security, a Plan should consult with its counsel to
determine whether the publicly offered exception, the insignificant
participation exception, or any other exception to the Plan Asset Regulations
would apply to the purchase of the security.
The DOL has issued several exemptions from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code. Those exemptions include, but are not limited to:
. Prohibited Transaction Class Exemption ("PTCE") 95-60, regarding
investments by insurance company general accounts;
. PTCE 96-23, regarding investment decisions by in-house asset managers;
. PTCE 91-38, regarding investments by bank collective investment funds;
. PTCE 90-1, regarding investments by insurance company pooled separate
accounts;
. PTCE 84-14, regarding investment decisions made by a qualified plan
asset manager;
. PTCE 83-1, regarding acquisitions by Plans of interests in mortgage
pools;
. various underwriter exemptions.
Before purchasing any securities, a Plan subject to the fiduciary responsibility
provisions of ERISA or described in Section 4975(e)(1) of the Code should
consult with its counsel to determine whether the conditions of any exemption
would be met. A purchaser of securities should be aware, however, that certain
of the exemptions do not apply to the purchase, sale, and holding of
subordinated securities. In addition, PTCE 83-1 will not apply to securities
evidencing interests in a trust estate that contains contracts Moreover, you
also should be aware that even if the conditions specified in one or more
exemptions are met, the scope of the relief provided by an exemption might not
cover all acts that might be construed as prohibited transactions.
Because the purchase or holding of securities may result in unfavorable
consequences for a Plan or its fiduciaries under the Plan Asset Regulations or
the prohibited transaction provisions of ERISA or the Code, certain classes of
securities will not be offered for sale to, and are not transferable to, any
benefit plan investor unless such benefit plan investor provides National
Mortgage with a "Benefit Plan Opinion." A Benefit Plan Opinion is an opinion of
counsel satisfactory to National Mortgage (and upon which National Mortgage, the
trustee, the TMP, and their respective counsel are authorized to rely) that the
ownership of a security of such class
. will not be treated as a prohibited transaction under Sections 406 and
407 of ERISA or Section 4975 of the Code and
. either
<PAGE>
. will not cause any of the assets in the trust -- or in the case of a
REMIC, the REMIC's assets -- to be regarded as plan assets for purposes
of the Plan Asset Regulation or
. will not give rise to any fiduciary duty under ERISA on the part of
National Mortgage, the trustee, the master servicer or the TMP.
The accompanying prospectus supplement will indicate which classes of
securities, if any, are restricted in their availability to benefit plan
investors.
In considering the possible application of the Plan Asset Regulations,
potential Plan investors should be aware that, with respect to certain series
and under certain circumstances, National Mortgage may have a right to redeem
the securities, at its option. In this case, National Mortgage's purpose for the
retention of such a redemption right is to enable National Mortgage to terminate
its administration obligations with respect to the securities in the event these
obligations become unprofitable. National Mortgage undertakes no obligation to
consider the interests of securityholders in deciding whether to exercise any
redemption right.
As described in "Federal Income Tax Consequences," an investment in a
security may produce unrelated business taxable income for tax-exempt employee
benefit plans. Potential investors also should be aware that ERISA requires that
the assets of a Plan be valued at their fair market value as of the close of the
plan year. Neither National Mortgage nor the underwriters currently intend to
provide valuations to securityholders. Plans contemplating the acquisition of
securities should consult their legal advisors with respect to the ERISA, Code,
and other consequences of an investment in the securities.
Prospective purchasers of securities that are insurance companies should be
aware that the United States Supreme Court interpreted the fiduciary
responsibility rules of ERISA in John Hancock Mutual Life Insurance Co. V.
Harris Bank and trust. In John Hancock, the Supreme Court ruled that assets held
in an insurance company's general account may be deemed to be plan assets for
ERISA purposes under certain circumstances. Prospective purchasers of securities
that are insurance companies should consult with their counsel with respect to
the application of the John Hancock case and PTCE 95-60 to their purchase of
securities, and should be aware that certain restrictions may apply to their
purchase of securities.
Legal Investment
The accompanying prospectus supplement describes whether the securities
will constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"). To the extent that any
securities constitute mortgage related securities, these securities will be
legal investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities -- including depository institutions, life
insurance companies and pension funds -- created pursuant to or existing under
the laws of the United States or of any state whose authorized investments are
subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any of its agencies or instrumentalities constitute legal
<PAGE>
investments for any of these entities. Pursuant to SMMEA, a number of states
enacted legislation, on or before the October 3, 1991 cutoff for such
enactments, limiting to varying extents the ability of certain entities to
invest in "mortgage related securities," in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA. Accordingly,
the investors affected by such legislation will be authorized to invest in the
securities only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in the securities
without limitation as to the percentage of their assets represented thereby;
federal credit unions may invest in the securities; and national banks may
purchase the securities for their own account without regard to the limitations
generally applicable to investment securities set forth in 12 U.S.C. Section 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe.
Securities that do not constitute "mortgage-related securities" under SMMEA
will require registration, qualification or an exemption under applicable state
securities laws and may not be "legal investments" to the same extent as
"mortgage-related securities."
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase certain types of the securities or
to purchase securities representing more than a specified percentage of the
investor's assets. You should consult your legal advisors in determining whether
and to what extent the securities constitute legal investments for you.
Plan of Distribution
National Mortgage may sell the securities either directly or through one or
more underwriters or underwriting syndicates. The accompanying prospectus
supplement sets forth the terms of the offering of your securities, including
the name or names of the underwriters, the proceeds to and their use by National
Mortgage, and either the initial public offering price, the discounts and
commissions to the underwriters and any discounts or concessions allowed or
reallowed to dealers, or the method by which the price at which the underwriters
will sell the securities will be determined.
Your securities may be acquired by underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The obligations of any underwriters will be
subject to certain conditions precedent, and the underwriters will be severally
obligated to purchase all the securities of a series described in the
accompanying prospectus supplement, if any are purchased. If securities of a
series are offered other than through underwriters, the accompanying prospectus
supplement will contain information regarding the nature of the offering and any
agreements to be entered into between National Mortgage and purchasers of these
securities.
<PAGE>
The place and time of delivery for your securities is set forth in the
accompanying prospectus supplement.
Securities issued under the registration statement of which this prospectus
is a part may be reregistered and reissued under the registration statement when
they are reacquired by National Mortgage and deposited by National Mortgage to
be part of the estate of a new trust. In addition, other securities issued by
affiliates of National Mortgage or persons unaffiliated with National Mortgage
may be acquired by National Mortgage and deposited to new trusts to be part of
the trust estate for securities issued pursuant to this prospectus and a related
prospectus supplement.
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 rating agency.
Any ratings on the securities address the likelihood of receipt by you of
all collections on the underlying trust assets to which you are entitled. These
ratings address the structural, legal and issuer-related aspects associated with
your securities, the nature of the underlying trust assets and the credit
quality of the guarantor, if any. Ratings do not represent any assessment of the
likelihood of principal prepayments by obligors or of the degree by which
prepayments might differ from those originally anticipated. As a result, you
might suffer a lower than anticipated yield, and, in addition, holders of Strip
Securities in extreme cases might fail to recoup their initial investments.
Reports to Securityholders
The master servicer, the trustee or the securities administrator will mail
monthly reports concerning your trust to the registered holder of each security.
Additional Information
National Mortgage is subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports and
other information with the SEC. Reports and other information filed by National
Mortgage with the SEC can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Regional Offices of the SEC at 7 World Trade Center, Suite
1300, New York, New York 10048; and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of these material can
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the SEC
maintains a public access site on the internet through the "world wide web" at
which any electronic filings, reports, information statements and other
information regarding National Mortgage may be viewed. The internet address of
the SEC's site is http://www.sec.gov.
<PAGE>
This prospectus does not contain all the information set forth in the
registration statements of which this prospectus is a part, such as the exhibits
National Mortgage has filed with the SEC. Copies of the information and the
exhibits are on file at the offices of the SEC may be obtained, upon payment of
the fee prescribed by the SEC, or may be examined without charge at the offices
of the SEC. Copies of the agreements for your series will be provided to each
person to whom a prospectus and prospectus supplement is delivered upon written
or oral request, provided that such request is made to National Mortgage
Securities Corporation, 909 East Main Street, Richmond, Virginia 23219-3002
(telephone (804) 649-3952).
Copies of Freddie Mac's most recent offering circular for Freddie Mac
certificates, Freddie Mac's most recent information statement and any subsequent
information statement, any supplement to any information statement relating to
Freddie Mac and any quarterly report made available by Freddie Mac after
December 31, 1983 can be obtained by writing or calling the Investor Relations
Department of Freddie Mac at Post Office Box 4112, Reston, Virginia 22090
(outside Washington, D.C. metropolitan area, telephone 800-424-5401, ext. 3725;
within Washington, D.C. metropolitan area, telephone 703-903-3725). National
Mortgage did not participate in the preparation of Freddie Mac's offering
circular, information statement or any supplement and, accordingly, makes no
representation as to the accuracy or completeness of the information in these
documents.
Copies of Fannie Mae's most recent prospectus for Fannie Mae certificates
and Fannie Mae's annual report and quarterly financial statements, as well as
other financial information, are available from the Director of Investor
Relations, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7115).
National Mortgage did not participate in the preparation of Fannie Mae's
prospectus and, accordingly, makes no representations as to the accuracy or
completeness of the information in these documents.
Data concerning Ginnie Mae certificates is available in electronic format
on gREX or by calling (800) 234-GNMA.
If your trust contains financial assets that are publicly-issued
securities, the related registration statement, prospectus, periodic filings and
other information required to be filed with the SEC may be found on the SEC's
internet site, located at http://www.sec.gov.
Financial Information
National Mortgage is not obligated with respect to the securities.
Accordingly, National Mortgage has determined that financial statements of
National Mortgage are not material to the offering of your securities.
Each trust will engage in no activities other than as described in this
prospectus and the accompanying prospectus supplement. Accordingly, no financial
statements concerning your trust are included in this prospectus.
<PAGE>
Incorporation of Certain Documents by Reference
All documents filed by National Mortgage pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and prior to the termination of the offering of the securities shall
be deemed to be incorporated into and made a part of this prospectus from the
date of filing of these documents.
National Mortgage undertakes to provide a copy of any and all information
that has been incorporated by reference into the registration statement -- not
including exhibits to the information incorporated by reference, unless these
exhibits are specifically incorporated by reference into the information that
the registration statements incorporate -- upon written or oral request of any
person, without charge, provided that such request is made to National Mortgage
Securities Corporation, 909 East Main Street, Richmond, Virginia 23219-3002
(telephone (804) 649-3952).
<PAGE>
Index of Principal Defined Terms
1996 Lender Liability Act.........................
30% Test..........................................
Accretion Class...................................
Act...............................................
Aggregation Rule..................................
All OID Election..................................
AMT...............................................
Asset Qualification Test..........................
Bankruptcy Code...................................
Beneficial Owner..................................
Cap...............................................
Capital Appreciation Class........................
CERCLA............................................
Code..............................................
Collection Period.................................
Complementary Securities..........................
Companion Class...................................
Compound Interest Class...........................
Contingent Payment Obligations....................
Contingent Payment Regulations....................
Current Recognition Election......................
Debt Securities...................................
Depository Participants...........................
Disqualified Organization.........................
Deemed Principal Payments.........................
DOL...............................................
ERISA.............................................
excess inclusion income...........................
Excess Premium....................................
FASIT.............................................
financial assets..................................
Financial Intermediary............................
First Distribution Period.........................
Floor.............................................
Foreign Person....................................
FTC Rule..........................................
Governor..........................................
Grantor Trust Securities..........................
indirect participants ............................
Interest Weighted Certificate.....................
Inverse Floater Certificates......................
IO Securities.....................................
IRS...............................................
Mark-to-Market Regulations........................
Mortgage Assets...................................
Multiple Rate VRDI Certificate....................
National Mortgage.................................
Net Series Rate...................................
Non-VRDI Certificate..............................
NOWA Certificates.................................
OID Regulations...................................
Ordinary Ratio Security...........................
PAC Class.........................................
Partnership Securities............................
<PAGE>
Pass-Through Securities...........................
Plan..............................................
Plan Asset Regulations............................
PO Securities.....................................
Pre-Funded Amount.................................
Pre-Funding Account...............................
Pre-Issuance Accrued Interest.....................
Pre-Issuance Accrued Interest Rule................
Prepayment Period.................................
Pricing Prepayment Assumptions....................
Principal Only Class..............................
Qualified Reserve Fund............................
Qualifying REIT Interest..........................
Rate Bubble Certificate...........................
Ratio Securities..................................
Realized Losses...................................
REIT..............................................
REMIC.............................................
REMIC Regulations.................................
Residual Certificates.............................
RIC...............................................
Series REMIC......................................
Single Rate VRDI Certificate......................
SMMEA.............................................
Strip Class.......................................
Strip Securities..................................
Stripping Regulations.............................
Superpremium Certificates.........................
Tax Administrator.................................
Taxable Mortgage Pool.............................
Teaser Certificate................................
Thrift Institution................................
TIN...............................................
TMP...............................................
True Discount.....................................
trust assets......................................
UBTI..............................................
Variable Rate Certificate.........................
VRDI..............................................
WAM...............................................
Weighted Average Certificates.....................
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSTECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection with
the offering of $300,000,000 of the Mortgage Pass-Through Certificates and
Asset-Backed Notes being registered under this Registration Statement, other
than underwriting discounts and commission:
SEC Registration....................................... $ 79,214
Printing and Engraving................................. 25,000
Legal Fees and Expenses................................ 65,000
Accounting Fees and Expenses........................... 50,000
Trustee Fees and Expenses.............................. 15,000
Rating Agency Fees..................................... 60,000
Miscellaneous.......................................... 5,786
TOTAL............................................ $300,000
-
* To be provided by amendment.
Item 15. Indemnification of Directors and Officers.
The Virginia Stock Corporation Act (the "Act") permits, and the
Registrant's bylaws require, indemnification of the Registrant's directors and
officers in a variety of circumstances, which may include liabilities under the
Securities Act of 1933, as amended. Under Section 13.1-697 of the Act, a
Virginia corporation generally may indemnify its officers and directors in civil
or criminal actions if they acted in good faith and believed their conduct to be
in the best interest of the corporation and, in the case of criminal actions,
had no reasonable cause to believe that the conduct was unlawful. The Act also
permits a corporation to require, and the Registrant's bylaws do require,
indemnification of officers and directors with respect to any action except in
the case of willful misconduct or knowing violation of the criminal law. In
addition, the Act limits the damages that may be assessed against a director or
officer of the Registrant in a shareholder or derivative proceeding to the
greater of (a) $100,000 or (b) the amount of cash compensation received by him
from the Registrant in the twelve months immediately preceding the act or
omission giving rise to liability. Because the directors and officers of the
Registrant will not be compensated, the maximum amount for which they may be
held liable is $100,000. This limit on liability will not apply in the event of
willful misconduct or a knowing violation of the criminal law or of federal or
state securities law.
The Registrant's parent corporation carries an insurance policy providing
directors' and officers' liability insurance for any liability its directors or
officers or the directors or officers of any of its subsidiaries, including the
Registrant, may incur in their capacities as such.
Under certain sales agreements entered into by the Registrant (as
purchaser) with sellers of collateral, such sellers are obligated to indemnify
the Registrant against certain expenses and liabilities.
II-1
<PAGE>
Reference is made to the form of Underwriting Agreement filed as an exhibit
hereto for provisions relating to the indemnification of directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
Item 16. Exhibits.
1.1 Form of Underwriting Agreement
4.1 Form of Pooling and Master Servicing Agreement*
4.2 Standard Terms to Pooling and Master Servicing Agreement (September 1999
Edition)*
4.3 Form of Indenture*
4.4 Form of Owner Trust Agreement*
5.1 Legality Opinion of Hunton & Williams
8.1 Tax Opinion re: Adequacy of Prospectus Disclosure
8.2 Tax Opinion re: REMIC Certificates
8.3 Tax Opinion re: Non-REMIC Certificates
8.4 Tax Opinion re: Notes
8.5 Tax Opinion re: FASIT Certificates
23.1 Consent of Hunton & Williams is contained in their opinions filed as
Exhibits 5.1, 8.1, 8.2, 8.3, 8.4 and 8.5
24.1 Power of Attorney*
99.1 Form of Sales Agreement between the Registrant, as Purchaser, and
Seller*
99.2 Standard Terms to Master Servicing Agreement
99.3 Form of Master Servicing Agreement
_________________________
* Previously filed.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in the volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20 change in the maximum aggregate offering price set forth
in the "Calculation of the Registration Fee" table in this
Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change of such information in the
Registration Statement;
II-2
<PAGE>
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in the post-effective
amendment by those paragraphs is contained in periodic reports filed
by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are included by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the indenture trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act of 1939, as
amended, in accordance with the rules and regulations prescribed by the
Commission under Section 305(b)(2) of the Trust Indenture Act.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 (including the security rating requirement)
and has duly caused this Pre-Effective Amendment No. 1 to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richmond, Commonwealth of Virginia, on December 17,
1999.
NATIONAL MORTGAGE SECURITIES
CORPORATION (Registrant)
/s/ John Wright
----------------------------------------
John Wright
President and Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ John Wright Chairman of the Board of Director December 17, 1999
- ----------------------
John Wright and President (Principal
Executive Officer)
/s/ Randall B. Saufley Director, Vice President and December 17, 1999
- ----------------------
Randall B. Saufley Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
/s/ William E. Hardy Director, Vice President and Secretary December 17, 1999
- ----------------------
William E. Hardy
</TABLE>
II-4
<PAGE>
NATIONAL MORTGAGE SECURITIES CORPORATION
[PASS-THROUGH CERTIFICATES]
[ASSET-BACKED NOTES]
UNDERWRITING AGREEMENT
[Date]
[Lead Underwriter]
[Names of Other Co-Managers]
c/o [Lead Underwriter]
[Address]
Ladies and Gentlemen:
National Mortgage Securities Corporation, a Virginia corporation (the
"Company") proposes to sell to you (the "Underwriters"), the [Pass-Through
Certificates][Asset-Backed Notes] of the series and classes, and in the
respective original principal or notional, as the case may be, amounts or
percentage interests, set forth in Schedule I hereto (the "Offered Securities"),
evidencing ownership interests in a trust consisting of [describe assets] to be
acquired by the Company (the "Assets") and related property (collectively, the
"Trust Fund"). The Assets will be acquired by the Company on the Closing Date
(as defined herein) from the seller (the "Seller") specified in the Prospectus
Supplement (as defined herein) pursuant to a sales agreement (the "Sales
Agreement"). The Assets will be of the type and will have the characteristics
described in the Prospectus Supplement, subject to the variances, ranges,
minimums and maximums set forth in the Prospectus Supplement, and will have the
aggregate principal balance set forth in the Prospectus Supplement, subject to
an upward or downward variance in principal balance, not to exceed the
percentage set forth in the Prospectus Supplement.
The Offered Securities, together with the other classes of
[certificates][notes] of the series specified on Schedule II hereto (the
"Private Securities," and collectively with the Offered Securities, the
"Securities") are to be issued under a [pooling and master servicing agreement
(the "Pooling and Servicing Agreement")][trust agreement (the "Trust Agreement")
and indenture (the "Indenture"), as applicable], dated as of the Cut-Off Date
(as defined in the Prospectus Supplement), among the [describe applicable
parties]. The Offered Securities of each class will be issued in the minimum
denominations and will have the terms set forth in the Prospectus Supplement.
Capitalized terms used but not otherwise defined herein shall have the
respective meanings ascribed thereto in the [Pooling and Servicing
Agreement][Trust Agreement][Indenture].
<PAGE>
1. Representations and Warranties. The Company represents and warrants to
------------------------------
and agrees with each of the Underwriters that:
(i) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (No. 333-87431) on Form S-3 for
the registration under the Securities Act of 1933, as amended (the "Act"),
of Pass-Through Certificates and Asset-Backed Notes (issuable in series),
including the Securities, which registration statement has become
effective, and a copy of which, as amended to the date hereof, has
heretofore been delivered to you. The Company proposes to file with the
Commission pursuant to Rule 424(b) under the rules and regulations of the
Commission under the Act (the "1933 Act Regulations") a supplement dated
______________ (the "Prospectus Supplement"), to the prospectus dated
________________ (the "Basic Prospectus"), relating to the Offered
Securities and the method of distribution thereof. Such registration
statement (No. 333-87431) including exhibits thereto and any information
incorporated therein by reference including "Computational Materials" and
"ABS Term Sheets" (collectively, the "Computational Materials and ABS Term
Sheets") as defined in the No-Action Letter of May 20, 1994 issued by the
Commission to Kidder, Peabody Acceptance Corporation I, Kidder, Peabody &
Co. Incorporated and Kidder Structured Asset Corporation, the No-Action
Letter of May 27, 1994 issued by the Commission to the Public Securities
Association, the No-Action Letter of February 17, 1995 issued by the
Commission to Cleary, Gottlieb, Steen & Hamilton on behalf of the Public
Securities Association, the No-Action Letter of March 9, 1995 issued by the
Commission to the Public Securities Association and the No-Action Letter of
April 5, 1996 issued by the Commission to Greenwood Trust Company, Discover
Card Master Trust I (the "SEC No-Action Letters"), as amended at the date
hereof, is hereinafter called the "Registration Statement"; and the Basic
Prospectus and the Prospectus Supplement and any information incorporated
therein by reference including Computational Materials and ABS Terms
Sheets, together with any amendment thereof or supplement thereto
authorized by the Company on or prior to the Closing Date for use in
connection with the offering of the Securities, are hereinafter called the
"Prospectus". Any preliminary form of the Prospectus Supplement which has
heretofore been filed pursuant to Rule 424, or prior to the effective date
of the Registration Statement pursuant to Rule 402(a), or 424(a) is
hereinafter called a "Preliminary Prospectus Supplement."
