As filed with the Securities and Exchange Commission on August 17, 2000
Registration Statement No. 333-_______
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------
REGISTRATION STATEMENT
ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
-------
FLEET MORTGAGE SECURITIES CORP.
(Exact name of registrant as specified in its charter)
Delaware 571103045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1333 Main Street
Columbia, South Carolina 29201
(803) 929-7900
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------
Randal D. Shields, Esq., Senior Vice President and General Counsel
1333 Main Street
Columbia, South Carolina 29201
(803) 929-7900
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
-------
With a copy to:
Dale W. Lum, Esq. Siegfried P. Knopf, Esq.
Brown & Wood LLP Brown & Wood LLP
555 California Street One World Trade Center
San Francisco, California 94104 New York, New York 10048
(415) 772-1200 (212) 839-5300
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
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 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, please check the following
box.[X]
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.[ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of to be Aggregate Price Aggregate Registration
Securities to Be Registered Registered Per Unit* Offering Price* Fee
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates... $292,617,727 100% $292,617,727(1) $91,394(2)
===========================================================================================================================
</TABLE>
* Estimated for the purpose of calculating the registration fee.
(1) $291,617,727 aggregate principal amount of securities registered
under registration No. 33-42848 referred to below and not previously
sold is carried forward in this Registration Statement pursuant to
Rule 429. A registration fee of $91,130 in connection with such
unsold amount of securities was paid previously under the foregoing
registration statement.
(2) Previously paid to the extent noted above.
Pursuant to Rule 429 and Rule 414, the prospectus and form of
prospectus supplement contained in this Registration Statement also relate to,
and this Registration Statement constitutes a post-effective amendment to,
Registration Statement No.33-42848, which was filed on September 8, 1991 on
Form S-11, by Fleet Mortgage Securities, Inc., as a result of a merger of
Fleet Mortgage Securities, Inc. into the Registrant. The Registrant expressly
adopts Registration Statement No.33-42848 as its own registration statement
for all purposes of the Securities Act of 1933 and the Securities Exchange Act
of 1934.
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 that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective upon such date as the Commission, acting pursuant to
said Section 8(a), may determine.
==============================================================================
<PAGE>
Information contained in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities, and it is not soliciting
an offer to buy these securities in any state where the offer or sale is not
permitted.
Preliminary, Subject to Change, Dated August 17, 2000
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 2000)
$___________
(Approximate)
FLEET MORTGAGE SECURITIES CORP.
Depositor
FLEET MORTGAGE GROUP, INC.
Seller and Master Servicer
_____ Mortgage Pass-Through Trust _____
Issuer
Distributions payable monthly, beginning _____, 2000
---------
The following classes of certificates are being offered pursuant to this
prospectus supplement and the accompanying prospectus:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Initial Class Pass-Through Initial Class Pass-Through
Certificate Balance Rate Certificate Balance Rate
<S> <C> <C> <C> <C> <C>
Class A-1 $ % Class M $ %
Class PO $ % Class B-1 $ %
Class X $ % Class B-2 $ %
Class A-R $ %
</TABLE>
---------------------------
Consider carefully
the risk factors
beginning on
page S-6 in this
prospectus
supplement and on
page 7 in the
prospectus.
---------------------------
The class PO certificates are principal only certificates, and the class
X certificates are interest only notional amount certificates. The
pass-through rate for the class X certificates is calculated as described
under "Description of the Certificates--Interest".
The assets of the trust will consist primarily of a pool of [30-year]
conventional [fixed-rate] mortgage loans secured by first liens on
one- to four-family residential properties.
Neither the SEC nor any state securities commission has approved these
securities or determined that this prospectus supplement or the prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
---------
_____, 2000
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
----
<S> <C>
Summary.........................................................................................................S-3
Offered Certificates............................................................................................S-3
Risk Factors....................................................................................................S-6
The Mortgage Pool..............................................................................................S-10
Servicing of Mortgage Loans....................................................................................S-21
Description of the Certificates................................................................................S-24
Yield, Prepayment and Maturity Considerations..................................................................S-40
Credit Enhancement.............................................................................................S-50
Use of Proceeds................................................................................................S-52
Material Federal Income Tax Consequences.......................................................................S-52
ERISA Considerations...........................................................................................S-53
Method of Distribution.........................................................................................S-55
Legal Matters..................................................................................................S-56
Ratings........................................................................................................S-56
</TABLE>
The Glossary on page S-58 contains definitions of the capitalized terms used
in this prospectus supplement.
<PAGE>
Summary
o This summary highlights selected information from this document and
does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of an
offering of the certificates, read carefully this entire document and the
accompanying prospectus.
Offered Certificates
_____ Mortgage Pass-Through Trust _____ will issue ten classes of
certificates, seven of which are being offered by this prospectus supplement
and the accompanying prospectus. The assets of the trust that will support
both the offered certificates and other classes of certificates will consist
of a pool of mortgage loans with a principal balance of approximately $_____
as of _____, 2000. The mortgage loans will consist primarily of [30-year]
conventional [fixed-rate] mortgage loans secured by first liens on one-to
four-family residential properties.
The following chart lists some of the characteristics of the classes of the
offered certificates. The classes of certificates listed below will not be
offered unless they are assigned the following ratings by [ ] and by [ ].
[ ] [ ]
Class Rating Rating Type
----- ------ ------ ----
Class Senior
A-1
Class Senior/Principal
PO Only
Class Senior/Notional
X Amount/Interest
Only
Class Senior/Residual
A-R
M Subordinate
Class Subordinate
B-1
Class Subordinate
B-2
A rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by either of the rating
agencies.
See "Ratings".
See "Description of the Certificates-General" and "--Book-Entry Certificates"
in this prospectus supplement and "The Mortgage Pool" in this prospectus
supplement and "The Trust Fund--The Mortgage Loans--General" in the
prospectus.
Cut-off Date
_____, 2000
Closing Date
On or about _____, 2000
Depositor
Fleet Mortgage Securities Corp. is a subsidiary of Fleet Mortgage Group, Inc.
Its address is 1333 Main Street, Columbia, South Carolina 29201, and its
telephone number is (803) 929-7900.
Seller and Master Servicer
Fleet Mortgage Group, Inc.
Trustee
---------------
Distribution Dates
We will make distributions on the 25th day of each month. If the 25th day of a
month is not a business day, then we will make distributions on the next
business day. The first distribution is scheduled for _____, 2000.
Interest Payments
Interest will accrue at the rate specified on the cover page or described in
this prospectus supplement on each interest bearing class of certificates on
the basis of a 360-day year divided into twelve 30-day months. The interest
accrual period for the interest bearing classes of certificates for any
distribution date will be the calendar month before the distribution date.
See "Description of the Certificates--Interest".
Principal Payments
Principal will be paid on each class of certificates entitled to receive
principal payments on the 25