(ii) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending or, to the Company's
knowledge, threatened by the Commission.
(iii) The Registration Statement and the Prospectus, as of the date
of the Prospectus Supplement, conform, and the Registration Statement as of
the effective date (the "Effective Date") and the Prospectus, as of its
date, each as revised, amended or supplemented and filed with the
Commission prior to the termination of the offering of the Offered
Securities, complied in all material respects to the requirements of the
Act and the 1933 Act Regulations, and the Registration Statement, as of the
Effective Date, did not, and as of the Closing Date, will not, contain any
untrue statement of a material fact or and did
2
<PAGE>
not and will not omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
Prospectus, as of the date of the Prospectus Supplement did not, and as of
the Closing Date, will not contain any untrue statement of a material fact
and did not and will not omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the Company
makes no representations or warranties as to the information contained in
the Prospectus or any revision or amendment thereof or supplement thereto
in reliance upon and in conformity with information furnished in writing to
the Company by any Underwriter through [Lead Underwriter] specifically for
use in connection with the preparation of the Prospectus or any revision or
amendment thereof or supplement thereto, and any information in any
Computational Materials or ABS Term Sheets required to be provided by any
Underwriter to the Company pursuant to Section 4.2, except to the extent
that such information constitutes Pool Information. As used herein, "Pool
Information" means information with respect to the assumed characteristics
of the Assets and administrative and servicing fees. The Company
acknowledges that the Underwriter Information constitutes the only
information furnished in writing by you or on your behalf for use in
connection with the preparation of the Registration Statement or the
Prospectus Supplement.
(iv) At or prior to the Closing Date, the direction by the Company to
the Trustee to execute, authenticate and deliver the Offered Securities
will have been duly authorized by the Company, and the Offered Securities,
when executed and authenticated in accordance with the [Pooling and
Servicing Agreement][Indenture or Trust Agreement, as applicable], and
delivered to and paid for by the Underwriters in accordance with the terms
of this Agreement will be duly and validly issued and outstanding and
entitled to the benefits of such Agreement. [Each Security of the classes
indicated to be "mortgage related securities" under the heading "Legal
Investment Considerations" in the Prospectus Supplement will, when issued,
be a "mortgage related security" as such term is defined in Section
3(a)(41) of the Exchange Act.]
(v) This Agreement has been duly authorized, executed and delivered
by the Company. At or prior to the Closing Date, the [Pooling and Servicing
Agreement][Indenture and Trust Agreement] and Sales Agreement will have
been duly authorized, executed and delivered by the Company and will
conform in all material respects to the descriptions thereof contained in
the Prospectus and, assuming the valid execution and delivery thereof by
the other parties thereto, the [Pooling and Servicing Agreement][Indenture
and Trust Agreement, as applicable] and the Sales Agreement will constitute
a legal, valid and binding agreement of the Company enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting creditors'
rights generally, by general principles of equity and by the effect of the
exercise by the Trustee of certain remedial provisions, including waivers,
against the Assets.
(vi) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the Commonwealth of
Virginia with
3
<PAGE>
corporate power and authority to own its properties and conduct its
business as described in the Prospectus and to enter into and perform its
obligations under the [Pooling and Servicing Agreement][the Trust
Agreement, the Indenture or the Sales Agreement, as applicable] and this
Agreement.
(vii) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as a part of any amendment thereto, or
filed pursuant to Rule 424 or Rule 462 under the Act, complied as to form,
when so filed, in all material respects with the Act and the rules and
regulations of the Commission thereunder.
(viii) Neither the execution and delivery by the Company of, nor the
performance by the Company of its obligations under, this Agreement, the
[Pooling and Servicing Agreement][Indenture or Trust Agreement] or the
Sales Agreement will contravene any provision of applicable law or the
articles of incorporation or by-laws of the Company or any agreement or
other instrument binding upon the Company that is material to the Company
or any judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company
of its obligations under this Agreement, the [Pooling and Servicing
Agreement][Indenture or Trust Agreement] or the Sales Agreement, except
such as may be required by the securities or "blue sky" laws of the various
states in connection with the offer and sale of the Offered Securities.
(ix) There are no legal or governmental proceedings pending or
threatened to which the Company is a party or to which any of the
properties of the Company are subject that are required to be described in
the Registration Statement or the Prospectus and that are not so described,
nor are there any statutes, regulations, contracts or other documents
required to be described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement that are not
described or filed as required.
(x) At the time of execution and delivery of the [Pooling and
Servicing Agreement][Indenture][Trust Agreement] and the Sales Agreement,
(1) the Company will own the Assets being transferred to the Trust Fund
pursuant thereto, free and clear of any lien, mortgage, pledge, charge,
encumbrance, adverse claim or other security interest (collectively,
"Liens"), except to the extent permitted in the related agreement, and will
not have assigned to any person other than the Trust Fund any of its right,
title or interest in the Assets, (2) the Company will have the power and
authority to transfer the Assets to the Trust Fund and to transfer the
Offered Securities to you, (3) upon execution and delivery to the Trustee
of the [Pooling and Servicing Agreement][Indenture and Trust Agreement] and
the Sales Agreement, and delivery of the Securities to the Company, the
Trust Fund will own the Assets free of Liens other than Liens permitted by
the related agreement or created or granted by you and (4) upon payment and
delivery of the Offered Securities to you, you will acquire ownership of
the Offered Securities, free of Liens other than Liens permitted by the
related agreement or created or granted by you.
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<PAGE>
(xi) Any taxes, fees and other governmental charges in connection
with the execution, delivery and issuance of this Agreement, the [Pooling
and Servicing Agreement][Indenture and Trust Agreement] and Sales Agreement
and the Securities have been or will be paid by the Company at or prior to
the Closing Date.
(xii) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company [since ________________].
(xiii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
2. Purchase and Sale. Subject to the terms and conditions and in reliance
-----------------
upon the representations and warranties herein set forth, the Company agrees to
sell, and each Underwriter agrees, severally and not jointly, to purchase from
the Company, the respective actual or notional, as the case may be, amounts or
percentage interests set forth in Schedule I hereto in the respective classes of
Offered Securities at the respective purchase price for each such class set
forth therein.
3. Delivery and Payment. The Offered Securities shall be delivered at the
--------------------
office, on the date and at the time specified in, Schedule II attached hereto,
which place, date and time may be changed by agreement between the Underwriters
and the Company (such date and time of delivery of and payment for such Offered
Securities being hereinafter referred to as the "Closing Date"). Delivery of the
[Class __] Securities (which [Class __] Securities shall also be referred to
herein as the "DTC Registered Securities") shall be made to you through The
Depository Trust Company ("DTC") and delivery of the [Class __] Securities
(collectively, the "Definitive Securities") shall be made in registered,
certified form, in each case against payment by you of the purchase prices
thereof to or upon the order of the Company by wire transfer in immediately
available funds. The Definitive Securities shall be registered in such names and
in such denominations as you may request not less than two business days in
advance of the Closing Date. The Company agrees to have the Definitive
Securities available for inspection, checking and packaging by you in New York,
New York not later than 1:00 p.m., New York City time, on the business day prior
to the Closing Date.
4. Offering by Underwriters.
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<PAGE>
4.1. It is understood that the several Underwriters propose to offer the
Offered Securities for sale to the public as set forth in the Prospectus and
that you will not offer, sell or otherwise distribute the Offered Securities
(except for the sale thereof in exempt transactions) in any state in which the
Offered Securities are not exempt from registration under "blue sky" or state
securities laws (except where the Offered Securities will have been qualified
for offering and sale at your direction under such "blue sky" or state
securities laws).
4.2. It is understood that each Underwriter may prepare and provide to
prospective investors certain Computational Materials and ABS Term Sheets in
connection with the offering of the Offered Securities, subject to the following
conditions:
(a) All Computational Materials and ABS Term Sheets provided by an
Underwriter to prospective investors that are required to be filed pursuant to
the SEC No-Action Letters shall bear a legend on each page including the
following statement:
"THE INFORMATION CONTAINED HEREIN HAS BEEN PROVIDED BY
[UNDERWRITER]. NEITHER THE ISSUER OF THE SECURITIES NOR ANY
OF ITS AFFILIATES MAKES ANY REPRESENTATION AS TO THE
ACCURACY OR COMPLETENESS OF THE INFORMATION HEREIN. THE
INFORMATION HEREIN IS PRELIMINARY, AND WILL BE SUPERSEDED BY
THE APPLICABLE PROSPECTUS SUPPLEMENT AND BY ANY OTHER
INFORMATION SUBSEQUENTLY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION."
In the case of Collateral Term Sheets (as defined in the SEC No-Action Letters),
such legend shall also include the following statement:
"THE INFORMATION CONTAINED HEREIN WILL BE SUPERSEDED BY THE
DESCRIPTION OF THE MORTGAGE POOL CONTAINED IN THE PROSPECTUS
SUPPLEMENT RELATING TO THE SECURITIES AND SUPERSEDES ALL
INFORMATION CONTAINED IN ANY COLLATERAL TERM SHEETS RELATING
TO THE MORTGAGE POOL PREVIOUSLY PROVIDED BY [UNDERWRITER]."
Notwithstanding the foregoing, this subsection (a) will be satisfied if all
Computational Materials and ABS Term Sheets referred to therein bear a legend in
a form previously approved in writing by the Company.
(b) Any [Computational Material and] ABS Term Sheets are subject to
the review by and approval of the Company prior to their distribution to any
prospective investors and a copy of such [Computational Material and] ABS Term
Sheets as are delivered to prospective investors shall, in addition to the
foregoing delivery requirements, be delivered to the Company simultaneously with
delivery to prospective investors.
(c) Each Underwriter shall provide to the Company, for filing on Form
8-K as provided in Section 5(i), copies (in such format as required by the
Company) of all
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Computational Materials and ABS Term Sheets prepared by it that
are required to be filed with the Commission pursuant to the SEC No-Action
Letters. An Underwriter may provide copies of the foregoing in a consolidated
or aggregate form that includes all information required to be filed. All
Computational Materials and ABS Term Sheets described in this Section 4.2(c)
must be provided to the Company not later than 9:00 a.m. New York time one
business day before filing thereof is required pursuant to the terms of the SEC
No-Action Letters. Each Underwriter severally agrees that it will not provide
to any investor or prospective investor in the Offered Securities any
Computational Materials or ABS Term Sheets on or after the day on which
Computational Materials and ABS Term Sheets are required to be provided to the
Company pursuant to this Section 4.2(c) (other than copies of Computational
Materials or ABS Term Sheets previously submitted to the Company in accordance
with this Section 4.2(c) for filing pursuant to Section 5(i)), unless such
Computational Materials or ABS Term Sheets are preceded or accompanied by the
delivery of a Prospectus to such investor or prospective investor.
(d) All information included in the Computational Materials and ABS
Term Sheets shall be generated based on substantially the same methodology and
assumptions that are used to generate the information in the Prospectus
Supplement as set forth therein; provided, however, that the Computational
Materials and ABS Term Sheets may include information based on alternative
methodologies or assumptions if specified therein. If any Computational
Materials or ABS Term Sheets that are required to be filed were based on
assumptions with respect to the Assets that are incorrect, that differ from the
final Pool Information in any material respect or on Security structuring terms
that were revised in any material respect prior to the printing of the
Prospectus, the Underwriter responsible therefor shall prepare revised
Computational Materials or ABS Term Sheets, as the case may be, based on the
final Pool Information and structuring assumptions, circulate such revised
Computational Materials and ABS Term Sheets to all recipients of the preliminary
versions thereof that indicated orally to such Underwriter they would purchase
all or any portion of the Securities, and include such revised Computational
Materials and ABS Term Sheets (marked, "as revised") in the materials delivered
to the Company pursuant to Section 4.2(c).
(e) The Company shall not be obligated to file any Computational
Materials or ABS Term Sheets that (i) in the reasonable determination of the
Company [and the respective Underwriter] are not required to be filed pursuant
to the SEC No-Action Letters or (ii) have been determined to contain any
material error or omission, provided that, at the request of the respective
Underwriter, the Company will file Computational Materials or ABS Term Sheets
that contain a material error or omission if clearly marked "superseded by
materials dated [date]" and accompanied by corrected Computational Materials or
ABS Term Sheets that are marked "material previously dated [date], as
corrected". In the event that at any time when a prospectus relating to the
Offered Securities is required to be delivered under the Act, any Computational
Materials or ABS Term Sheets are determined, in the reasonable judgment of the
Company or the respective Underwriter, to contain a material error or omission,
such Underwriter shall prepare a corrected version of such Computational
Materials or ABS Term Sheets, shall circulate such corrected version of such
Computational Materials and ABS Term Sheets to all recipients of the prior
versions thereof that either indicated orally to such Underwriter they would
purchase all or any portion of the Offered Securities, or actually purchased all
or any portion thereof, and
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<PAGE>
shall deliver copies of such corrected Computational Materials and ABS Term
Sheets (marked, "as corrected") to the Company for filing with the Commission in
a subsequent Form 8-K submission (subject to the Company's obtaining an
accountant's comfort letter in respect of such corrected Computational Materials
and ABS Term Sheets, which shall be at the expense of such Underwriter) provided
that if any such letter is required to be revised solely because of a change in
the Pool Information, any additional expenses for such letter resulting from the
change in Pool Information shall be paid by the Company.
(f) If the Underwriter does not provide any Computational Materials
and ABS Term Sheets to the Company pursuant to Section 4.2(c), such Underwriter
shall be deemed to have represented, as of the Closing Date, that it did not
provide any prospective investors with any information in written or electronic
form in connection with the offering of the Offered Securities that is required
to be filed with the Commission in accordance with the SEC No-Action Letters,
and such Underwriter shall provide the Company with a certification to that
effect on the Closing Date.
4.3. Each Underwriter severally represents and warrants and agrees
with the Company that as of the date hereof and as of the Closing Date that:
(i) the Computational Materials and ABS Term Sheets furnished by it to the
Company pursuant to Section 4.2(c) constitute (either in original, aggregate or
consolidated form) all of the materials furnished to prospective investors by
such Underwriter prior to the time of delivery thereof to the Company that are
required to be filed with the Commission with respect to the Offered Securities
in accordance with the SEC No-Action Letters, and such Computational Materials
and ABS Term Sheets comply with the requirements of the SEC No-Action Letters;
(ii) on the date any such Computational Materials and ABS Term Sheets with
respect to such Securities (or any written or electronic materials furnished to
prospective investors on which the Computational Materials and ABS Term Sheets
are based) were last furnished to each prospective investor and on the date of
delivery thereof to the Company pursuant to Section 4.2(c) and on the related
Closing Date, such Computational Materials and ABS Term Sheets (or materials)
were accurate in all material respects when read in conjunction with the
Prospectus (taking into account the assumptions explicitly set forth in the
Computational Materials), except to the extent of any errors therein that are
caused by errors in the Pool Information; (iii) each Underwriter has not and
will not represent to potential investors that any Computational Materials and
ABS Term Sheets were prepared or disseminated on behalf of the Company; and (iv)
all Computational Materials and ABS Term Sheets (or underlying materials
distributed to prospective investors by it on which the Computational Materials
and ABS Term Sheets were based) contained and will contain the legend in the
form set forth in Section 4.2(a) (or in such other form previously approved in
writing by the Company).
Notwithstanding the foregoing, no Underwriter makes any representation
or warranty as to whether any Computational Materials or ABS Term Sheets (or any
written or electronic materials furnished to prospective investors on which the
Computational Materials or ABS Term Sheets are based) included or will include
any inaccurate statement resulting directly from any error contained in the Pool
Information.
8
<PAGE>
5. Agreements. The Company agrees with each Underwriter that:
----------
(a) Before amending or supplementing the Registration Statement or the
Prospectus with respect to the Securities, the Company will furnish you with a
copy of each such proposed amendment or supplement and will not file any such
proposed amendment or supplement to which any Underwriter reasonably objects.
(b) The Company will cause the Prospectus Supplement to be transmitted
to the Commission for filing pursuant to Rule 424 under the Act by means
reasonably calculated to result in filing with the Commission pursuant to said
rule and, if necessary, within 15 days of the Closing Date, will transmit for
filing by means reasonably calculated to result in filing with the Commission a
report on Form 8-K for purposes of filing the [Pooling and Servicing
Agreement][Trust Agreement][Indenture][Sales Agreement], and will promptly
advise each Underwriter when the Prospectus Supplement has been so filed.
(c) Prior to the termination of the offering of the Offered
Securities, the Company will promptly advise each Underwriter (i) when any
amendment to the Registration Statement has become effective or any revision of
or supplement to the Prospectus has been so filed (unless such amendment,
revision or supplement does not relate to the Securities), (ii) of any request
by the Commission for any amendment of the Registration Statement or the
Prospectus or for any additional information (unless such request for additional
information does not relate to the Securities), (iii) of any written
notification received by the Company of the suspension of qualification of the
Offered Securities, for sale in any jurisdiction or the initiation of
threatening of any proceeding for such purpose and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the institution or to the knowledge of the Company, the threatening
of any proceeding for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order and, if issued, to obtain as soon as
possible the withdrawal thereof. Except as otherwise provided in Section 5(d),
the Company will not file prior to the termination of such offering any
amendment to the Registration Statement or any revision of or supplement to the
Prospectus (other than any such amendment, revision or supplement which does not
relate to the Offered Securities) which shall be disapproved by the Underwriters
after reasonable notice and review of such filing.
(d) If at any time when a Prospectus relating to the Offered
Securities is required to be delivered under the Act (i) any event occurs as a
result of which the Prospectus as then amended or supplemented would include any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein in the light of the circumstances under which
they were made not misleading, or (ii) it shall be necessary to revise, amend or
supplement the Prospectus to comply with the Act or the rules and regulations of
the Commission thereunder, the Company promptly will notify each Underwriter and
will, upon the request of any Underwriter, or may, after consultation with each
Underwriter, prepare and file with the Commission a revision, amendment or
supplement which will correct such statement or omission or effect such
compliance, and furnish without charge to each Underwriter as many copies as
such Underwriter may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such statement
or omission or effect such compliance.
9
<PAGE>
(e) The Company will furnish to each Underwriter and counsel to each
Underwriter, without charge, conformed copies of the Registration Statement
(including exhibits thereto) and, so long as delivery of a prospectus relating
to the Offered Securities is required under the Act, as many copies of the
Prospectus, any documents incorporated by reference therein and any revisions or
amendments thereof or supplements thereto as may be reasonably requested.
(f) The Company will endeavor to arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as you may
reasonably designate and will maintain such qualification in effect so long as
required for the initial distribution of the Offered Securities; provided,
however, that the Company shall not be required to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action that would
subject it to general or unlimited service of process in any jurisdiction where
it is not so subject.
(g) Whether or not the transactions contemplated in the [Pooling and
Servicing Agreement][Trust Agreement][Indenture] were consummated or this
Agreement is terminated, the Company shall pay or cause to be paid all expenses
incident to the performance of its obligations under this Agreement, including:
(i) the reasonable fees, disbursements and expenses of the Company's counsel in
connection with the registration and delivery of the Offered Securities under
the Act and all other reasonable fees or expenses in connection with the
preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Offered Securities to the Underwriters, including
any transfer or other taxes payable thereon, (iii) the cost of printing or
producing any "blue sky" memorandum in connection with the offer and sale of the
Offered Securities under state securities laws and all expenses in connection
with the qualification of the Offered Securities for offer and sale under state
securities laws as provided in Section 5(f), including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in connection
with such qualification and in connection with the "blue sky" memorandum, (iv)
all filing fees and disbursements of counsel for the Underwriters incurred in
connection with any review and qualification of the offering by the National
Association of Securities Dealers, Inc., (v) the cost of printing the Offered
Securities, (vi) the costs and charges of any transfer agent, registrar or
depositary, and (vii) all other reasonable costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision is
not otherwise made in this Section.
(h) So long as any Offered Securities are outstanding, upon request of
any Underwriter, the Company will, or will cause the [[Master] Servicer] to,
furnish to such Underwriter, as soon as available, a copy of (i) the annual
statement of compliance delivered by the [[Master] Servicer] to the Trustee
under the [Pooling and Servicing Agreement][Trust Agreement][Indenture], (ii)
the annual independent public accountants' servicing report furnished to the
Trustee pursuant to the [Pooling and Servicing Agreement][Trust Agreement]
[Indenture], (iii) each report of the Company regarding the Offered Securities
filed with the Commission under the Exchange Act or mailed to the holders of the
Offered Securities and (iv) from time to time, such other information concerning
the Offered Securities which may be furnished by the
10
<PAGE>
Company or the [[Master] Servicer] without undue expense and without violation
of applicable law.
(i) The Company shall file the Computational Materials and ABS Term
Sheets (if any) provided to it by any Underwriter under Section 4.2(c) with the
Commission pursuant to a Current Report on Form 8-K by 10:00 a.m. on the morning
the Prospectus is delivered to such Underwriter or, the case of any Collateral
Term Sheet required to be filed prior to such date, by 10:00 a.m. on the second
business day following the first day on which such Collateral Term Sheet has
been sent to a prospective investor; provided, however, that prior to such
filing of the Computational Materials and ABS Term Sheets (other than any
Collateral Term Sheets that are not based on the Pool Information) by the
Company, such Underwriter must comply with its obligations pursuant to Section
4.2 and the Company must receive a letter from ______________________, certified
public accountants, satisfactory in form and substance to the Company and its
counsel, to the effect that such accountants have performed certain specified
procedures, all of which have been agreed to by the Company, as a result of
which they determined that all information that is included in the Computational
Materials and ABS Term Sheets (if any) provided by the Underwriters to the
Company for filing on Form 8-K, as provided in Section 4.2 and this Section
5(i), is accurate except as to such matters that are not deemed by the Company
to be material. The foregoing letter shall be at the sole expense of the
Company. The Company shall file any corrected Computational Materials or ABS
Term Sheets described in Section 4.2(e) as soon as practicable following receipt
thereof.
6. Conditions to the Obligations of Underwriters. The obligation of
---------------------------------------------
each Underwriter to purchase the Offered Securities to be purchased by it shall
be subject to the accuracy in all material respects of the representations and
warranties on the part of the Company contained herein as of the date hereof and
as of the Closing Date, to the accuracy of the statements of the Company made in
any officer's certificate pursuant to the provisions hereof, to the performance
in all material respects by the Company of its obligations hereunder and to the
following additional conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement shall be in effect, and no proceedings for that purpose shall be
pending or, to the knowledge of the Company, threatened, and the Prospectus
Supplement shall have been filed or transmitted for filing by means reasonably
calculated to result in a filing with the Commission pursuant to Rule 424 under
the Act.
(b) The Company shall have furnished to the Underwriters a
certificate, dated the Closing Date, of the Company, signed by an authorized
officer of the Company, to the effect that the signer of such certificate has
carefully examined the Registration Statement, the Prospectus, this Agreement
[the Pooling and Servicing Agreement][the Indenture][the Trust Agreement] and
that:
(i) The representations and warranties of the Company in this
Agreement [the Pooling and Servicing Agreement][the Indenture][the Trust
Agreement] are true and correct in all material respect on and as of the
Closing Date with the same effect as if made on the
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Closing Date, and the Company has complied with all agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
instituted and are pending or, to his knowledge, have been threatened as of
the Closing Date;
(iii) Nothing has come to the attention of such person that would
lead him to believe that the Prospectus (other than any Computational
Materials or ABS Term Sheets incorporated therein by reference) contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and
(iv) Since ___________, there has been no material adverse change
(not in the ordinary course of business) in connection with the Company.
(c) The Company shall have furnished or caused to have been furnished to
the Underwriters a certificate, dated the Closing Date, of the Seller, signed by
an authorized officer of the Seller, to the effect that the signer of such
certificate has carefully examined the Prospectus and nothing has come to the
attention of such person that would lead him to believe that the Prospectus
contains any untrue statement of a material fact with respect to the Seller or
the Assets or omits to state any material fact with respect to the Seller or the
Assets necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(d) The Company shall have furnished to you and opinion, dated the Closing
Date, of Messrs. Hunton & Williams, special counsel to the Company,
substantially to the effect that:
(i) The Registration Statement and any amendments thereto have
become effective under the Act; to the best knowledge of such counsel, no
stop order suspending the effectiveness of the Registration Statement has
been issued and not withdrawn, no proceedings for that purpose have been
instituted or threatened and not terminated; and the Registration
Statement, the Prospectus and each amendment or supplement thereto, as of
their respective effective or issue dates (other than the financial and
statistical information contained therein as to which such counsel need
express no opinion), complied as to form in all material respects with the
applicable requirements of the Act and the rules and regulations of the
Commission thereunder;
(ii) To the best knowledge of such counsel, there are not material
contracts, indentures or other documents of a character required to be
described or referred to in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement other than those
described or referred to therein or filed or incorporated by reference as
exhibits thereto;
(iii) The Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the Commonwealth of
Virginia;
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<PAGE>
(iv) This Agreement has been duly authorized, executed and delivered
by the Company.
(v) Each of the [Pooling and Servicing Agreement][Indenture][Trust
Agreement] and the Sales Agreement has been duly authorized, executed and
delivered by the Company and, assuming the due authorization, execution and
delivery by other parties thereto, constitutes a valid, legal and binding
agreement of the Company, is enforceable against the Company in accordance
with its terms, subject as to enforceability to bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally, to general principals of equity regardless of whether
enforcement is sought in a proceeding in equity or at law and to the effect
of the exercise by the Trustee of certain remedial provisions, including
waivers, against the Assets;
(vi) The Offered Securities have been duly authorized and, assuming
authentication and delivery in the manner contemplated in the [Pooling and
Servicing Agreement][Indenture][Trust Agreement], and upon delivery by the
Company of the Offered Securities to be purchased by the Underwriters and
payment by the Underwriters of the purchase price therefor in the manner
contemplated by this Agreement, the Offered Securities will be (A) validly
issued and outstanding and entitled to the benefits of the [Pooling and
Servicing Agreement][Indenture][Trust Agreement] and (B) free and clear of
any lien, pledge, encumbrance or other security interest other than one
permitted by the [Pooling and Servicing Agreement][Indenture][Trust
Agreement] or created or granted by any Underwriter;
(vii) To the best knowledge of such counsel, no consent, approval,
authorization or order of any New York, Virginia or federal governmental
agency or body or any New York, Virginia or federal court is required for
the consummation by the Company of the transactions contemplated by the
terms of this Agreement, the [Pooling and Servicing
Agreement][Indenture][Trust Agreement] or the Sales Agreement, except such
as may be required under the "blue sky" or state securities laws of any
jurisdiction in connection with the offering, sale or acquisition of the
Offered Securities, any recordations of the assignment of the Assets to the
Trustee (to the extent such recordations are required pursuant to the
[Pooling and Servicing Agreement][Trust Agreement]) that have not yet been
completed and such other approvals as have been obtained;
(viii) The sale of the Offered Securities to be purchased by the
Underwriters pursuant to this Agreement and the consummation of any of the
transactions contemplated by the terms of the [Pooling and Servicing
Agreement][Indenture][Trust Agreement], Sales Agreement or this Agreement
do not conflict with or result in a breach or violation of any material
term or provision of, or constitute a default under, the articles of
incorporation of the Company, or to the best knowledge of such counsel, any
indenture or other agreement or instrument to which the Company is a party
or by which it is bound, or any New York, Virginia or federal statute or
regulation applicable to the Company or an order of any New York, Virginia
or federal court, regulatory body, administrative agency or governmental
body having jurisdiction over the Company;
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<PAGE>
(ix) The Offered Securities, the Sales Agreement and the [Pooling
and Servicing Agreement][Indenture][Trust Agreement] conform to the
descriptions thereof contained in the Prospectus;
(x) The statements in the Prospectus under the headings "Federal
Income Tax Consequences," "Legal Investment Considerations" and "ERISA
Considerations" have been reviewed by such counsel and are correct in all
material respects;
(xi) [The Offered Securities indicated under the heading "Summary
of Terms" and "Legal Investment Considerations" in the Prospectus
Supplement to be "mortgage related securities" will be mortgage related
securities, as defined in Section 3(a)(41) of the Exchange Act, so long as
such Offered Securities are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization;] [and]
(xii) The [Pooling and Servicing Agreement][Indenture][Trust
Agreement] [is not required to be][has been] qualified] under the Trust
Indenture Act of 1939, as amended, and the Trust Fund created by the
[Pooling and Servicing Agreement][Trust Agreement] is not required to be
registered under the Investment Company Act of 1940, as amended[.] [; and]
[(xiii) The Trust Fund as described in the Prospectus Supplement and
the Pooling and Servicing Agreement will qualify as a "real estate mortgage
investment conduit" ("REMIC") within the meaning of Section 860D of the
Internal Revenue Code of 1986, as amended (the "Code"), assuming: (i) an
election is made to treat the Trust Fund as a REMIC, (ii) compliance with
the Pooling and Servicing Agreement and (iii) compliance with changes in
the law, including any amendments to the Code or applicable Treasury
regulations thereunder.]
Such counsel shall also state that nothing has come to its attention that
would lead such counsel to believe that the Registration Statement, at the time
it became effective, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of the date of the
Prospectus Supplement, and on the Closing Date, contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; it being understood
that such counsel need express no view as to (i) any financial, economic or
statistical information and data contained therein or incorporated therein by
reference or (ii) any description in the Prospectus of any third party providing
credit enhancement to the Offered Securities.
Such opinion may express its reliance as to factual matters on the
representations and warranties made by, and on certificates or other documents
furnished by officers of, the parties to this Agreement and the [Pooling and
Servicing Agreement][Indenture][Trust Agreement]. Such opinion may assume the
due authorization, execution and delivery of the instruments and documents
referred to therein by the parties thereto other than the Company or its
affiliates. Such opinion may be qualified as an opinion only on the corporate
laws of the Commonwealth of
14
<PAGE>
Virginia, the laws of the State of New York and the federal law of the United
States. To the extent that such counsel relies upon the opinion of other counsel
in rendering any portion of its opinion, the opinion of such other counsel shall
be attached to and delivered with the opinion of such counsel that is delivered
to the Underwriters.
(e) Each party providing credit enhancement to the Offered Securities
shall have furnished to the Underwriters an opinion, dated the Closing Date, of
its counsel, with respect to the Registration Statement and the Prospectus, and
such other related matters, in the form previously agreed to by such provider
and the Underwriters.
(f) The Underwriters shall have received from their counsel such opinion
or opinions, dated the Closing Date, with respect to the issuance and sale of
the Offered Securities, the Registration Statement and the Prospectus, and such
other related matters as you may reasonably require.
(g) The Underwriters shall have received from ___________________,
certified public accountants, (a) a letter dated the date hereof and
satisfactory in form and substance to you and your counsel, to the effect that
they have performed certain specified procedures, all of which have been agreed
to by you, as a result of which they determined that certain information of an
accounting, financial or statistical nature set forth in the Prospectus
Supplement under the captions "The Asset Pool", "Description of the
[Certificates][Notes]" and "Maturity and Prepayment Considerations" agrees with
the records of the Company and the Seller excluding any questions of legal
interpretation and (b) the letter prepared pursuant to Section 5(i).
(h) Subsequent to the date hereof, there shall not have occurred any
change, or any development involving a prospective change, in or affecting the
business or properties of the Seller which in your reasonable judgment
materially impairs the investment quality of the Offered Securities so as to
make it impractical or inadvisable to proceed with the public offering or the
delivery of the Offered Securities as contemplated by the Prospectus.
(i) The Offered Securities shall be rated not lower than the required
ratings set forth under the heading "Ratings" in the Prospectus Supplement, such
ratings shall not have been rescinded and no public announcement shall have been
made that any such required rating of the Offered Securities has been placed
under review (otherwise than for possible upgrading).
(j) The Underwriters shall have received copies of any opinions of counsel
to the Company supplied to the rating organizations relating to certain matters
with respect to the Offered Securities. Any such opinions shall be dated the
Closing Date and addressed to the Underwriters or accompanied by reliance
letters addressed to the Underwriters.
(k) All Classes of Offered Securities being publicly offered by the
Underwriters shall have been issued and paid for pursuant to the terms of this
Agreement.
(l) The Trustee shall have furnished to the Underwriters an opinion dated
the Closing Date, of counsel to the Trustee (who may be an employee of the
Trustee), substantially to the effect that:
15
<PAGE>
(i) The Trustee has full corporate power and authority to execute
and deliver the [Pooling and Servicing Agreement][Indenture][Trust
Agreement] and to perform its obligations thereunder and to execute,
countersign and deliver the Offered Securities.
(ii) The [Pooling and Servicing Agreement][Indenture][Trust
Agreement] has been duly authorized, executed and delivered by the Trustee.
(iii) The [Pooling and Servicing Agreement][Indenture][Trust
Agreement] is a legal, valid and binding obligation of the Trustee,
enforceable against the Trustee in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium,
receivership, conservatorship and similar laws affecting the rights of
creditors generally, and subject, as to enforceability, to general
principles of equity, regardless of whether such enforcement is considered
in a proceeding at law or equity.
Such opinion may express its reliance as to factual matters on the
representations and warranties made by, and on certificates or other documents
furnished by officers of, the parties to the [Pooling and Servicing
Agreement][Indenture][Trust Agreement]. Such opinion may assume the due
authorization, execution and delivery of the instruments and documents referred
to therein by the parties thereto other than the Trustee or its affiliates. Such
opinion may be qualified as an opinion only on the laws of the State of New York
and federal law of the United States. To the extent that such counsel relies
upon the opinion of other counsel in rendering any portion of its opinion, the
opinion of such other counsel shall be attached to and delivered with the
opinion of such counsel that is delivered to the Underwriters.
(a) The Seller shall have sold the Assets to the Company pursuant to the
Sales Agreement.
(b) The Company shall have furnished to the Underwriters such further
information, certificates and documents as the Underwriters may reasonably have
requested, and all proceedings in connection with the transactions contemplated
by this Agreement and all documents incident hereto shall be in all material
respects reasonably satisfactory in form and substance to the Underwriters and
their counsel.
(c) Since ________, there shall have been no material adverse change (not
in the ordinary course of business) in the judgment of each Underwriter in the
condition of the Company that makes it, in the judgment of such Underwriter,
impractible to market the Offered Securities on the terms and in the manner
contemplated by the Prospectus.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, this
Agreement and all obligations of an Underwriter hereunder may be canceled at, or
at any time prior to, the Closing Date by such Underwriter. Notice of such
cancellation shall be given to the Company in writing, or by telephone or
telegraph confirmed in writing.
16
<PAGE>
7. Indemnification and Contribution. The Company agrees to indemnify and
--------------------------------
hold harmless each of the Underwriters and each person, if any, who controls
either such Underwriter within the meaning of either Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), from and
against any and all losses, claims, damages and liabilities, joint or several,
to which they or any of them may become subject under the Act, the Exchange Act,
or other Federal or State Statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) were caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement as originally filed
or in any amendment thereof or other filing incorporated by reference therein,
including Computational Materials and ABS Term Sheets, or in any preliminary
prospectus or the Prospectus or incorporated by reference therein, including
Computational Materials and ABS Term Sheets (if used within the period mentioned
in Section 5(a) and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated therein,
in light of the circumstances under which they were made, not misleading, except
insofar as such losses, claims, damages or liabilities were caused by any such
untrue statement or omission or alleged untrue statement or omission made
therein based upon and in conformity with (i) the information furnished in
writing to the Company by any Underwriter through [Lead Underwriter]
specifically for use in connection with the preparation of the Registration
Statement, any preliminary prospectus or the Prospectus or any revision or
amendment thereof or supplement thereto and (ii) any information in any
Computational Materials or ABS Term Sheets required to be provided by any
Underwriter to the Company pursuant to Section 4.2, except to the extent such
material misstatement or omission is based upon the Pool Information. Such
indemnity with respect to any Corrected Statement (as defined below) in such
Prospectus (or supplement thereto) shall not inure to the benefit of the
Underwriters (or any person controlling either of the Underwriters) from whom
the person asserting any loss, claim, damage or liability purchased the Offered
Securities that are the subject thereof if such person did not receive a copy of
the supplement to such Prospectus at or prior to the confirmation of the sale of
such Securities and the untrue statement or omission of material fact contained
in such Prospectus (or supplement thereto) was corrected (a "Corrected
Statement") in such other supplement and such supplement was furnished by the
Company to the Underwriters prior to the delivery of such confirmation.
Each Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company and its directors and officers who sign the Registration
Statement and any person controlling the Company within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as
the foregoing indemnity from the Company to the Underwriters, but only with
reference to (i) information relating to the Underwriters furnished in writing
to the Company by any Underwriter specifically for use in connection with the
preparation of the Registration Statement, any preliminary prospectus or the
Prospectus or any revision or amendment thereof or supplement thereto and (ii)
any Computational Materials, the ABS Term Sheets or the Collateral Term Sheets,
as applicable, except to the extent of any errors in the Computational Materials
or ABS Term Sheets that are caused by errors in the Pool Information.
17
<PAGE>
In case any proceeding (including any governmental investigation) shall be
instituted involving any person in respect of which indemnity may be sought
pursuant to either of the two preceding paragraphs, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by _________________ in the case of parties indemnified
pursuant to the first paragraph of this Section 7 and by the Company in the case
of parties indemnified pursuant to the second paragraph of this Section 7. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. Notwithstanding the foregoing sentence, if at
any time any indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel as contemplated
by the third sentence of this paragraph, the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claim that
are the subject matter of such proceeding.
To the extent the indemnification provided for in this Section 7 is
unavailable to an indemnified party under the first or second paragraph of this
Section 7 or is insufficient in respect of any losses, claims, damages or
liabilities referred to therein, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand, and by the several
Underwriters on the other, from the offering of the Offered Securities or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law, in such
18
<PAGE>
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand, and of the several Underwriters on the other, in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand, and any Underwriter
on the other, in connection with the offering of the Offered Securities shall be
deemed to be in the same respective proportions that the total net proceeds from
the offering of the Offered Securities (before deducting expenses) received by
the Company and the total underwriting discounts and commissions received by
each of the Underwriters in respect thereof respectively, bear to the aggregate
public offering price of the Offered Securities. The relative fault of the
Company on the one hand, and of any Underwriter on the other, shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or by an
Underwriter and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. Each
Underwriter's obligation to contribute pursuant to this Section 7 is several in
proportion to the respective principal amounts of Offered Securities it has
purchased hereunder, and not joint.
The Company and the several Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which [the total underwriting discounts and
commissions received by such Underwriter in connection with the Offered
Securities underwritten and distributed to the public by such Underwriter] [the
total price at which the Offered Securities underwritten by it and distributed
to the public were offered to the public] exceeds the amount of any damages that
such Underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 7 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
The indemnity and contribution agreements contained in this Section 7 and
the representations and warranties of the Company in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of the Underwriters or
any person controlling either of the Underwriters or by on behalf of the
Company, its directors or officers or any person controlling the Company and
(iii) acceptance of any payment for any of the Offered Securities.
19
<PAGE>
8. Termination. This Agreement shall be subject to termination in [Lead
-----------
Underwriter]'s absolute discretion, by notice given to the Company, if (a) after
the execution and delivery of this Agreement and prior to the Closing Date (i)
trading generally shall have been suspended or materially limited on or by, as
the case may be, any of the New York Stock Exchange, the American Stock
Exchange, the National Association of Securities Dealers, Inc., the Chicago
Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board
of Trade, (ii) trading of any securities of the Company shall have been
suspended on any exchange or in any over-the-counter market, (iii) a general
moratorium on commercial banking activities in New York shall have been declared
by either Federal or New York State authorities, or (iv) there shall have
occurred any outbreak or escalation of hostilities or any change in financial
markets or any calamity or crisis that, in the judgment of the Underwriters, is
material and adverse and such event singly or together with any other such
event, makes it, in the judgment of the Underwriters, impracticable to market
the Offered Securities on the terms and in the manner contemplated in the
Prospectus or (b) if the sale of the Securities provided for herein is not
consummated because of any failure or refusal on the apart of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason the Company shall be unable to perform its obligations under
this Agreement. If you terminate this Agreement in accordance with this Section
8 or because of any failure or refusal on the part of the Company to comply with
the terms or to fulfill any of the conditions of this Agreement, the Company
will reimburse you for all reasonable out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been reasonably
incurred by the Underwriters in connection with the proposed purchase and sale
of the Securities.
9. Default by an Underwriter. If any one or more of the Underwriters
-------------------------
shall fail to purchase and pay for any of the Offered Securities agreed to be
purchased by such Underwriter or Underwriters hereunder and such failure to
purchase shall constitute a default in the performance of its or their
obligations under this Agreement, the remaining Underwriters shall be obligated
severally to take up and pay for (in the respective proportions which the
aggregate principal amount of all the Offered Security of the various Classes
set forth opposite the name of all the remaining Underwriters) the Offered
Securities that the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate principal
amount of Offered Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase shall exceed 10% of the aggregate principal amount
of all of the Offered Securities set forth in the Prospectus Supplement, the
remaining Underwriters shall have the right to purchase all, but shall not be
under any obligation to purchase any, of the Offered Securities, and if such
nondefaulting Underwriters do no purchase all the Offered Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
seven days, as the nondefaulting Underwriters shall determine in order that
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
the Company and to any nondefaulting Underwriter for damages occasioned by its
defaulting hereunder.
20
<PAGE>
If this Agreement shall be terminated by the Underwriters, or any of them,
because of the failure or refusal on the part of the Company to comply with the
terms or fulfill any of the conditions of this Agreement, or if for any reason
the Company shall reimburse the Underwriters or such Underwriters as have so
terminated this Agreement with respect to themselves, severally, for all out-of-
pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering of the Offered Securities.
10. Representations and Indemnities to Survive. The respective indemnity
------------------------------------------
and contribution agreements and the representations, warranties and other
statements of the Company, its officers and the Underwriters set forth in or
made pursuant to this Agreement will remain in full force and effect, regardless
of any termination of this Agreement, any investigation made by or on behalf of
any Underwriter or the Company or any of the officers, directors or controlling
persons referred to in Section 7 and delivery of and payment for the Offered
Securities.
11. Successors. This Agreement will inure to the benefit of and be binding
----------
upon the parties hereto and their respective successors and the officers,
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
12. Counterparts. This Agreement may be signed in any number of
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement will be governed by and construed in
--------------
accordance with the internal laws of the State of New York, without reference to
its conflict of law provisions, and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws.
14. Headings. The headings of the sections of this Agreement have been
--------
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
15. Notices. All communications hereunder shall be in writing and
-------
effective only on receipt and, if sent to an Underwriter, shall be delivered to
the address specified on the signature page hereof; or if sent to the Company,
shall be delivered to National Mortgage Securities Corporation, 909 East Main
Street, Richmond, Virginia 23219, Attention: President, phone (804) 649-3952,
telecopy (804) 649-0990.
16. Miscellaneous. Time shall be of the essence of this Agreement. This
-------------
Agreement supersedes all prior or contemporaneous agreements and understandings
relating to the subject matter hereof. Neither this Agreement nor any term
hereof may be change, waived, discharged or terminated except by a writing
signed by the party against whom enforcement of such change, waiver, discharge
or termination is sought.
21
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the undersigned a counterpart hereof, whereupon this
Agreement and your acceptance shall represent a binding agreement by and among
the Company and each Underwriter.
Very truly yours,
NATIONAL MORTGAGE SECURITIES CORPORATION
By:___________________________
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted.
Accepted, ___________, ____
[ ]
[NAMES OF OTHER CO-MANAGERS]
Acting severally on behalf of themselves
and the several Underwriters
named in Schedule I hereto.
By
By:________________________
Name:
Title:
22
<PAGE>
SCHEDULE I
I-1
<PAGE>
SCHEDULE II
II-1
<PAGE>
[Hunton & Williams Letterhead]
Exhibit 5.1
-----------
December 17, 1999
National Mortgage Securities Corporation
909 East Main Street
Richmond, Virginia 23219
Dear Sirs:
We have acted as counsel to National Mortgage Securities Corporation, a
Virginia corporation (the "Company"), in connection with the Company's
Registration Statement on Form S-3 (the "Registration Statement") filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
with respect to the proposed sale by the Company of up to $300,000,000 in
aggregate principal amount of Pass-Through Certificates and Asset-Backed Notes,
issuable in one or more series (the "Securities"). In this capacity, we have
examined the Registration Statement, the Company's Articles of Incorporation and
Bylaws, the form of Pooling and Master Servicing Agreement, including Standard
Terms thereto (the "Pooling and Servicing Agreement"), the form of Indenture
(the "Indenture") and such other materials as we have deemed necessary to the
issuance of this opinion.
On the basis of the foregoing, we are of the opinion that:
1. The Company has been organized and is existing as a corporation under
the laws of the Commonwealth of Virginia.
2. When each Pooling and Servicing Agreement and Indenture has been duly
authorized by all necessary corporate action and has been duly executed and
delivered by the parties thereto, each will constitute a valid, legal and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally and
to general principles of equity, regardless of whether enforcement is sought in
a proceeding in equity or at law.
<PAGE>
National Mortgage Securities
Corporation
December 17, 1999
Page 2
3. When the Securities have been duly authorized for sale by all
necessary corporate action, and when the Securities have been duly issued,
executed and authenticated in accordance with the provisions of the related
Pooling and Servicing Agreement or Indenture, as applicable, and delivered to
and paid for by the purchasers thereof, the Securities will be legally and
validly issued for adequate consideration and (a) the Security holders will be
entitled to the benefits provided by the Pooling and Servicing Agreement or
Indenture, as applicable, pursuant to which such Securities were issued and (b)
no Security holder will be subject to any further assessment in respect of the
purchase price of his Securities.
The foregoing opinions are limited to matters of the laws of the United
States of America and Commonwealth of Virginia. We hereby consent to the filing
of this opinion as an exhibit to the Registration Statement. In giving this
consent, we do not admit that we are within the category of persons whose
consent is required by Section 7 of the Securities Act of 1933, as amended, or
the rules and regulations promulgated thereunder by the Securities and Exchange
Commission.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
[Hunton & Williams Letterhead]
Exhibit 8.1
-----------
December 17, 1999
National Mortgage Securities Corporation
909 East Main Street
Richmond, Virginia 23219
Gentlemen:
We have acted as counsel to National Mortgage Securities Corporation,
a Virginia corporation (the "Company"), in connection with the Company's
Registration Statement on Form S-3 (the "Registration Statement"), filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), for the registration under the Act of $300,000,000
aggregate principal amount of Pass-Through Certificates and Asset-Backed Notes
(the "Securities") representing interests in one or more trusts (each a "Trust")
to be established by the Company. The Securities will be issued pursuant to a
form of Pooling and Master Servicing Agreement, including Standard Terms
thereto, or a form of Indenture (each, an "Agreement").
We have reviewed the originals or copies of (i) the Articles of
Incorporation, By-laws, and other organizational documents of the Company; (ii)
certain resolutions of the Board of Directors of the Company; (iii) the
Agreements, including the forms of the Securities; (iv) the Registration
Statement and the prospectus included therein; and (v) such other documents as
we have deemed necessary or appropriate as a basis for the opinion set forth
below.
Based on the foregoing, we are of the opinion that the legal
conclusions contained in the Registration Statement under the caption "Federal
Income Tax Consequences" are correct in all material respects, and the
discussion thereunder does not omit any material provision with respect to the
matters covered. You should be aware that this opinion represents our
conclusions as to the application of existing law to a transaction as described
above. There can be no assurance that contrary positions will not be taken by
the Internal Revenue Service or that the law will not change.
<PAGE>
National Mortgage Securities
Corporation
December 17, 1999
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the caption "Federal Income Tax Consequences" in the Prospectus. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
No opinion has been sought and none has been given concerning the tax
treatment of the issuance and sale of the Certificates under the laws of any
state.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
[Hunton & Williams Letterhead]
Exhibit 8.2
-----------
December 17, 1999
National Mortgage Securities Corporation
909 East Main Street
Richmond, Virginia 23219
Gentlemen:
We have acted as counsel to National Mortgage Securities Corporation,
a Virginia corporation (the "Company"), in connection with the preparation of
the Company's Registration Statement on Form S-3 (the "Registration Statement"),
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), for the registration under the Act of $300,000,000
aggregate principal amount of Pass-Through Certificates (the "Certificates") and
Asset-Backed Notes representing interests in one or more trusts (each a "Trust")
to be established by the Company. The Certificates of each Trust will be issued
pursuant to a form of Pooling and Master Servicing Agreement, including Standard
Terms thereto, among the Company, a trustee to be named therein, and a servicer
to be named therein (a "Pooling and Servicing Agreement").
We have reviewed the originals or copies of (i) the Articles of
Incorporation, By-laws, and other organizational documents of the Company; (ii)
certain resolutions of the Board of Directors of the Company; (iii) the Pooling
and Servicing Agreement, including the forms of the Certificates annexed
thereto; (iv) the Registration Statement and the prospectus included therein;
and (v) such other documents as we have deemed necessary or appropriate as a
basis for the opinions set forth below.
Based on the foregoing, we adopt and confirm that the legal conclusions
contained in the Registration Statement under the caption "Federal Income Tax
Consequences" are our opinion as to the material federal income tax consequences
associated with the purchase, ownership and disposition of the Certificates. We
also are of the opinion that, with respect to the issuance of the Certificates
of a Trust for which an election to be treated as a real estate mortgage
investment conduit ("REMIC") is to be made, if (i) the Company, the Trustee, and
the other parties to the
<PAGE>
National Mortgage Securities
Corporation
December 17, 1999
Page 2
issuance transaction comply (without waiver) with all of the provisions of the
Pooling and Servicing Agreement and certain other documents to be prepared and
executed in connection with such transaction, (ii) the Certificates are issued
and sold as described in the Registration Statement and the prospectus
supplement to be issued in connection with the Trust, and (iii) an election is
properly made and filed for the Trust (or designated assets thereof) to be
treated as one or more REMICs pursuant to Section 860D of the Internal Revenue
Code of 1986, as amended (the "Code"), the Trust (or designated assets thereof)
will qualify as one or more REMICs, and the Certificates relating to the Trust
will be considered to be "regular interests" or the "residual interest" in a
REMIC (as designated in the relevant prospectus supplement) on the date of
issuance thereof and thereafter, assuming continuing compliance with the REMIC
provisions of the Code and any regulations thereunder.
You should be aware that the above opinions represent our conclusions as to
the application of existing law to a transaction as described above. There can
be no assurance that contrary positions will not be taken by the Internal
Revenue Service or that the law will not change.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the caption "Federal Income Tax Consequences" in the Prospectus. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
No opinion has been sought and none has been given concerning the tax
treatment of the issuance and sale of the Certificates under the laws of or any
state.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
[Hunton & Williams Letterhead]
Exhibit 8.3
-----------
December 17, 1999
National Mortgage Securities Corporation
909 East Main Street
Richmond, Virginia 23219
Gentlemen:
We have acted as counsel to National Mortgage Securities Corporation,
a Virginia corporation (the "Company"), in connection with the preparation of
the Company's Registration Statement on Form S-3 (the "Registration Statement"),
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), for the registration under the Act of $300,000,000
aggregate principal amount of Pass-Through Certificates (the "Certificates") and
Asset-Backed Notes representing interests in one or more trusts (each a "Trust")
to be established by the Company. The Certificates of each Trust will be issued
pursuant to a form of Pooling and Master Servicing Agreement, including Standard
Terms thereto, among the Company, a trustee to be named therein, and a servicer
to be named therein (a "Pooling and Servicing Agreement").
We have reviewed the originals or copies of (i) the Articles of
Incorporation, By-laws, and other organizational documents of the Company; (ii)
certain resolutions of the Board of Directors of the Company; (iii) the Pooling
and Servicing Agreement, including the forms of the Certificates annexed
thereto; (iv) the Registration Statement and the prospectus included therein;
and (v) such other documents as we have deemed necessary or appropriate as a
basis for the opinions set forth below.
Based on the foregoing, we adopt and confirm that the legal conclusions
contained in the Registration Statement under the caption "Federal Income Tax
Consequences" are our opinion as to the material federal income tax consequences
associated with the purchase, ownership and disposition of the Certificates. We
also are of the opinion that, with respect to the issuance of the Certificates
of a Trust for which no election to be treated as a real estate mortgage
investment
<PAGE>
National Mortgage Securities
Corporation
December 17, 1999
Page 2
conduit or as a financial asset securitization investment trust is to be made,
if (i) the Company, the Trustee, and the other parties to the issuance
transaction comply (without waiver) with all of the provisions of the Pooling
and Servicing Agreement and certain other documents to be prepared and executed
in connection with such transaction and (ii) the Certificates are issued and
sold as described in the Registration Statement and the prospectus supplement to
be issued in connection with the Trust, the Trust will be classified as either a
grantor trust under Subpart E, Part 1 of subchapter J of the Internal Revenue
Code of 1986, as amended (the "Code"), or a partnership under subchapter k of
the Code, and not as an association taxable as a corporation.
You should be aware that the above opinions represent our conclusions as to
the application of existing law to the transaction described above. There can be
no assurance that contrary positions will not be taken by the Internal Revenue
Service or that the law will not change.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the caption "Federal Income Tax Consequences" in the Prospectus. In giving
this consent, we do not admit that we are in the category of persons whose
consent is required by Section 7 of the Act or the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
No opinion has been sought and none has been given concerning the tax
treatment of the issuance and sale of the Certificates under the laws of any
state.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
[Hunton & Williams Letterhead]
Exhibit 8.4
-----------
December 17, 1999
National Mortgage Securities Corporation
909 East Main Street
Richmond, Virginia 23219
Gentlemen:
We have acted as counsel to National Mortgage Securities Corporation,
a Virginia corporation (the "Company"), in connection with the preparation of
the Company's Registration Statement on Form S-3 (the "Registration Statement"),
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), for the registration under the Act of $300,000,000
aggregate principal amount of Pass-Through Certificates (the "Certificates") and
Asset-Backed Notes (the "Notes") representing interests in one or more trusts
(each a "Trust") to be established by the Company. Each series of Notes will be
issued pursuant to a form of Indenture among the Company, and an indenture
trustee to be named therein (an "Indenture").
We have reviewed the originals or copies of (i) the Articles of
Incorporation, By-laws, and other organizational documents of the Company; (ii)
certain resolutions of the Board of Directors of the Company; (iii) the
Indenture, including the forms of the Notes annexed thereto; (iv) the
Registration Statement and the prospectus included therein; and (v) such other
documents as we have deemed necessary or appropriate as a basis for the opinions
set forth below.
<PAGE>
National Mortgage Securities
Corporation
December 17, 1999
Page 2
Based on the foregoing, we adopt and confirm that the legal
conclusions contained in the Registration Statement under the caption "Federal
Income Tax Consequences" are our opinion as to the material federal income tax
consequences associated with the purchase, ownership and disposition of the
Notes. In arriving at the opinion expressed above, we have assumed that the
Indenture will be duly authorized by all necessary corporate action on the part
of the parties thereto for such series of Notes and will be duly executed and
delivered by the parties thereto substantially in the applicable form filed or
incorporated by reference as an exhibit to the Registration Statement, that each
series of Notes will be duly executed and delivered in substantially the forms
set forth in the related Indenture filed or incorporated by reference as an
exhibit to the Registration Statement, that each series of Notes will be sold as
described in the Registration Statement, and that the parties to the
transactions involving the issuance of each series of Notes will comply (without
waiver) with all of the provisions of the related Indenture and the other
documents prepared and executed in connection with such transactions.
You should be aware that the above opinions represent our conclusions as to
the application of existing law to the transaction described above. There can be
no assurance that contrary positions will not be taken by the Internal Revenue
Service or that the law will not change.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the caption "Federal Income Tax Consequences" in the Prospectus. In giving
this consent, we do not admit that we are in the category of persons whose
consent is required by Section 7 of the Act or the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
No opinion has been sought and none has been given concerning the tax
treatment of the issuance and sale of the Notes under the laws of any state.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
[Hunton & Williams Letterhead]
Exhibit 8.5
-----------
December 17, 1999
National Mortgage Securities Corporation
909 East Main Street
Richmond, Virginia 23219
Gentlemen:
We have acted as counsel to National Mortgage Securities Corporation,
a Virginia corporation (the "Company"), in connection with the preparation of
the Company's Registration Statement on Form S-3 (the "Registration Statement"),
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), for the registration under the Act of $300,000,000
aggregate principal amount of Pass-Through Certificates (the "Certificates") and
Asset-Backed Notes representing interests in one or more trusts (each a "Trust")
to be established by the Company. The Certificates of each Trust will be issued
pursuant to a form of Pooling and Servicing Agreement, including Standard Terms
thereto, among the Company, a trustee to be named therein, and a servicer to be
named therein (a "Pooling and Servicing Agreement").
We have reviewed the originals or copies of (i) the Articles of
Incorporation, By-laws, and other organizational documents of the Company; (ii)
certain resolutions of the Board of Directors of the Company; (iii) the Pooling
and Servicing Agreement, including the forms of the Certificates annexed
thereto; (iv) the Registration Statement and the prospectus included therein;
and (v) such other documents as we have deemed necessary or appropriate as a
basis for the opinions set forth below.
Based on the foregoing, we adopt and confirm that the legal conclusions
contained in the Registration Statement under the caption "Federal Income Tax
Consequences" are our opinion as to
<PAGE>
National Mortgage Securities
Corporation
December 17, 1999
Page 2
the material federal income tax consequences associated with the purchase,
ownership and disposition of the Certificates. We also are of the opinion that,
with respect to the issuance of the Certificates of a Trust for which an
election to be treated as a financial asset securitization investment trust
("FASIT") is to be made, if (i) the Company, the Trustee, and the other parties
to the issuance transaction comply (without waiver) with all of the provisions
of the Pooling and Servicing Agreement and certain other documents to be
prepared and executed in connection with such transaction, (ii) the Certificates
are issued and sold as described in the Registration Statement and the
prospectus supplement to be issued in connection with the Trust, and (iii) an
election is properly made and filed for the Trust (or designated assets thereof)
to be treated as one or more FASITs pursuant to Section 860L of the Internal
Revenue Code of 1986, as amended (the "Code"), the Trust (or designated assets
thereof) will qualify as one or more FASITs, and the Certificates relating to
the Trust will be considered to be "regular interests" or the "ownership
interest" in a FASIT (as designated in the relevant prospectus supplement) on
the date of issuance thereof and thereafter, assuming continuing compliance with
the FASIT provisions of the Code and any regulations thereunder.
You should be aware that the above opinions represent our conclusions as to
the application of existing law to a transaction as described above. There can
be no assurance that contrary positions will not be taken by the Internal
Revenue Service or that the law will not change.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the caption "Federal Income Tax Consequences" in the Prospectus. In giving
this consent, we do not admit that we are in the category of persons whose
consent is required by Section 7 of the Act or the rules and regulations
promulgated thereunder by the Securities and Exchange Commission.
No opinion has been sought and none has been given concerning the tax
treatment of the issuance and sale of the Certificates under the laws of or any
state.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
STANDARD TERMS
to
MASTER SERVICING AGREEMENT
OCTOBER 1, 1999 EDITION
NATIONAL MORTGAGE SECURITIES CORPORATION
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS
Section 1.01. Definitions................................................................... 1
ARTICLE II
ASSIGNMENT OF MORTGAGE LOANS AND TRUST ESTATE;
DOCUMENTS TO BE DEPOSITED WITH THE TRUSTEE
Section 2.01. Trustee to Retain Possession of Documents..................................... 5
Section 2.02. Trustee to Retain Possession of Certain Insurance Policies and Documents...... 5
ARTICLE III
ADMINISTRATION AND SERVICING OF MORTGAGE LOANS
Section 3.01. General Duties of Master Servicer............................................. 6
Section 3.02. Termination of Sales/Servicing Agreements..................................... 6
Section 3.03. Enforcement of "Due-on-Sale" Clauses; Assumption Agreements................... 7
Section 3.04. Release of Trustee Mortgage Loan Files........................................ 8
Section 3.05. Documents, Records and Funds in Possession of Master Servicer to be
Held for Trustee.............................................................. 9
Section 3.06. Modification of Requirements to Servicing Provisions of the
Sales/Servicing Agreement..................................................... 10
Section 3.07. Waiver by master Servicer of Certain Requirements in the
Sales/Servicing Agreement..................................................... 11
Section 3.08. Assignment of Sales/Servicing Agreements...................................... 11
Section 3.09. Representations and Warranties................................................ 11
Section 3.10. Closing Certificate and Opinion............................................... 12
ARTICLE IV
INSURANCE AND BONDS
Section 4.01. Maintenance of Insurance and Collections Thereunder........................... 13
Section 4.02. Payment of Premiums........................................................... 13
Section 4.03. Presentment of Claims and Collection of Proceeds.............................. 13
Section 4.04. Renewal of Primary Mortgage Insurance Policies................................ 14
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
ARTICLE V
ADVANCES BY MASTER SERVICER FOR P & I
ADVANCES, ATTORNEYS' FEES AND OTHER COSTS
<S> <C>
Section 5.01. Recoverable Advances.......................................... 14
Section 5.02. Non-Recoverable Advances...................................... 15
ARTICLE VI
PAYMENTS BY MASTER SERVICER
Section 6.01. General....................................................... 16
Section 6.02. Deposits Into Master Custodial P&I Account.................... 16
Section 6.03. Withdrawals From Master Custodial P&I Accounts................ 16
Section 6.04. Payments for Additional Interest In Connection with Certain
Prepayments and Other Liquidations............................ 17
Section 6.05. Payments for the Repurchase of Loans.......................... 18
Section 6.06. Payments for Losses due to Mortgagor Bankruptcies............. 19
ARTICLE VII
COMPENSATION AND DISBURSEMENTS TO MASTER SERVICER
Section 7.01. Compensation to the Master Servicer........................... 19
Section 7.02. Authorized Disbursements from the Collateral Proceeds Account. 19
ARTICLE VIII
REPORTS AND CERTIFICATE TO TRUSTEE
Section 8.01. Reports to the Issuer and Trustee............................. 20
Section 8.02. Annual Officer's Certificate as to Compliance................. 20
Section 8.03. Annual Independent Public Accountants' Servicing Report....... 21
ARTICLE IX
MERGER OR CONSOLIDATION OF MASTER SERVICER; RESIGNATION
Section 9.01. Merger or Consolidation....................................... 22
Section 9.02. Assignment or Transfer of Master Servicing Agreement.......... 22
Section 9.03. Resignation of Master Servicer................................ 22
ARTICLE X
DEFAULT
Section 10.01. Events of Default by Master Servicer.......................... 22
Section 10.02. Other Remedies of Trustee..................................... 24
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
ARTICLE XI
DUTIES OF THE MASTER SERVICER
<S> <C>
Section 11.01. General Bond Administration............................................ 24
Section 11.02. REMIC Bond Administration.............................................. 26
Section 11.03. Additional Bond Administration Rights and Duties of Master Servicer.... 26
Section 11.04. Additional Costs Payable by Master Servicer............................ 27
ARTICLE XII
MISCELLANEOUS
Section 12.01. No Assignment or Delegation of Duties by Master Servicer............... 27
Section 12.02. Binding Nature of Agreement; Assignment................................ 27
Section 12.03. Entire Agreement....................................................... 27
Section 12.04. Amendments and Supplements............................................. 27
Section 12.05. Controlling Law........................................................ 28
Section 12.06. Indulgences, No Waivers................................................ 28
Section 12.07. Titles Not to Affect Interpretation.................................... 28
Section 12.08. Attorney's Fees........................................................ 28
EXHIBITS
Exhibit A Form of Performance Letter................................................... A-1
Exhibit B Monthly Bond Remittance Report............................................... B-1
</TABLE>
-iii-
<PAGE>
RECITALS
A master servicer identified in the Master Servicing Agreement of which
these Standard Terms are a part (the "Master Servicer") intends to act as
"master servicer" on behalf of National Mortgage Securities Corporation ("NMSC")
for one or more Series of collateralized structured securities (the
"Securities") pursuant to an indenture between NMSC or an owner trust created by
it (the "Issuer") and the trustee identified in such indenture (the "Trustee").
The Securities are to be secured by mortgage loans that have been sold or
pledged to the Issuer by NMSC (the "Mortgage Loans"). Collection of the
scheduled principal and interest payments on the Mortgage Loans, plus pass-
through payments of prepayments and liquidation proceeds, will be paid to the
Trustee on behalf of the Issuer for the payment of the principal and interest on
the Securities.
NMSC has entered into Sales/Servicing Agreements with various Servicers
acceptable to the Master Servicer and has assigned its interest in the
Sales/Servicing Agreements either to the Issuer or to one of its subsidiaries,
which, in turn, has assigned its interest to the Issuer. Under the terms of its
Sales/Servicing Agreement, each Servicer has agreed to service the mortgage
loans sold by it to NMSC. To provide for the administration and servicing of
the Mortgage Loans that secure payment of the Securities, including the orderly
and timely collection of scheduled payments of principal and interest and the
advance of such payments by the Master Servicer to the extent recoverable from
Liquidation Proceeds, Insurance Proceeds, or subsequent payments by the
Borrower, the Issuer and NMSC, on behalf of itself or one of its subsidiaries,
have retained the Master Servicer to act as a "master servicer" for all Mortgage
Loans and to manage and supervise the administration and servicing of the
Mortgage Loans by all Servicers for the benefit of the Issuer, NMSC, the Trustee
and the Securityholders.
STANDARD TERMS
NOW THEREFORE, in consideration of the mutual covenants and obligations
contained below and for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Issuer, NMSC and Master Servicer
agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions.
-----------
The following terms shall have the meanings ascribed to them below, unless
the context or use otherwise clearly indicates another or different meaning and
intent. Moreover, such meanings are equally applicable to the singular and the
plural forms of such terms, as the context may require. Capitalized terms not
otherwise defined in these Standard Terms shall have the meanings ascribed to
them in the Sales/Servicing Agreement. (Copies of the Sales/Servicing
<PAGE>
Agreement are held by the Master Servicer and the Issuer at their respective
places of business located at the addresses specified in the Master Servicing
Agreement.)
"Advance Claims Endorsement": An endorsement to the Pool Insurance Policy
--------------------------
which obligates the Mortgage Insurer that issued such Pool Insurance Policy to
advance delinquent principal and interest installments on any Mortgage Loan.
"Collateral Proceeds Account": A trust account established by the Trustee
---------------------------
with a bank, savings and loan association or other depository to which the
Master Servicer shall remit from time to time the funds the Master Servicer has
collected and deposited in a Master Custodial P&I Account in respect of the
Mortgage Loans pledged to the Trustee as collateral for Securities.
"Event of Default": As provided in Section 10.01 of these Standard Terms.
----------------
"FNMA Guidelines": The guidelines contained in the FNMA Seller's Guide and
---------------
in the FNMA Servicing Guide pertaining to one-to-four family, first-lien,
conventional residential mortgage loans, and such other rules, regulations and
guidelines adopted by FNMA that establish eligibility requirements for the
purchase of conventional, residential mortgage loans by FNMA or establish loan
service requirements for mortgage loans purchased by FNMA, as amended or
supplemented from time to time.
"Indenture": A trust indenture between the Trustee and the Issuer under
---------
which Securities are issued, as amended or supplemented from time to time.
"Issuer": An affiliate of NMSC which has issued Securities secured by
------
Mortgage Loans.
"Master Custodial P & I Account": An account maintained by the Master
------------------------------
Servicer specifically for the collection from any Servicer of the payment of
principal and interest on mortgage loans purchased by NMSC.
"Master Servicer Remittance Date": The date specified in the Master
-------------------------------
Servicing Agreement, which is the day each month on which the Master Servicer
will remit funds to the Trustee.
"Master Servicer": The Person designated and appointed by the Trustee to
---------------
act as "master servicer" pursuant to Sections 9.03 and 10.01 of these Standard
Terms.
"Master Servicer Errors and Omissions Insurance Policy": Insurance
-----------------------------------------------------
coverage in an amount and otherwise in form and substance acceptable under FNMA
guidelines, insuring the Master Servicer as the named insured against liability
for damages arising out of errors, omissions or mistakes committed in the
performance of the services and other obligations required of the Master
Servicer under its Master Servicing Agreement with the Issuer and, unless waived
by the Master Servicer, naming the Trustee as an additional insured, containing
a severability of interests provision, but no other exclusion or other provision
that would limit the liability of any insured to any other insured.
-2-
<PAGE>
"Master Servicer Fidelity Bond": A fidelity bond issued by an insurer and
------------------------------
in form and substance acceptable under FNMA Guidelines, under which such insurer
(a) agrees to indemnify the Master Servicer for all losses sustained as a result
of any theft, embezzlement, fraud or other dishonest act on the part of the
Master Servicer's directors, officers or employees, and (b) provides for limits
of liability under such bond for each director, officer or employee of not less
than an amount required by such guidelines.
"Master Servicing Agreement": Each agreement between the Issuer and the
---------------------------
Master Servicer under which the Master Servicer agrees to supervise the
Servicers of the Mortgage Loans and to assume certain other obligations in
accordance with such agreement and the terms and conditions of these Standard
Terms, as supplemented and amended from time to time.
"Monthly Remittance Report": The monthly report to be provided by the
-------------------------
Master Servicer to the Trustee pursuant to Section 8.01 of these Standard Terms,
providing such information as is set forth in Exhibit C.
"Monthly P & I Advance": An advance of funds by the Master Servicer
----------------------
pursuant to the Master Servicing Agreement or by any other institution pursuant
to an Advance Claims Endorsement to pay delinquent principal and interest
installments (net of related servicing fees) on any Mortgage Loan.
"Mortgage Loans": The loans evidenced by the Notes and Security
---------------
Instruments referred to in the Mortgage Loan Schedule attached to the Indenture
Supplement, respectively, which the Issuer has pledged to the Trustee as
collateral for the Securities pursuant to the Indenture.
"Mortgagor Bankruptcy Bond": A surety bond, insurance policy, letter of
-------------------------
credit or other credit instrument, in form and substance satisfactory to the
Issuer and the Trustee, issued by an insurance company, surety company, or by a
bank, trust company, savings and loan association or other financial institution
acceptable to the Trustee providing coverage against loss resulting from any
order, decree or other action by a court in connection with a bankruptcy
proceeding that reduces the amount of indebtedness secured by any Security
Instrument or the interest rate of any Note.
"NMSC": National Mortgage Securities Corporation, a Virginia corporation.
----
"Non-Recoverable Advance": As provided in Section 5.01(f) to these
------------------------
Standard Terms.
"Officer's Certificate": A certificate signed by a Servicing Officer.
----------------------
"Opinion of Counsel": A written opinion of counsel to the Master Servicer,
-------------------
which opinion is as to form and substance, and is issued by counsel, reasonably
acceptable to the Trustee.
"Performance Letter": A letter of credit issued by an entity satisfactory
-------------------
to the Rating Agency in such amount and substance that is satisfactory to the
Rating Agency and in substantially the form attached hereto as Exhibit A, duly
executed by it and delivered to the
-3-
<PAGE>
Trustee (i) contemporaneously with the execution and delivery of the Master
Servicing Agreement, (ii) in substitution for a cash deposit or insurance policy
pursuant to Section 6.05 hereof or (iii) in substitution for a Performance
Letter delivered to the Trustee contemporaneously with the execution and
delivery of the Master Servicing Agreement.
"Purchase Price": With respect to a Mortgage Loan purchased from the Trust
---------------
Estate, an amount equal to the unpaid Principal Balance of the Mortgage Loan
plus thirty days interest thereon at the Note Rate.
"Rating Agency": The rating agency or rating agencies that rate the
--------------
Securities at the request of the Issuer at the time of issuance of the
Securities.
"REMIC Election": An election to treat the collateral pledged to secure
--------------
the Securities as a real estate mortgage investment conduit (a "REMIC") pursuant
to Section 860D of the Code.
"REMIC Pool": The collateral pledged to secure the Securities as to which
----------
a REMIC Election is made.
"Sales/Servicing Agreement": Each of the several Sales/Servicing
--------------------------
Agreements between a Servicer and NMSC under which the Servicer has agreed to
service certain Mortgage Loans, and in case any of such Sales/Servicing
Agreements is hereafter terminated, any substitute Sales/Servicing Agreement
between NMSC and a substitute servicer, together with all amendments or
supplements to the foregoing as may be entered into from time to time.
"Securities": Obligations of the Issuer secured by Mortgage Loans and
----------
issued pursuant to the terms of an Indenture.
"Securityholder": A Person whose name appears as the holder of Securities
--------------
on the register maintained by or for an Issuer.
"Series Year": The twelve month period following the date of the Master
-----------
Servicing Agreement and each anniversary thereof.
"Servicer": The mortgage loan servicing company that has entered into a
---------
Sales/Servicing Agreement with NMSC and is servicing Mortgage Loans, its
successors and permitted assigns, and any other Person that shall enter into a
substitute Sales/Servicing Agreement with the consent of the Master Servicer.
"Servicing Officer": Any officer of the Master Servicer who is responsible
------------------
for the administration and supervision of servicing of the Mortgage Loans.
"Special Hazard Insurance Policy": A casualty insurance policy, in form
-------------------------------
and substance satisfactory to the Issuer and the Trustee, insuring the Trustee
against loss sustained by damage or destruction to Mortgaged Premises, which
loss is not insured by a Hazard Insurance Policy or Flood Insurance Policy (if
any).
-4-
<PAGE>
"Standard Terms to Master Servicing Agreement" or "Standard Terms": These
-----------------------------------------------------------------
Standard Terms and all exhibits, schedules and appendices hereto, as amended and
supplemented from time to time.
"Trust Estate": The corpus of the trust created by the Indenture
-------------
consisting of (i) the Mortgage Loans, excluding all payments of principal and
interest due before the Cut-Off Date; (ii) such funds as from time to time are
held in the Collateral Proceeds Account; (iii) such funds as from time to time
are held in the Master Custodial P & I Account and the Custodial P & I Accounts;
(iv) the Mortgaged Premises that secure a Mortgage Loan which have been acquired
by foreclosure (of any type) or by deed-in-lieu of foreclosure; (v) any
Insurance Proceeds or Liquidation Proceeds to which the holder of any Mortgage
Loan or the Trustee is entitled; (vi) all right, title and interest of the
Issuer under the Master Servicing Agreement; (vii) all rights of NMSC pursuant
to the respective Sales/Servicing Agreements relative to the Servicers'
obligations with respect to the Mortgage Loans; and (viii) any other tangible or
intangible property, rights or benefits that were granted, assigned or conveyed
to the Trustee under the Indenture as collateral for the Securities.
"Trust Receipt": As provided in Section 3.04(b) of these Standard Terms.
--------------
"Trustee": The trustee acting as "trustee" for the Bondholders under the
--------
Indenture.
"Trustee Mortgage Loan File": As provided in Section 2.01 of these
---------------------------
Standard Terms.
ARTICLE II
ASSIGNMENT OF MORTGAGE LOANS AND TRUST ESTATE;
DOCUMENTS TO BE DEPOSITED WITH THE TRUSTEE
Section 2.01. Trustee to Retain Possession of Documents.
-----------------------------------------
Concurrently with the execution and delivery of the Master Servicing
Agreement, the Issuer shall have pledged, transferred and assigned to the
Trustee, as collateral for the payment of principal and interest on the
Securities, all right, title and interest of the Issuer in and to the Trust
Estate. Prior to or contemporaneously with the execution of such Master
Servicing Agreement, the Issuer shall have delivered or caused to be delivered
to the Trustee or its agent with respect to each Mortgage Loan certain documents
and instruments as specified in Section 362 of the Sales/Servicing Agreement,
which shall be referred to in these Standard Terms as the "Trustee Mortgage Loan
File." The Trustee or its agent shall retain possession of these documents and
shall release them only under the circumstances specified herein.
Section 2.02. Trustee to Retain Possession of Certain Insurance Policies
----------------------------------------------------------
and Documents.
- -------------
The Trustee or its agent shall also retain possession and custody of the
originals of any Special Hazard Insurance Policy, any Pool Insurance Policy, any
Mortgagor Bankruptcy Bond, any Performance Letter, and any certificates of
renewal as to the foregoing as may be issued from time to time as contemplated
by these Standard Terms. Until the Bonds have been paid in
-5-
<PAGE>
full and the Issuer otherwise has fulfilled its obligations under the Indenture,
the Trustee or its agent shall also retain possession and custody of each
Trustee Mortgage Loan File in accordance with and subject to the terms and
conditions of the Indenture. The Master Servicer shall promptly deliver to the
Trustee or its agent upon the execution or receipt thereof, the originals of any
Special Hazard Insurance Policy, any Pool Insurance Policy, any Mortgagor
Bankruptcy Bond, any Performance Letter, and any certificates of renewal
thereof, and such other documents or instruments that constitute portions of the
Trustee Mortgage Loan File that come into the possession of the Master Servicer
from time to time.
ARTICLE III
ADMINISTRATION AND SERVICING OF MORTGAGE LOANS
Section 3.01. General Duties of Master Servicer.
---------------------------------
For and on behalf of the Trustee, NMSC, and the Securityholders, the Master
Servicer shall supervise, administer, monitor and oversee the servicing of the
Mortgage Loans by the Servicers and the observance and performance by the
Servicers of all services, duties, responsibilities and obligations that are to
be observed or performed by them under their respective Sales/Servicing
Agreements. Upon the request of a Servicer, the Master Servicer will not
unreasonably withhold its consent to the transfer of the servicing obligations
from such Servicer to another Servicer, provided, however, that the new Servicer
executes a new Sales/Servicing Agreement whose servicing provisions are
identical to the previous Sales/Servicing Agreement, and the new Servicer has
been approved by the Master Servicer. Moreover, the Master Servicer agrees to
maintain the Master Servicer Errors and Omissions Policy and the Master Servicer
Fidelity Bond in full force and effect throughout the term of the Master
Servicing Agreement.
During the term of the Master Servicing Agreement the Master Servicer shall
consult fully with each of the Servicers as may be necessary from time to time
to perform and carry out the Master Servicer's obligations hereunder and
receive, review and evaluate all reports, information and other data that are
provided to the Master Servicer by each Servicer and otherwise exercise
reasonable efforts to cause each Servicer to perform and observe the covenants,
obligations and conditions to be performed or observed by it under its
Sales/Servicing Agreement. If any Servicer materially breaches or fails to
perform or observe any material obligations or conditions of its Sales/Servicing
Agreement, the Master Servicer shall promptly deliver to the Trustee, NMSC and
the Issuer an Officer's Certificate certifying that such Servicer is in default
and describing the events and circumstances giving rise to the default and what
action (if any) has been, or is to be, taken by the Servicer to cure the default
and setting forth what action (if any) that the Master Servicer plans to take.
Section 3.02. Termination of Sales/Servicing Agreements.
-----------------------------------------
If the Master Servicer or the Trustee terminates any Sales/Servicing
Agreement with a Servicer, the Master Servicer, at its election, shall enter
into a substitute servicing agreement
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<PAGE>
with NMSC, or arrange for another mortgage loan service company acceptable to it
to do so, under which such mortgage loan service company or the Master Servicer,
as the case may be, shall assume, satisfy, perform and carry out all
liabilities, duties, responsibilities and obligations that are to be, or
otherwise were to have been, satisfied, performed and carried out by the
Servicer under such terminated Sales/Servicing Agreement, regardless whether
such liabilities, duties, responsibilities or obligations shall have accrued
before or after the termination of such Sales/Servicing Agreement, including but
not limited to, the Servicer's obligations to purchase certain Mortgage Loans
and any other liabilities or obligations of the Servicer arising from any breach
by the Servicer of any representations and warranties contained in its
Sales/Servicing Agreement causing a material impairment in the value of such
Mortgage Loans. If the Master Servicer does not elect to enter into a substitute
Sales/Servicing Agreement with NMSC, the Master Servicer shall nevertheless
assume, satisfy, perform and carry out all obligations which otherwise were to
have been satisfied, performed and carried out by the Servicer under such
terminated Sales/Servicing Agreement until a substitute mortgage loan service
company has been appointed and designated and a substitute Sales/Servicing
Agreement has been entered into by NMSC and such substitute Servicer.
Section 3.03. Enforcement of "Due-on-Sale" Clauses; Assumption Agreements.
-----------------------------------------------------------
(a) Enforcement. Each Sales/Servicing Agreement requires the Servicer to
-----------
enforce any "due-on-sale clause" contained in any Note or Security Instrument to
the extent that such enforcement is permissible by law and governmental
regulation and will not adversely affect or jeopardize coverage under any
Primary Mortgage Insurance Policy or any Pool Insurance Policy; provided,
however, that if the Servicer reasonably expects that the enforceability or
legality of the "due-on-sale clause" will be litigated, the Servicer shall
promptly notify the Master Servicer and each Mortgage Insurer and obtain their
written approval before initiating any enforcement proceedings. The Master
Servicer shall grant such approval if, in its and its counsel's reasonable
judgment, such enforcement is permissible by law and governmental regulation,
will not adversely affect or jeopardize coverage under any Primary Mortgage
Insurance Policy or any Pool Insurance Policy and will not result in advances by
or other expenses to the Servicer or the Master Servicer that are not
recoverable from Liquidation Proceeds or Insurance Proceeds relating to the
Mortgage Loan.
(b) Assumptions. Subject to the limitation specified in Subsection 3.03(a)
-----------
above and to such other limitations or conditions in the related Sales/Servicing
Agreement, whenever a Mortgaged Premises is to be conveyed to a Person by a
Borrower and the Person is to enter into an assumption agreement or modification
agreement or supplement to the Note or the Security Instrument that requires the
signature of the Trustee, or if an instrument of release signed by the Trustee
is required to release the Borrower from liability on the Mortgage Loan, the
Master Servicer shall obtain from the Servicer the assumption agreement with the
Person to whom the Mortgage Premises is to be conveyed and such modification
agreement or supplement to the Note or the Security Instrument or other
instruments as are reasonable or necessary to carry out the terms of the Note or
the Security Instrument or otherwise to comply with any applicable laws
regarding assumptions and/or the transfer of the Mortgaged Premises to such
Person, and deliver them to the Trustee for signature with a letter explaining
the nature of such documents and the
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reason or reasons why the Trustee's signature is required. With such letter, the
Master Servicer shall also deliver to the Trustee an Officer's Certificate from
the applicable Servicer as provided in Section 741 of the Sales/Servicing
Agreement. Upon the closing of the transactions contemplated by such documents,
the Master Servicer shall cause the fully executed and duly recorded (where
appropriate) originals of the assumption agreement, the release (if any) or the
modification or supplement to the Note or the Security Instrument to be
delivered to the Trustee or its agent and deposited in the Trustee Mortgage Loan
File.
Section 3.04. Release of Trustee Mortgage Loan Files.
--------------------------------------
(a) Payments-in-Full. The Sales/Servicing Agreement requires that upon the
----------------
payment-in-full of any Mortgage Loan, the Servicer shall deposit the proceeds
thereof in the appropriate Custodial P & I Account maintained by the Servicer,
and prepare and deliver to the Master Servicer with respect to the Security
Instrument which secures the Note, a request for reconveyance, deed or
conveyance or release or satisfaction of the Security Instrument or other
appropriate instrument releasing the Mortgaged Premises from the lien
represented by the Security Instrument. Upon receipt of the certificate (RMIC
Form 340) as required by the Sales/Servicing Agreement, the Master Servicer
shall deliver such certificate to the Trustee, together with a certificate of a
Servicing Officer setting forth the Master Servicer's recommendations as to what
action should be taken by the Trustee in respect of such documents. In the
event the Trustee Mortgage Loan File with respect to such Mortgage Loan is
released, the Trustee or its agent shall send such Trustee Mortgage Loan File to
the Servicer for recordation of the mortgage release or satisfaction in the
proper recording office.
(b) Release of Trustee Mortgage Loan File for Other Purposes. From time to
--------------------------------------------------------
time as is appropriate for the servicing or foreclosure of a Mortgage Loan or
the acquisition of Mortgaged Premises in lieu of foreclosure or for the making
of any claim against or collection under any Mortgage Insurance Policy, Flood
Insurance Policy, Hazard Insurance Policy, Mortgagor Bankruptcy Bond, the
Special Hazard Insurance Policy, the Servicer Fidelity Bond, the Servicer Errors
and Omissions Policy, or for purposes of effecting a partial release of any
Mortgaged Premises from the lien of the Security Instrument or for making any
corrections to the Note or the Security Instrument or other documents
constituting the Trustee Mortgage Loan File, the Master Servicer shall deliver
to the Trustee, with a copy to the Issuer, (i) an officer's certificate of the
Servicer (RMIC Form 340) as required under Section 731 or Section 742 of the
Sales/Servicing Agreement, and shall certify as to the reason for such release
and that such release will not invalidate the insurance coverage provided in
respect to the Mortgage Loan under any of the foregoing insurance policies, and
(ii) an executed Trust Receipt (RMIC Form 347), executed by an officer of the
Lender or by a Servicing Officer, designating whether the Trustee Mortgage File,
or the part thereof requested, shall be released to the Master Servicer or the
Servicer. Upon receipt of the foregoing, the Issuer will cause the Trustee or
its agent to deliver to the Master Servicer, or the Servicer if the Master
Servicer so requests, the Trustee Mortgage Loan File or documents so requested.
Subject to the further limitations in this Section 3.04(b) below, the Master
Servicer shall cause the Trustee Mortgage Loan File or documents so released to
be returned to the Trustee or its agent when the need therefor by the Master
Servicer or Servicer no longer exists, unless the Mortgage Loan is liquidated
and the proceeds thereof are
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<PAGE>
deposited in a Custodial P & I Account, in which case the Issuer shall cause the
Trustee to deliver the Trust Receipt to the Master Servicer. If a Servicer at
any time seeks to initiate a foreclosure proceeding in respect of any Mortgaged
Premises as authorized by its Sales/Servicing Agreement, the Master Servicer
shall deliver or cause to be delivered to the Trustee, for signature, as
appropriate, any court pleadings, request for trustee's sale or other documents
necessary to such foreclosure or to any legal action brought to obtain judgment
against the Borrower on the Note or the Security Instrument or to obtain a
deficiency judgment or to enforce any other remedies or rights provided by the
Note or the Security Instrument or otherwise available at law or in equity.
Together with such documents or pleadings, the Master Servicer shall deliver to
the Trustee an officer's certificate of the Servicer as required under Section
731 or Section 742 of the Sales/Servicing Agreement requesting that such
pleadings or documents be executed by the Trustee and a Servicing Officer shall
certify as to the reason such documents or pleadings are required and that the
execution and delivery thereof by the Trustee will not invalidate the insurance
coverage under the Special Hazard Insurance Policy, Flood Insurance Policy (if
any), or Mortgagor Bankruptcy Bond or invalidate or otherwise affect the lien of
the Security Instrument except for the termination of such lien upon completion
of the foreclosure. Notwithstanding the foregoing, the Master Servicer shall
cause possession of any Trustee Mortgage Loan File or documents therein which
have been released by the Trustee to be retained at all times by the Master
Servicer or the Servicer, if appropriate, unless (i) the Mortgage Loan has been
liquidated and the Insurance Proceeds or Liquidation Proceeds relating to the
Mortgage Loan have been deposited in a Custodial P & I Account or (ii) the
Trustee Mortgage Loan File or documents have been delivered to an attorney or to
a public trustee or other public official as required by law for purposes of
initiating or pursuing legal action or other proceedings for the foreclosure of
the Mortgage Premises and the Master Servicer has delivered to the Trustee a
certificate of a Servicing Officer certifying as to the name and address of the
Person to which the Trustee Mortgage Loan File or documents were delivered and
the purpose or purposes of such delivery.
Section 3.05. Documents, Records and Funds in Possession of Master
----------------------------------------------------
Servicer to be Held for Trustee.
- -------------------------------
Notwithstanding other provisions of the Master Servicing Agreement, the
Master Servicer shall transmit to the Trustee as required by the Master
Servicing Agreement and the Sales/Servicing Agreement all documents and
instruments coming into the possession of the Master Servicer from time to time
and shall account fully to the Trustee and NMSC for all funds received by the
Master Servicer in the Master Custodial P & I Account or which otherwise are
collected by the Master Servicer as Liquidation Proceeds or Insurance Proceeds
in respect of any Mortgage Loan. All Trustee Mortgage Loan Files, Lender
Mortgage Loan Files and funds collected or held by, or under the control of, the
Master Servicer in respect of any Mortgage Loans, whether from the collection of
principal and interest payments or from Liquidation Proceeds or Insurance
Proceeds, including but not limited to, any funds on deposit in the Master
Custodial P & I Account and in any Custodial P & I Account, shall be held by the
Master Servicer for and on behalf of the Trustee, NMSC and the Securityholders
and shall be and remain the sole and exclusive property of the Trustee. The
Master Servicer also agrees that it shall not create, incur or subject any
Lender Mortgage Loan File, Trustee Mortgage Loan File or funds
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<PAGE>
that are deposited in any Custodial P & I Account or Custodial T & I Reserve
Account, in the Master Custodial P & I Account and or any funds that otherwise
are or may become due or payable to the Trustee, to any claim, lien, security
interest, judgment, levy, writ of attachment or other encumbrance, nor assert by
legal action or otherwise any claim or right of set-off against any Lender
Mortgage Loan File or Trustee Mortgage Loan File or any funds collected on, or
in connection with, a Mortgage Loan except, however, that the Master Servicer
shall be entitled to set-off against and deduct from any such funds any amounts
that are properly due and payable to the Master Servicer under this Agreement.
The Master Servicer hereby acknowledges that concurrently with the execution of
the Master Servicing Agreement, the Trustee shall have acquired and shall hold a
security interest in the Lender Mortgage Loan Files and Trustee Mortgage Loan
Files (and in all Mortgage Loans represented by such Lender Mortgage Loan Files
and Trustee Mortgage Loan Files) and in all funds now or hereafter held by, or
under the control of, a Servicer or the Master Servicer that are collected by
any Servicer or the Master Servicer in connection with the Mortgage Loans,
whether as scheduled installments or principal or interest or as full or partial
prepayments of principal or interest or as Liquidation Proceeds or Insurance
Proceeds, and in all proceeds of the foregoing and proceeds of proceeds (but
excluding any Servicing Fees or other amounts to which the Servicer is entitled
under its Sales/Servicing Agreement or the Master Servicer is entitled to under
the Master Servicing Agreement); and the Master Servicer agrees that so long as
the Mortgage Loans are assigned to and held by the Trustee, all Lender Mortgage
Loan Files and Trustee Mortgage Loan Files (and any documents or instruments
constituting a part of such files) and such funds which come into the possession
or custody of, or which are subject to the control of, the Master Servicer shall
be held by the Master Servicer for and on behalf of the Trustee as the Trustee's
agent and bailee for purposes of perfecting the Trustee's security interest
therein as provided by the applicable uniform commercial code or other laws.
Section 3.06. Modification of Requirements to Servicing Provisions of the
-----------------------------------------------------------
Sales/Servicing Agreement.
- -------------------------
Subject to the prior written approval of the Issuer, NMSC and the Trustee,
the Master Servicer from time to time may issue to any Servicer, to the extent
permitted by such Servicer's Sales/Servicing Agreement, such modifications and
amendments to the Sales/Servicing Agreement that the Master Servicer deems
necessary or appropriate to confirm or carry out more fully the intent and
purpose of the Sales/Servicing Agreement and the duties, responsibilities and
obligations to be performed by the Servicer thereunder. Such consents by the
Issuer, NMSC and the Trustee will not be unreasonably withheld. Prior to the
issuance of any modification or amendment, the Master Servicer shall deliver to
the Trustee, with a copy to the Issuer and NMSC, an Officer's Certificate
setting forth (i) the provision that is to be modified or amended, (ii) the
modification or amendment that the Master Servicer desires to issue and (iii)
the reason or reasons for such proposed amendment or modification.
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<PAGE>
Section 3.07. Waiver by master Servicer of Certain Requirements in the
--------------------------------------------------------
Sales/Servicing Agreement.
- -------------------------
In addition to any other powers granted the Master Servicer, the Master
Servicer is specifically hereby authorized, in its sole discretion, to waive
compliance by any Servicer with:
(a) the requirement in the Sales/Servicing Agreement that the Fidelity Bond
and Errors and Omissions Policy name NMSC and the Master Servicer as additional
obligees or insureds;
(b) the requirement in the Sales/Servicing Agreement that the Errors and
Omissions Policy contain a severability of interests provisions; and
(c) the requirement in the Sales/Servicing Agreement that property taxes
and insurance premiums be collected on any Mortgage Loan with a Loan-to-Value in
excess of 80% and deposited in a Custodial T & I Account either (i) on a loan by
loan basis for a Servicer whose Errors and Omissions Policy is in an amount
equal to at least $1 million or (ii) on an over-all Servicer basis for a
Servicer whose Errors and Omissions Policy is in an amount equal to at least $5
million.
Section 3.08. Assignment of Sales/Servicing Agreements.
----------------------------------------
Pursuant to Section 140 of the Sales/Servicing Agreement, without the
consent of the Master Servicer, a Servicer may not transfer or assign all or
substantially all of its rights, benefits or privileges under any
Sales/Servicing Agreement to any other Person nor delegate to or subcontract
with, nor authorize or appoint, any other Person to perform all or substantially
all of the Servicer's duties, covenants or obligations to be performed by the
Servicer under the Sales/Servicing Agreement. The Master Servicer agrees that
on written application from a Servicer, it will consider promptly such a request
to transfer and/or delegate and will not unreasonably withhold its consent to
such transfer and/or delegation.
Section 3.09. Representations and Warranties.
------------------------------
The Master Servicer hereby represents and warrants to the Issuer, the
Trustee, NMSC, and the underwriters for the Securities, and at all times during
the terms of each Master Servicing Agreement shall be deemed to represent and
warrant, that:
(a) The Master Servicer has been duly incorporated and is validly existing
in good standing under the laws of the jurisdiction of its incorporation and is
duly qualified to do business as a foreign corporation and is in good standing
under the laws of each jurisdiction in which the performance of its duties under
the Master Servicing Agreement would require such qualification; the Master
Servicer holds all material licenses, certificates and permits from all
governmental authorities necessary for the conduct of its business and has
received no notice of proceedings relating to the revocation of any such
license, certificate or permit, which singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would materially affect the
conduct of the business, results of operations, net worth or condition
(financial or
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<PAGE>
otherwise) of the Master Servicer; and the Master Servicer will have the
corporate power and authority to conduct its business as required or
contemplated by the Master Servicing Agreement and to perform the covenants and
obligations to be performed by it hereunder.
(b) The execution and delivery by the Master Servicer of the Master
Servicing Agreement is within the corporate power of the Master Servicer and has
been duly authorized by all necessary corporate action on the part of the Master
Servicer; and neither the execution and delivery of the Master Servicing
Agreement by the Master Servicer, nor the consummation by the Master Servicer of
the transactions herein contemplated, nor compliance with the provisions hereof
by the Master Servicer, will (1) conflict with or result in a breach of, or will
constitute a default under, any of the provisions of the certificate of
incorporation or by-laws of the Master Servicer or any law, governmental rule or
regulation, or any judgment, decree or order binding on the Master Servicer or
its properties, or any of the provisions of any indenture, mortgage, deed of
trust, contract or other instrument to which the Master Servicer is a party or
by which it is bound or (2) result in the creation or imposition of any lien,
charge or encumbrance upon any of its properties pursuant to the terms of any
such indenture, mortgage, deed of trust, contract or other instrument.
(c) The Master Servicing Agreement has been duly executed and delivered
by the Master Servicer and constitutes a legal, valid and binding agreement of
the Master Servicer enforceable against the Master Servicer in accordance with
its terms, subject to enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency or other similar laws affecting the enforcement of
creditors' rights generally and to general principles of equity.
Section 3.10. Closing Certificate and Opinion.
-------------------------------
On or before the date of closing of a series of Securities, the Master
Servicer will deliver to the Issuer an Officer's Certificate, dated the date of
the closing of such series of Securities, confirming that the representations
and warranties contained in Section 3.09 are true and correct as of such date,
and that the underwriters of such series of Securities shall be entitled to rely
thereon. The Master Servicer shall cause to be delivered to the underwriters of
such series of Securities an opinion of counsel, dated the date of closing on
such series of Securities, in form and substance satisfactory to such
underwriters, as to the due authorization, execution and delivery of the Master
Servicing Agreement by the Master Servicer and the enforceability thereof. The
Master Servicer shall also deliver a Certificate dated the date of closing on
such series of Securities, signed by two officers, as required under the
Indenture, to the effect that:
(a) No Event of Default by the Master Servicer has occurred hereunder;
(b) To the extent required by any Rating Agency rating the Securities, a
guarantee of the performance of certain obligations of the Master Servicer
hereunder has been provided; and
(c) The Master Servicer maintains such errors and omissions insurance and
fidelity bond coverage as is required hereunder.
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ARTICLE IV
INSURANCE AND BONDS
Section 4.01. Maintenance of Insurance and Collections Thereunder.
---------------------------------------------------
The Master Servicer shall maintain and keep in full force and effect during
the term of the Master Servicing Agreement each Pool Insurance Policy (and any
endorsement thereto), the Mortgagor Bankruptcy Bond and the Special Hazard
Insurance Policy and shall provide from time to time to the surety or insurer
under each such policy or bond all reports and other information required
thereby; provided, however, that the Trustee must pay when due the premium or
premiums due each surety or insurance company issuing such policies and bonds.
In the event (i) that any insurance company or surety company for any of the
foregoing policies or bonds shall be unable to fulfill its obligations under
such bond or policy, or (ii) any Rating Agency shall lower or propose to lower
the rating on the Securities due to the financial condition of such insurance
company or surety company, the Master Servicer upon approval of the Trustee
shall terminate such policy or bond and secure replacement policies in form and
substance satisfactory to the Trustee with coverage comparable to that which has
been terminated. A replacement policy or bond shall also be obtained for any
such policy or bond that is cancelled or terminated for any reason.
Notwithstanding the foregoing, if the cost of any such replacement policy or
bond shall be greater than the cost of the policy or bond that has been
terminated, then the Master Servicer shall notify NMSC of such increase in cost
and, if NMSC does not agree to pay such additional amounts, the amount of
coverage shall be reduced to a level such that the premium therefor shall not
exceed the cost of premium for the policy or bond that has been terminated,
provided that the Rating Agency has consented to such reduction in coverage. If
NMSC does agree to pay an amount in excess of the cost of the original policy or
bond, the Master Servicer shall structure the replacement policy or bond so that
failure by NMSC to pay such additional amount will not affect the amount of
coverage obtainable for the cost of the original policy or bond.
Section 4.02. Payment of Premiums.
-------------------
No later than 15 Business Days prior to the date thereof, the Master
Servicer shall deliver to the Trustee a statement of the premium due on the
Mortgagor Bankruptcy Bond (if any), each Pool Insurance Policy (if any), and the
Special Hazard Policy (if any), together with an Officer's Certificate
certifying that the amount reflected on the statement is correct and is properly
due and payable and instructing the Trustee to pay such amounts to the
appropriate insurer or surety. The Master Servicer shall obtain and provide to
the Trustee from each such insurer or surety a renewal policy or a certificate
evidencing that such policy or bond has been renewed and will remain in force
for the renewal period stated thereon.
Section 4.03. Presentment of Claims and Collection of Proceeds.
------------------------------------------------
The Master Servicer shall prepare and present on behalf of the Trustee and
the Securityholders all claims under any Mortgagor Bankruptcy Bond, each
Servicer Fidelity Bond,
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<PAGE>
each Servicer Errors and Omissions Policy, and the Special Hazard Insurance
Policy, and take such actions (including the negotiation, settlement, compromise
or enforcement of the insured's claim) as shall be necessary to realize recovery
under such bonds and policies. Any proceeds disbursed to the Master Servicer in
respect of such policies or bonds shall be promptly deposited in the Master
Custodial P & I Account upon receipt, except for any amounts realized under the
Special Hazard Insurance Policy that are to be applied to the repair or
restoration of the related property as a condition requisite to the presentation
of claims on the related Mortgage Loan to the insurer under any applicable
Mortgage Insurance Policy. The Master Servicer shall also assure that each
Servicer prepares and presents on behalf of the Trustee and the Securityholders
all claims under each applicable Mortgage Insurance Policy, and that each
Servicer takes such other actions (including the negotiation, settlement,
compromise and enforcement of the insured's claim) as is necessary to realize
recovery under such policies and that all claim proceeds are deposited in the
appropriate Custodial P & I Account.
Section 4.04. Renewal of Primary Mortgage Insurance Policies.
----------------------------------------------
The Master Servicer may, subject to applicable law, direct any Servicer to
renew any Primary Mortgage Insurance Policy on any Mortgage Loan not insured by
the Mortgage Insurer that issued the Pool Insurance Policy which covered such
Mortgage Loan with a Primary Mortgage Insurance Policy issued by the Mortgage
Insurer which issued the Pool Insurance Policy relating to such Mortgage Loan.
ARTICLE V
ADVANCES BY MASTER SERVICER FOR P & I
ADVANCES, ATTORNEYS' FEES AND OTHER COSTS
Section 5.01. Recoverable Advances.
--------------------
The Master Servicer shall be required to make the following advances with
respect to Mortgage Loans to the extent the Master Servicer determines, in good
faith, that an advance made hereunder is recoverable from Insurance Proceeds,
Liquidation Proceeds or subsequent payments by the Borrower of the related
Mortgage Loans. In the event the Master Servicer determines that all, or a
portion, of any advance required by this Section 5.01 is not so recoverable, the
Master Servicer shall promptly deliver to the Trustee and to NMSC an Officer's
Certificate setting forth the reasons for such determination.
(a) Monthly P & I Advance. The Master Servicer shall make a Monthly P & I
---------------------
Advance to the Master Custodial P & I Account, in the amount, if any, of the
aggregate scheduled installments of principal and interest (less applicable
servicing fees) on the Mortgage Loans that were due on the Due Date but which
were not received or advanced by the Servicers and remitted to the Master
Custodial P & I Account on or prior to the Master Servicer Remittance Date. Each
Monthly P & I Advance shall be remitted in immediately available funds to the
Master Custodial P & I Account no later than the Master Servicer Remittance Date
for the month in which the Due Date occurs. Prior to the close of business on
the Master Servicer
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Remittance Date, the Master Servicer shall determine whether and to what extent
any Servicers have failed to make any advances of principal or any interest in
respect to scheduled installments of principal and interest that were due on the
Due Date and whether such deficiencies, if advanced by the Master Servicer,
would be reimbursable from Insurance Proceeds, Liquidation Proceeds or
subsequent payments by the Borrower of the related Mortgage Loans.
(b) Advances for Attorneys' Fees. To the extent not made by the
----------------------------
Servicer, the Master Servicer shall make advances from time to time for
attorneys' fees and court costs incurred, or which reasonably can be expected to
be incurred, for the foreclosure of any Mortgage Loan or for any transaction in
which the Trustee is expected to receive a deed-in-lieu of foreclosure.
(c) Advances for Repairs and Restoration. In the event that any
------------------------------------
Mortgaged Premises shall be damaged or destroyed, and if the Servicer fails to
advance the funds necessary to repair or restore the damaged or destroyed
Mortgaged Premises, then the Master Servicer shall advance such funds and take
such other action as if necessary to repair or restore the damage or loss.
(d) Advances for Taxes and Insurance Premiums. To the extent a Servicer
-----------------------------------------
is required to advance funds sufficient to pay the taxes or insurance premiums
with respect to a Mortgage Loan pursuant to Section 980 of the Sales/Servicing
Agreement and the Servicer fails to make such advance, the Master Servicer shall
advance such funds and take such steps as are necessary to pay such taxes or
insurance premiums.
(e) Advances for Amounts Collected by Servicer but Not Remitted. In the
-----------------------------------------------------------
event that any Servicer fails to remit to the Master Custodial P & I Account on
or before the Master Servicer Remittance Date, the full amount of the funds in
the custody or under the control of the Servicer that the Servicer is required
to remit under its Sales/Servicing Agreement, then the Master Servicer, upon and
subject to the terms of this Article V, shall promptly advance and remit to the
Master Custodial P & I Account an amount equal to the required remittance.
Section 5.02. Non-Recoverable Advances.
------------------------
Any Monthly P & I Advance or other advance previously made by the Master
Servicer under this Section 5.01 which the Master Servicer shall ultimately
determine in its good faith judgment to be not recoverable from Insurance
Proceeds, Liquidation Proceeds or subsequent payments by the Borrower shall be a
Non-Recoverable Advance. The determination by the Master Servicer that it has
made a Non-Recoverable Advance shall be evidenced by an Officer's Certificate of
the Master Servicer promptly delivered to the Trustee and NMSC setting forth the
reasons for such determination. Following the Trustee's receipt of the
Officer's Certificate and NMSC's acceptance of such certification, the Master
Servicer shall be entitled to reimbursement for such Non-Recoverable Advance as
provided in Section 7.02 of these Standard Terms.
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ARTICLE VI
PAYMENTS BY MASTER SERVICER
Section 6.01. General.
-------
The Master Servicer shall establish and maintain a Master Custodial P&I
Account into which the Master Servicer shall deposit payments, collections and
advances with respect to each Mortgage Loan until such amounts are transferred
to the Collateral Proceeds Account as provided herein. The Master Servicer may
elect to use a single Master Custodial P&I Account for more than one series of
Securities. Each separate Master Custodial P&I Account shall reflect the
custodial nature of the account and that all funds in such account are held in
trust for the benefit of the Trustee. In the event that Master Servicer does
not timely receive each installment of principal and interest in respect of any
Mortgage Loan, the Master Servicer shall advance funds as provided in Section
5.01 hereof.
Section 6.02. Deposits Into Master Custodial P&I Account.
------------------------------------------
On the 15th calendar day of each month (or the next preceding business day
if such 15th day is not a business day) the Master Servicer shall withdraw from
each Custodial P&I Account maintained by a Servicer and deposit into the Master
Custodial P&I Account an amount with respect to each Mortgage Loan serviced by
such Servicer equal to:
(a) All scheduled installments of principal and interest on the Mortgage
Loan received or advanced by the Servicer net of (a) Servicing Fees due the
Servicer and (b) any funds to be applied by the Trustee from the Buy-Down Fund;
(b) Any amounts in respect of a Mortgage Loan representing late payments
of principal and interest to the extent such amounts exceed outstanding
unreimbursed advances, if any, of the Servicer with respect to such Mortgage
Loan, net of Servicing Fees due the Servicer;
(c) Each principal prepayment (whether full or partial) on such Mortgage
Loans (net of Servicing Fees due the Servicer), together with any interest
applicable to such principal prepayments which has been paid by the Borrower;
and
(d) Any Insurance Proceeds (to the extent not applied to the repair or
restoration of the Mortgaged Property) or Liquidation Proceeds (net of Servicing
Fees due the Servicer).
Section 6.03. Withdrawals From Master Custodial P&I Accounts.
----------------------------------------------
On a daily basis, to the extent of amounts received in respect of a
Mortgage Loan from Insurance Proceeds, Liquidation Proceeds, or late payments
made by the Borrower, the Master Servicer may withdraw from the appropriate
Master Custodial P&I Account any amounts advanced by the Master Servicer for
principal and interest on such Mortgage Loan for which the Master Servicer is
entitled to reimbursement under these Standard Terms.
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If at any time the funds in any Master Custodial P&I Account exceed the
limits of the FDIC insurance on such account, the Master Servicer shall promptly
withdraw such excess funds from such account and transfer such excess funds to
the appropriate Collateral Proceeds Account or a separate Master Custodial P&I
Account. Any funds deposited in a Master Custodial P&I Account, may be invested
to the next Master Servicer Remittance Date only in "Eligible Investments" as
defined in the Indenture.
On or prior to the Master Servicer Remittance Date, the Master Servicer, to
the extent not remitted prior to the Master Servicer Remittance Date, shall
remit from the funds in each Master Custodial P&I Account by wire transfer (or
as otherwise instructed by the Trustee) in immediately available funds to the
Collateral Proceeds Account an amount equal to the aggregate of the following:
(i) All scheduled installments of principal and interest on the
applicable Mortgage Loans received or advanced by a Servicer or the Master
Servicer that were due on the Due Date, net of (a) Servicing and Master
Servicing Fees due the Servicer and the Master Servicer, respectively, and
(b) any funds to be applied by the Trustee from the Buy-Down Fund;
(ii) All amounts received in respect of the applicable Mortgage
Loans representing late payments of principal and interest due to the
extent such amounts exceed outstanding unreimbursed advances, if any, of
the Servicer or the Master Servicer with respect to such Mortgage Loans,
net of Servicing and Master Servicing Fees;
(iii) Each principal prepayment (whether full or partial) on the
applicable Mortgage Loans, together with interest calculated to the end of
the calendar month during which such principal prepayment shall have been
received by the Servicer as required by Section 6.04 (including the portion
of the interest which shall have been paid by the Borrower and the
interest, if any, which shall have been paid by the Master Servicer
pursuant to Section 6.04 hereof), net of Servicing and Master Servicing
Fees; and
(iv) Any Insurance Proceeds in respect of such Mortgage Loans (to
the extent not applied to the repair or restoration of the Mortgaged
Property) or Liquidation Proceeds together with interest calculated to the
end of the calendar month during which such Insurance Proceeds or
Liquidation Proceeds shall have been received by the Servicer as required
by Section 6.04 (including the portion of the interest which shall have
been paid from such proceeds and the interest, if any, which shall have
been paid by the Master Servicer pursuant to Section 6.04 hereof), net of
Servicing and Master Servicing Fees.
Section 6.04. Payments for Additional Interest In Connection with Certain
-----------------------------------------------------------
Prepayments and Other Liquidations.
- ----------------------------------
In the event that any Mortgage Loan is paid in full following the 6th day
preceding the Master Servicer Remittance Date or partially prepaid, whether from
payment by the Borrower, Liquidation Proceeds, Insurance Proceeds or otherwise
and such prepayment in full or partial
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prepayment does not include interest on the outstanding principal balance
through and including the last day of the month during which such prepayment is
made, then to the extent that such interest shall not have been paid by the
Servicer and deposited in the appropriate Custodial P & I Account on or before
the Master Servicer Remittance Date next succeeding the date of such full or
partial prepayment, the Master Servicer shall pay and deposit into the Master
Custodial P & I Account, on or before the Master Servicer Remittance Date of the
month in which such prepayment is remitted to the Trustee an amount equal to
such additional interest (net of Servicing Fees). Such payment will not be
considered a Non-Recoverable Advance; and in case of such payment, the Master
Servicer shall not be entitled to any recovery or reimbursement from the
Trustee, NMSC, or the Securityholders, but may seek and obtain recovery from the
Servicer that failed to make the payment through legal action or otherwise, to
the extent provided in the related Sales/Servicing Agreement.
In the event of any prepayment in full of any Mortgage Loan on or before
the 6th day preceding the Master Servicer Remittance Date, such prepayment shall
be deemed to have been made as of the last day of the preceding calendar month,
so that no interest will be deemed to have accrued on such Mortgage Loan with
respect to the calendar month in which the prepayment in full occurs and the
Master Servicer will not be obligated to deposit to the Master Custodial P&I
Account any interest actually accrued and paid on such Mortgage Loan with
respect to the calendar month in which such prepayment occurs.
Section 6.05. Payments for the Repurchase of Loans.
------------------------------------
In lieu of the Issuer providing a mortgage repurchase bond to secure the
Securities, the Master Servicer agrees to the following condition to secure its
obligation under Section 3.02 of these Standard Terms. Section 3.02
specifically requires the Master Servicer, upon a default or termination of a
Servicer under a Sales/Servicing Agreement, to assume the Servicer's obligations
under the Sales/Servicing Agreement, including the obligation to purchase
certain Mortgage Loans pursuant to Section 630 of the Sales/Servicing Agreement.
The Master Servicer's obligation to repurchase Mortgage Loans securing a series
of Securities is specifically limited to repurchase in the event that insurance
proceeds otherwise payable have been denied on the grounds of fraud and is
further limited at any one time to the First Year Repurchase Limit set forth in
the Master Servicing Agreement for the period ending one year from the date of
the Master Servicing Agreement (the "First Year"); to the Second Year Repurchase
Limit set forth in the Master Servicing Agreement (less any amounts already paid
by the Master Servicer under this Section 6.05) for the period beginning one
year from the date of this Master Servicing Agreement and ending one year
thereafter (the "Second Year"); to the Third Year Repurchase Limit set forth in
the Master Servicing Agreement (less any amount already paid by the Master
Servicer under this Section 6.05) for the period beginning two years from the
date of this Master Servicing Agreement and ending three years thereafter (the
"Third Year"); to the Fourth Year Repurchase Limit set forth in the Master
Servicing Agreement (less any amounts already paid by the Master Servicer under
this Section 6.05) for the period beginning three years from the date of this
Master Servicing Agreement and ending four years thereafter (the "Fourth Year");
and to the Fifth Year Repurchase Limit set forth in the Master Servicing
Agreement (less any amounts already paid by the Master Servicer under this
Section 6.05) for the period beginning four years
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from the date of this Master Servicing Agreement and ending five years
thereafter (the "Fifth Year"). Any payments by the Master Servicer under this
Section 6.05 will not be considered a Non-Recoverable Advance. The obligations
of the Master Servicer under this Section 6.05 are further secured by the
Performance Letter. In lieu of a Performance Letter, or partially in lieu of a
Performance Letter, (i) the Master Servicer may put up cash into a fund held by
the Trustee, (ii) the Master Servicer may pledge an insurance policy
satisfactory to the Rating Agencies or (iii) the Issuer may structure into the
Securities a subordinated amount designated for this repurchase obligation.
Section 6.06. Payments for Losses due to Mortgagor Bankruptcies.
-------------------------------------------------
In lieu of the Issuer providing a mortgagor bankruptcy insurance policy,
the Master Servicer will pledge to the Trustee a Mortgagor Bankruptcy Fund to
protect against any losses to the Securityholders from the reduction of the
principal balance or interest rate on any Note by a bankruptcy court. To the
extent the Trustee draws on such Mortgagor Bankruptcy Fund, such loss will be
borne by the Master Servicer, and will not be considered a Non-Recoverable
Advance. The amount of the Mortgagor Bankruptcy Fund will be specified in the
Indenture for the Securities.
ARTICLE VII
COMPENSATION AND DISBURSEMENTS TO MASTER SERVICER
Section 7.01. Compensation to the Master Servicer.
-----------------------------------
As compensation for the services provided by the Master Servicer under the
Master Servicing Agreement, the Master Servicer shall be entitled to receive as
a monthly servicing fee in respect of each Mortgage Loan, payable from the
Master Custodial P & I Account, an amount equal to the product of the "Master
Servicing Fee Percentage" set forth in the Master Servicing Agreement multiplied
by the outstanding principal amount of each Mortgage Loan determined as of the
Due Date of the month prior to the month for which this fee is due, divided by
12. In return for its obligations under Section 6.04, the Master Servicer is
entitled to receive as additional compensation, any interest earnings on the
Master Custodial P & I Account, and any interest received on Liquidation
principal that is received in the same month that such Liquidation principal is
remitted to the Trustee. The Master Servicer is permitted to pay itself the
monthly servicing fee within five Business Days after the Master Servicer has
delivered to the Trustee the Monthly Remittance Report for such month; provided,
however, that the Master Servicer shall not be entitled to receive any monthly
servicing fee until the month during which the first Master Servicer Remittance
Date occurs.
Section 7.02. Authorized Disbursements from the Collateral Proceeds
-----------------------------------------------------
Account.
- -------
Following receipt by the Trustee of the Officer's Certificate required by
Section 5.01(f) and NMSC's acceptance thereof, not later than five Business Days
following the Trustee's receipt of the Monthly Remittance Report from the Master
Servicer, the Trustee shall reimburse
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or pay the Master Servicer or each Servicer, as appropriate, from the Collateral
Proceeds Account (or any other account established by the Indenture) to the
extent not previously reimbursed or paid, the amounts set forth below in the
following descending order of priority prior to the disbursement of any funds to
the Securityholders:
(a) Any advances made by the Master Servicer under the Master Servicing
Agreement that are Non-Recoverable Advances; and
(b) Any advances made by any Servicer under its Sales/Servicing Agreement
that are Non-Recoverable Advances.
ARTICLE VIII
REPORTS AND CERTIFICATE TO TRUSTEE
Section 8.01. Reports to the Issuer and Trustee.
---------------------------------
Not later than the day of each calendar month specified in Subsections (a)
or (b) below (or the previous Business Day if such specified day is not a
Business Day), the Master Servicer shall forward to the Issuer and the Trustee
the following statements and reports, each certified as true and correct by a
Servicing Officer:
(a) On or by the 16th day of each month, the Master Servicer shall notify
the Trustee of the amount of funds to be remitted by the Master Servicer to the
Trustee on the Master Servicer Remittance Date.
(b) On or by the 20th day of each month, the reports described in
paragraphs A, B, C, D and E on Exhibit B, together with an Officer's Certificate
---------
certifying that all such information is correct, and that the Master Servicer
has complied with all aspects of the Master Servicing Agreement.
The reports constituting the Monthly Remittance Report shall be current as
of the first day of such month. The Master Servicer shall use its best efforts
promptly to provide such reports to the Rating Agencies rating the Securities.
Section 8.02. Annual Officer's Certificate as to Compliance.
---------------------------------------------
The Master Servicer shall deliver to the Trustee on or before April 30 of
each year, an Officer's Certificate with respect to each Master Servicing
Agreement entered into by the Issuer, NMSC, and the Master Servicer on or before
the preceding December 31, certifying that (i) such Servicing Officer has
reviewed the activities of the Master Servicer during the calendar year or
portion thereof and its performance under each such Master Servicing Agreement,
(ii) to the best of such Servicing Officer's knowledge, based on such review,
the Master Servicer has performed and fulfilled its duties, responsibilities and
obligations under each such Master Servicing Agreement in all material respects
throughout such year, or, if there has been a default in the fulfillment of any
such duties, responsibilities or obligations, specifying each such default known
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to such Servicing Officer and the nature and status thereof, (iii) a Servicing
Officer has conducted an examination of the activities of each Servicer during
the preceding calendar year and its performance under the Sales/Servicing
Agreement, (iv) a Servicing Officer has examined each Servicer Fidelity Bond and
Servicer Errors and Omissions Policy and that such bond and policy are in effect
and conform to the requirements of the related Servicing Agreement and (v) the
Master Servicer has received from each Servicer such Servicer's annual audited
financial statements and other information as required by Section 111 of the
Sales/Servicing Agreement and (vi) to the best of such Servicing Officer's
knowledge, based on such examination, the Servicer has performed and fulfilled
its duties, responsibilities and obligations under its Sales/Servicing Agreement
in all material respects throughout such year, or, if such duties,
responsibilities or obligations, specifying each such default known to such
Servicing Officer and the nature and status thereof.
Section 8.03. Annual Independent Public Accountants' Servicing Report.
-------------------------------------------------------
The Master Servicer at its expense shall cause its independent certified
public accountants, which shall be a firm of national reputation, to furnish a
single statement to the Trustee and to the Issuer on or before April 30 of each
year relative to all series of Securities for which a Master Servicing Agreement
has been executed to the effect that such firm has examined certain records and
documents prepared by the Master Servicer relating to the Master Servicer's
performance of its obligations required by Articles Four and Five of the
Standard Terms to each Master Servicing Agreement entered into on or before the
preceding December 31, and that, on the basis of such examination, such firm is
of the opinion that the Master Servicer's activities have been conducted in
compliance with each such Master Servicing Agreement, except for (i) such
exceptions as such firm believes to be immaterial and (ii) such other exceptions
as are set forth in such statement. Such examination shall be performed using
various statistical sampling techniques to verify the performance or occurrence
of the following: (i) receipt of the detail and certification reports and the
custodial account reconciliation reports from the Servicers each month, (ii)
reconciliation and verification of the Servicer remittance each month, (iii)
reconciliation of the funds transferred to the Trustee by Bond Series, (iv)
receipt of a copy of the Servicer's Errors and Omissions Policy, Fidelity Bond
Policy and ACH Authorization forms, and (v) maintenance by the Master Servicer
of an Errors and Omission Policy in favor of [_________________] and a Fidelity
Bond Policy in favor of [________], which additionally names [______________] as
a named insured. In addition, such examination shall include inquiries of the
Trustee, to determine whether the Trustee has received (i) a report setting
forth the principal balance and monthly remittance amount for each loan by the
15th day of each month and (ii) funds due from the Master Servicer by the 20th
day of each month. Upon request by the Trustee, NMSC, or the Issuer, the Master
Servicer shall furnish to the Trustee copies of the audit report for each
Servicer as shall be required by the Sales/Servicing Agreement with such
Servicer.
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ARTICLE IX
MERGER OR CONSOLIDATION OF MASTER SERVICER; RESIGNATION
Section 9.01. Merger or Consolidation.
-----------------------
Anything herein to the contrary notwithstanding, any corporation into which
the Master Servicer may be merged or consolidated or any corporation resulting
from any merger or consolidation to which the Master Servicer shall be a party
or any corporation succeeding to the business of the Master Servicer shall be
the successor of the Master Servicer hereunder without the execution or filing
of any paper or any further act on the part of any of the parties hereto.
Section 9.02. Assignment or Transfer of Master Servicing Agreement.
----------------------------------------------------
The Master Servicer may, with the prior written consent of the Issuer,
NMSC, and the Trustee, assign or transfer all of its rights and obligations
under the Master Servicing Agreement, provided, however, that the Trustee shall
not consent to such an assignment or transfer unless it shall have received
written notice from the Rating Agency that rated the Series to which the Master
Servicing Agreement relates that such assignment or transfer will not result in
a reduction of the rating assigned by the Rating Agency to such Series.
Section 9.03. Resignation of Master Servicer.
------------------------------
The Master Servicer shall not resign from the obligations and duties hereby
imposed on it except upon determination that its duties hereunder are no longer
permissible under applicable law. Any such determination permitting the
resignation of the Master Servicer shall be evidenced by an opinion of counsel
to such effect delivered to the Trustee. No such resignation shall become
effective until the Trustee shall have assumed or a successor master servicer
shall have been appointed by the Trustee and until such successor shall have
assumed the Master Servicer's responsibilities and obligations under the Master
Servicing Agreement.
ARTICLE X
DEFAULT
Section 10.01. Events of Default by Master Servicer.
------------------------------------
The happening of any of the following events shall constitute a default
("Event of Default") by the Master Servicer under the Master Servicing
Agreement:
(a) Any failure on the part of the Master Servicer to make when due any
of the advances or to perform any other obligations required under Article V
above;
(b) Any failure on the part of the Master Servicer to make when due any
payment or to perform any other obligations required under Article VI above;
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(c) Any failure on the part of the Master Servicer duly to observe or
perform in any material respect any covenants or conditions (other than those
referred to in Section 10.01(a) and 10.01(b) above) to be performed or observed
by it in the Master Servicing Agreement which continues uncured for a period of
45 days after the date on which the Trustee shall have given to the Master
Servicer written notice of such failure and demanding that such default be
cured;
(d) Any involuntary petition in bankruptcy or any other similar petition
shall be filed against the Master Servicer seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future federal, state or other statute, law or
regulation, and shall remain undismissed for 60 days, or if any custodian,
trustee, receiver or liquidator of all or any substantial part of the assets of
the Master Servicer shall be appointed or take possession of such assets without
the consent or acquiescence of the Master Servicer and such appointment remains
unvacated for 60 days;
(e) The Master Servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of, or relating to, the Master
Servicer, or all or substantially all of the Master Servicer's property;
(f) The Master Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations; or
(g) Any Rating Agency shall lower or give written notice to lower the
then current rating of the Securities because the existing or prospective
financial condition or mortgage loan servicing capability of the Master Servicer
is insufficient to maintain the then current rating of the Securities.
In case of any Event of Default, the Trustee or the Issuer upon written
approval of the Trustee may terminate all authority, power and rights of the
Master Servicer under the Master Servicing Agreement, and all rights, power and
authority of the Master Servicer shall automatically and without further action
by any Person pass to and be vested in the Trustee. Without limiting the
generality of the foregoing, the Trustee is hereby authorized and empowered to
execute and deliver on behalf of the Master Servicer, as the Master Servicer's
attorney-in-fact, any and all documents and other instruments, and to do or
accomplish all other acts or things that in the Trustee's sole and absolute
judgment may be necessary or appropriate to effect such termination.
Notwithstanding the foregoing, upon any such termination the Master Servicer
shall do all things reasonably requested by the Trustee to effect the
termination of the Master Servicer's responsibilities, rights and powers
hereunder, including, without limitation, providing to the Trustee all documents
and records reasonably requested by the Trustee to enable the Trustee or its
designee to assume and carry out the duties and obligations that otherwise were
to have been performed and carried out by the Master Servicer hereunder but for
such termination.
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Section 10.02. Other Remedies of Trustee.
-------------------------
Upon any Event of Default, the Trustee, in addition to the rights specified
in Section 10.01, shall have the right, in its own name and as "Trustee", to
take all actions now or hereafter existing at law, in equity or by statute to
enforce its rights and remedies, of the Securityholders (including the
institution and prosecution of all judicial, administrative and other
proceedings and the filings of proofs of claim and debt in connection
therewith). No remedy provided for by the Master Servicing Agreement shall be
exclusive of any other remedy, and each and every remedy shall be cumulative and
in addition to any other remedy and no delay or omission to exercise any right
or remedy shall impair any such right or remedy or shall be deemed to be a
waiver of any Event of Default.
ARTICLE XI
DUTIES OF THE MASTER SERVICER
Section 11.01. General Bond Administration.
---------------------------
The Master Servicer shall perform (or supervise the performance of) the
following duties on behalf of the Issuer (unless otherwise specified, references
in this subsection are to Sections of the Indenture and each capitalized term
used in this Section 11.01 and not otherwise defined shall have the meaning
ascribed to it in the Indenture):
(i) cause each Paying Agent other than the Trustee to execute and
deliver to the Trustee an instrument specifying the responsibilities of
such Paying Agent in accordance with the provisions of Section 9.03
(Section 9.03);
(ii) prepare and cause to be delivered to the Trustee the annual
written compliance statement (Section 9.09);
(iii) compensate and reimburse the Trustee pursuant to Section 7.07
(Section 7.07);
(iv) prepare (or cause to be prepared) any supplemental indenture or
amendment to the Indenture to be executed subsequent to the Closing Date
(and documents required to accompany them) as the Issuer or Trustee may
determine to be necessary or appropriate (Sections 10.01 and 10.02);
(v) prepare and deliver notices to the Trustee for execution as
necessary, distribute such notices and prepare such other information and
documents as may be required in connection with any optional redemption of
the Bonds (Sections 11.01, 11.03 and 11.04);
(vi) advise the Issuer with respect to any proposed removal of the
Trustee and, if a successor or additional trustee is to be appointed,
solicit and review bids, examine the qualifications of bidders, submit to
the Issuer a list of qualified candidates from which
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such appointment may be made by the Issuer and draft any notice required in
connection with the appointment of a successor trustee (Sections 7.10 and
7.11);
(vii) if a successor to the Bond Registrar is to be appointed
subsequent to the Closing Date, solicit and review bids, examine the
qualifications of bidders, and submit to the Issuer a list of qualified
candidates from which such appointment may be made by the Issuer (Section
3.05);
(viii) subsequent to the Closing Date, prepare, file, record or
deliver such continuation statements, instruments of further assurance and
such other instruments as required by Section 9.05 of the Indenture and
submit such instruments to the Issuer for execution and filing or delivery
and advise the Issuer when the Master Servicer becomes aware of a necessity
to take other action to protect the Trust Estate (Section 9.05);
(ix) cause all Opinions of Counsel required by Section 9.06 to be
prepared and delivered to the Issuer for delivery to the Trustee (Section
9.06);
(x) prepare documents necessary for the satisfaction and discharge
of the Indenture, submit such documents to the Issuer and (upon execution
by the Issuer) deliver and (as necessary) record such documents (Section
5.01);
(xi) prepare and deliver to the Issuer for distribution any
notifications required in connection with any election by the Issuer to
defease the Bonds (Section 5.01);
(xii) prepare all documents required in connection with any Grant
of Substitute Mortgage Collateral and submit such documents to the Issuer
for execution, obtain any Opinions of Counsel required in connection
therewith, and prepare any notices required in connection with the issuance
of a replacement Guaranteed Investment Contract and deliver such notices to
the Issuer (Section 3.11);
(xiii) prepare (or cause to be prepared) certificates or opinions
with respect to compliance with the Indenture and submit such certificates
or opinions to the Issuer for execution (Section 15.01 );
(xiv) prepare and cause to be filed all reports required to be
filed pursuant to Section 8.04 (Section 8.04);
(xv) compile and render all Accounting Reports, Interest Payment
Date Reports and Collateral Valuation Reports required pursuant to Section
12.09 (Section 12.09);
(xvi) cause to be delivered to the Trustee the Yearly Accountants'
Certificates (Sections 13.01(f));
(xvii) make any required corrections in Collateral Valuation and
Accounting Reports (Section 13.01(h));
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(xviii) cause to be delivered to the Trustee all Accountants'
Certificates, written instructions, and other documents required to
disburse excess funds or release Mortgage Collateral from the Trust Estate
(Section 13.05); and
(xix) notify the Rating Agencies of any events of which the Issuer
is required to give notice pursuant to the Indenture.
Section 11.02. REMIC Bond Administration.
-------------------------
With respect to a Series of Bonds for which the Issuer has made (or intends
to make) a REMIC Election, the Master Servicer shall perform (or supervise the
performance of), on behalf of the Issuer, the following duties relating to
federal, state, and local tax compliance of the REMIC:
(i) the preparation of and filing (after execution by the Issuer
or other person, as necessary) with the Internal Revenue Service or other
taxing authority any and all tax or information returns or reports required
to be filed by the REMIC Pool that are due after the Closing Date,
including any Forms 8281 (collectively, "Post-Closing Reports and Returns")
in the time and manner required by the Code, applicable regulations or
procedures thereunder, or equivalent provisions of state or local law;
(ii) the making of an election for the REMIC Pool to be treated as
a REMIC in the time and manner required by the Code or applicable
regulations or procedures thereunder;
(iii) the provision of advice and instruction to the Issuer as to
how to conduct the affairs of the REMIC Pool in a manner consistent with
applicable provisions of the Code and regulations thereunder in connection
with maintaining the status of the REMIC Pool as a REMIC (including with
respect to the termination of the REMIC and, in connection with the
termination of the REMIC, the preparation of a plan of liquidation of the
REMIC Pool at the appropriate time);
(iv) the acquisition and retention of ownership of a nominal
principal amount of any residual interest Bond or residual interest
certificate and the performance of the duties of the REMIC "tax matters
person" under the Code;
(v) the provision of advice and instruction to the Issuer with
respect to all requirements for any exemption from withholding (that the
Master Servicer reasonably believes to be available) of federal or state
income taxes with respect to the Bonds including the filing of any related
Post-Closing Reports and Returns and the acquisition
Section 11.03. Additional Bond Administration Rights and Duties of Master
----------------------------------------------------------
Servicer.
- --------
The Master Servicer will provide such additional reports, statements and
other information relating to the Securities to the Issuer, the Trustee, or the
Securityholders, as may reasonably be requested by the Issuer.
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Section 11.04. Additional Costs Payable by Master Servicer.
-------------------------------------------
The Master Servicer will pay all Trustee's fees associated with the Series
Bonds and will bear all costs associated with the performance of the Master
Servicer's duties hereunder, including (but not limited to) accountants' fees,
attorneys' fees, internal costs, and costs associated with the Performance
Letter and the Pool Insurance Policies.
ARTICLE XII
MISCELLANEOUS
Section 12.01. No Assignment or Delegation of Duties by Master Servicer.
--------------------------------------------------------
Except as expressly provided in the Master Servicing Agreement, the Master
Servicer shall not assign or transfer any of its rights, benefits or privileges
under the Master Servicing Agreement to any other Person, or delegate to or
subcontract with, or authorize or appoint any other Person to perform any of the
duties, covenants or obligations to be performed by the Master Servicer
hereunder, without the prior written consent of the Trustee, and any agreement,
instrument or act purporting to effect any such assignment, transfer, delegation
or appointment shall be void. Notwithstanding the foregoing, the Master
Servicer shall have the right without the prior written consent of the Trustee
and hereby agrees to delegate to or subcontract with or authorize or appoint an
affiliate of the Master Servicer to perform and carry out any duties, covenants
or obligations to be performed and carried out by the Master Servicer hereunder.
In no case, however, except an assignment pursuant to Section 9.02 of these
Standard Terms, shall any permitted assignment relieve the Master Servicer of
any liability to the Trustee, NMSC, or the Issuer hereunder.
Section 12.02. Binding Nature of Agreement; Assignment.
---------------------------------------
The Master Servicing Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
Section 12.03. Entire Agreement.
----------------
The Master Servicing Agreement, which includes these Standard Terms and the
Sales/Servicing Agreement, contains the entire agreement and understanding among
the parties hereto with respect to the subject matter hereof, and supersedes all
prior and contemporaneous agreements, understanding, inducements and conditions,
express or implied, oral or written, or any nature whatsoever with respect to
the subject matter hereof. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof.
Section 12.04. Amendments and Supplements.
--------------------------
These Standard Terms may not be modified, amended or superseded other than
by an agreement in writing among the Master Servicer, NMSC, and the Issuer which
has been
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approved in writing by the Trustee. The Master Servicer shall use its best
efforts promptly to provide notice to the Rating Agency if these Standard Terms
are so modified, amended or superseded.
Section 12.05. Controlling Law.
---------------
The Master Servicing Agreement and all questions relating to its validity,
interpretation, performance and enforcement, shall be governed by and construed,
interpreted and enforced in accordance with the laws of the Commonwealth of
Virginia, notwithstanding any Virginia or other choice-of-law provisions to the
contrary.
Section 12.06. Indulgences, No Waivers.
-----------------------
Neither the failure nor any delay on the part of a party to exercise any
right, remedy, power or privilege under the Master Servicing Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, remedy, power or privilege preclude any other or further exercise of the
same or of any other right, remedy, power or privilege, nor shall any waiver of
any right, remedy, power or privilege with respect to any occurrence be
construed as a waiver of such right, remedy, power or privilege with respect to
any other occurrence. No waiver shall be effective unless it is in writing and
is signed by the party asserted to have granted such waiver.
Section 12.07. Titles Not to Affect Interpretation.
-----------------------------------
The titles of paragraphs and subparagraphs contained in these Standard
Terms are for convenience only, and they neither form a part of these Standard
Terms nor are they to be used in the construction or interpretation hereof.
Section 12.08. Attorney's Fees.
---------------
If either party hereto shall bring suit against the other as a result of
any alleged breach or failure by the other party to fulfill or perform any
covenants or obligations under the Master Servicing Agreement or in any deed,
instrument or other document delivered pursuant hereto, or to seek declaratory
relief as to the rights or obligations of either party hereto, then in such
event, the prevailing party in such action shall, in addition to any other
relief granted or awarded by the Court, be entitled to judgment for reasonable
attorneys' fees incurred by reason of such action and all costs of suit and
those incurred in preparation thereof, at both trial and appellate levels.
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<PAGE>
Exhibits to
Standard Terms to Master Servicing Agreement
--------------------------------------------
Exhibits Title
- -------- -----
A Performance Letter
B Monthly Remittance Report
EXHIBIT A
PERFORMANCE LETTER
_____________, 19__
[Trustee]
[Address]
[Address]
Attn: ______________________
Re: Our Transferable Letter of Credit No. ____________
Section 6.05 of Standard Terms to Master Servicing Agreement
------------------------------------------------------------
Gentlemen:
By order of our client, [____________] (the "Master Servicer"), we hereby
open our Transferable Letter of Credit No. ____________ in favor of
"[_____________], Trustee", as the trustee under the indenture referred to in
the second paragraph hereof, for an amount not to exceed in the aggregate U.S.
$_____________ (_______________________ U.S. Dollars), effective immediately.
This Letter of Credit is relative to, but does not incorporate by such
reference, that certain indenture dated as of ___________________, 198_, as
supplemented by the Series Supplement dated as of ____________ 1, 198_, between
[Issuer] [NMSC] [(the "Issuer")] and you (the "Indenture").
Funds under this Letter of Credit are available to you as such trustee or
to your successor as such trustee under the Indenture (collectively, "Trustee")
to whom this Letter of Credit shall be transferred by you as hereafter provided
(collectively the "Trustee") against Trustee's sight draft(s) drawn on us,
mentioning thereon our Credit No. ___________. Each such draft must be
accompanied by Trustee's signed written statement to us, certifying (i) that the
officer executing
A-1
<PAGE>
the certificate is a duly authorized officer of the drawer of the draft, (ii)
that the drawer of the draft is the Trustee under the Indenture and (iii) that
the amount of the accompanying draft represents the amount due and payable under
the Master Servicing Agreement dated as of ___________, 19__, between the Master
Servicer and, _______________ and the Issuer (the "Master Servicing Agreement")
for which Trustee is entitled to draw under this Letter of Credit because the
Master Servicer has not complied with the terms of Section 6.05 of the Master
Servicing Agreement.
We may at any time terminate this Letter of Credit upon at least sixty (60)
days prior written notice to Trustee delivered via registered mail specifying
that this Letter of Credit shall expire on a date not less than sixty (60) days
from the date such notice is delivered to Trustee, whereupon this Letter of
Credit shall expire on such date with the same effect as if such expiry date had
originally been set forth herein, provided, however, that upon Trustee's receipt
of such notification, Trustee will have a minimum of sixty (60) days to draw one
sight draft for the unutilized balance of this Letter of Credit, mentioning
thereon our Credit No. __________, and accompanied by Trustee's signed written
statement to us certifying (i) that the officer executing the certificate is a
duly authorized officer of the drawer of the draft, and (ii) that the drawer of
the draft is the Trustee under the Indenture.
This Letter of Credit may be transferred in its entirety for the then
relevant amount to your successor as trustee under the Indenture, and said
transfer will become effective upon our receipt at our ____________ office, New
York, New York, Attention: _____________________ of (a) the original of this
Letter of Credit, and (b) our transfer form properly filled out and signed by
you. If we receive here Trustee's sight drafts(s) and statement(s) in
conformity with the terms and conditions hereof, we will honor the same by
payment in immediately available funds upon the due presentation and delivery of
such documents. Where any date mentioned herein shall fall on a day when our
said office is closed for business, such date shall be extended to 3:00 p.m. New
York time on the next following day on which such office is open for business.
We hereby agree to provide written notice to you of any change in the
rating of our commercial paper.
The Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1983 Revision), International Chamber of Commerce
Publication No. 400, and, to the extent not inconsistent with said Uniform
Customs, the laws of the State of New York, including the New York Uniform
Commercial Code.
Very truly yours,
_______________________
Authorized Signature
A-2
<PAGE>
EXHIBIT B
MONTHLY REMITTANCE REPORT
The Monthly Remittance Report forwarded to the Issuer and the Trustee for
Mortgage Loans will set forth the information set forth below.
A. Calculation of the monthly remittance to the Trustee (including
payments of principal and interest and all other cash adjustments) (i)
for each Mortgage Loan, and (ii) for all Mortgage Loans in the
aggregate.
B. The aggregate remaining scheduled principal balance of the Mortgage
Loans.
C. The calculation of the Master Servicing Fee due for the current month.
D. For any uninsured loss, a schedule setting forth the loan number, the
Borrower's last name, the amount of the uninsured loss and an
explanation;
E. If requested by the Issuer, for any principal prepayment (curtailment
or liquidation), a schedule setting forth the loan number, Borrower's
last name, the amount of the principal prepayment, and, if a
curtailment, whether such curtailment is deemed to have been paid
prior to the first day of the remittance month.
F. Calculation and required balance of the Month-End Reserve Fund.
B-1
<PAGE>
Exhibit 99.3
MASTER SERVICING AGREEMENT
between
[__________],
Master Servicer
and
NATIONAL MORTGAGE OWNER TRUST SERIES [ ]-[ ]
Issuer
ASSET BACKED NOTES,
SERIES [ ]-[ ]
[ ], [ ]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS................................................................ 1
AGREEMENT............................................................... 1
Section 1. Definitions.................................................. 1
Section 2. Duties and Responsibilities of the Master Servicer........... 2
Section 3. Compensation................................................. 2
Section 4. Standard Terms............................................... 2
Section 5. Distributions................................................ 3
Section 6. Term......................................................... 3
Section 7. Note Insurer................................................. 3
Section 8. Representations and Warranties............................... 3
Section 9. Reserved..................................................... 3
Section 10. Notices..................................................... 3
Section 11. Binding Nature of Agreement; Assignment..................... 4
Section 12. Entire Agreement............................................ 4
Section 13. Controlling Law............................................. 4
Section 14. Indulgences Not Waivers..................................... 4
Section 15. Titles Not to Affect Interpretation......................... 5
Section 16. Provisions Separable........................................ 5
Signatures.............................................................. 9
Schedule I. Mortgage Collateral
Schedule II. Servicing Agreement(s)
</TABLE>
<PAGE>
This Master Servicing Agreement, entered into as of this 1st day of [ ],
[ ], between National Mortgage Owner Trust [ ]-[ ], a Delaware business
trust (the "Issuer") and [__________], a [______] corporation (the "Master
Servicer"), recites and provides as follows:
RECITALS
The Issuer has entered into an indenture, dated as of [ ] [ ], [ ](the
"Indenture"), between the Issuer and [Trustee], as trustee (the "Trustee"),
under which the Issuer will issue its Asset Backed Notes, Series [ ]-[ ] (the
"Notes"). The Notes are to be secured by Mortgage Loans identified on Schedule
I hereto that have been transferred to the Issuer by National Mortgage
Securities Corporation, a Virginia corporation (the "Depositor") pursuant to a
contribution agreement dated [ ], [ ] (the "Contribution Agreement").
The Depositor acquired to Mortgage Loans from [__________], a [___________]
corporation (in such capacity, the "Seller") pursuant to an Asset Sales
Agreement between the Issuer and the Seller, dated [ ], [ ], (the "Sales
Agreement"). Collection of the scheduled principal and interest payments on the
Mortgage Loans, plus amounts representing prepayments and liquidation proceeds,
will be paid to the Trustee on behalf of the Issuer for the payment of the
principal and interest on the Notes.
The Seller or an affiliate has entered into [a] Servicing Agreement[s] (the
"Servicing Agreement[s]"), with [a][various[ servicer[s] acceptable to the
Master Servicer (the "Servicer[s]") and the Seller has assigned its interests in
the Servicing Agreement[s] to the Depositor who has assigned it to the Issuer.
Under the terms of [the][its] Servicing Agreement, [each] Servicer has agreed to
service the mortgage loans in accordance with the terms of the Servicing
Agreement. To provide for the administration and servicing of the Mortgage
Loans that secure payment of the Notes, including the orderly and timely
collection of scheduled payments of principal and interest and the advance of
such payments by the Servicer to the extent recoverable from Liquidation
Proceeds, Insurance Proceeds, and subsequent payments by the Borrower, the
Issuer desires to retain the Master Servicer to act as a "master servicer" for
all Mortgage Loans and to manage and supervise the administration and servicing
of the Mortgage Loans by the Servicer for the benefit of the Issuer, the
Trustee, [the Note Insurer] and the Noteholders.
AGREEMENT
NOW THEREFORE, in consideration of the mutual promises, covenants,
representations and warranties hereinafter set forth and for good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Issuer and the Master Servicer agree as follows:
Section 1. Definitions.
--------- -----------
The following terms shall have the meanings ascribed to them below, unless
the context or use otherwise clearly indicates another or different meaning and
intent. Moreover, such meanings are equally applicable to the singular and the
plural forms of such terms, as the context
<PAGE>
may require. Capitalized terms not otherwise defined in this Agreement shall
have the meanings ascribed to them in the Standard Terms to Master Servicing
Agreement, or the Indenture.
"Agreement": This Master Servicing Agreement, as amended from time to
time.
"Cut-Off Date": [ ] 1, [ ].
"Master Servicer Remittance Date": The Business Day immediately preceding
each Payment Date for the Notes.
"Rating Agencies": [Those nationally recognized statistical rating
organizations that are rating the Notes at the request of the Issuer.]
"Servicer[s]": [Collectively, each Servicer that is a party to a Servicing
Agreement.]
"Servicing Agreement[s]": [Each of] the Servicing Agreement[s] listed on
Schedule II hereto.
- -----------
"Standard Terms": The Standard Terms to Master Servicing Agreement, August
1, 1999, Edition.
Section 2. Duties and Responsibilities of the Master Servicer.
---------- --------------------------------------------------
The Master Servicer hereby agrees to supervise, administer, monitor and
oversee the servicing of the Mortgage Loans by the Servicer[s], for and on
behalf of the Trustee, the Issuer, [the Note Insurer] and the Noteholders, in
accordance with the provisions of this Agreement (including those provisions
contained in the Standard Terms, as amended or supplemented from time to time).
Section 3. Compensation.
---------- ------------
In consideration of the services rendered under this Master Servicing
Agreement, the Master Servicer shall be entitled to the compensation provided
for in Section 7.01 of the Standard Terms. For the purposes of computing
compensation under such section the "Master Servicing Fee Percentage" shall be
0.[ ]%. The Master Servicer also shall be entitled to earnings on the funds
provided by it hereunder.
Section 4. Standard Terms.
---------- --------------
The Master Servicer acknowledges that the Standard Terms, a copy of which
has been received by the Master Servicer, prescribes additional terms and
conditions under which the Master Servicer is to supervise the servicing of the
Mortgage Loans. The Master Servicer agrees to perform and observe the duties,
responsibilities and obligations that are to be performed and observed by the
Master Servicer under the Standard Terms as such Standard Terms may be amended
and supplemented from time to time, and that the Standard Terms, as amended or
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<PAGE>
supplemented, are and shall be a part of this Agreement to the same extent as if
set forth herein in full. The Master Servicer acknowledges that it has received
a copy of the edition of the Standard Terms that is in effect as of the date of
this Agreement and warrants that it has read and is fully familiar with the
terms thereof.
Section 5. Distributions.
---------- -------------
Section 6. Term.
---------- ----
Section 7. Note Insurer.
---------- ------------
Section 8. Representations and Warranties.
---------- ------------------------------
In addition to the representations and warranties made and given in the
Standard Terms, the Master Servicer represents and warrants to the Issuer, the
Trustee and the Underwriter for the Notes, and at all times during the term of
this Agreement shall be deemed to represent and warrant, that the Master
Servicer has examined the Servicing Agreement[s], that the Master Servicer is
familiar with the terms thereof and that [each] Servicer has been approved by
and is acceptable to the Master Servicer. In addition, the Master Servicer
hereby represents and warrants that it has not taken any action in performing or
attempting to perform any of its rights or obligations under this Agreement
which is unreasonable, arbitrary or capricious, or which has not been taken in
good faith or performed in a commercially reasonable manner.
Section 9. Reserved.
---------- --------
Section 10. Notices.
----------- -------
All notices, requests, demands and other communications required or
permitted under the Master Servicing Agreement shall be in writing and shall be
deemed to have been duly given, made and received when delivered against receipt
or upon actual receipt of registered or certified mail, postage prepaid, return
receipt requested, addressed as set forth below:
(a) If to the Issuer:
National Mortgage Owner Trust [ ]-[ ]
c\o [ ]
[ ]
Attention:
(b) If to the Master Servicer:
[__________]
[__________]
[__________]
Attention: Servicing Department
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<PAGE>
Any party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
Section 11. Binding Nature of Agreement; Assignment.
----------- ---------------------------------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. The
Trustee, in its capacity as trustee under the Indenture, and the Note Insurer
are intended third-party beneficiaries of this Agreement. This Agreement inures
to the benefit of the Trustee and the Note Insurer (and after a Note Insurer
Event of Default has occurred, the Trustee, shall be able to enforce all of the
rights of the Issuer hereunder).
Section 12. Entire Agreement.
----------- ----------------
This Agreement and the Standard Terms (which includes the Servicing
Agreement[s]) contain the entire agreement and understanding between the parties
hereto with respect to the subject matter hereof and supersede all prior and
contemporaneous agreements, understandings, inducements and conditions,
expressed or implied, oral or written, of any nature whatsoever with respect to
the subject matter hereof. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
agreement in writing, between the Master Servicer and the Issuer, that has been
approved in writing by the Note Insurer and the Trustee. The Master Servicer
shall use its best efforts promptly to provide notice to the Rating Agencies
rating the Notes if this Agreement is so modified and amended.
Section 13. Controlling Law.
----------- ---------------
THIS AGREEMENT AND ALL QUESTIONS RELATING TO ITS VALIDITY, INTERPRETATION,
PERFORMANCE AND ENFORCEMENT, SHALL BE GOVERNED BY AND CONSTRUED, INTERPRETED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, NOTWITHSTANDING
ANY NEW YORK OR OTHER CHOICE-OF-LAW RULES TO THE CONTRARY.
Section 14. Indulgences Not Waivers.
----------- -----------------------
Neither the failure nor any delay on the part of a party to exercise any
right, remedy, power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy, power or
privilege preclude any other or further exercise of the same or of any other
right, remedy, power or privilege, nor shall any waiver of any right, remedy,
power or privilege with respect to any occurrence be construed as a waiver of
such right, remedy, power or privilege with respect to any other occurrence. No
waiver shall be effective unless it is in writing and is signed by the party
asserted to have granted such waiver.
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<PAGE>
Section 15. Titles Not to Affect Interpretation.
----------- -----------------------------------
The titles of paragraphs and subparagraphs contained in this Agreement are
for convenience only, and they neither form a part of this Agreement nor are
they to be used in the construction or interpretation hereof.
Section 16. Provisions Separable.
----------- --------------------
The provisions of this Agreement are independent of and separable from each
other, and no provision shall be affected or rendered invalid or unenforceable
by virtue of the fact that for any reason any other or others of them may be
invalid or unenforceable in whole or in part.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Master Servicing
Agreement as of the date set forth above.
NATIONAL MORTGAGE OWNER TRUST
[ ]-[ ]
By: [ ],
in its capacity as Owner Trustee
By: __________________________________
Its: __________________________________
[__________]
By: __________________________________
Its: __________________________________
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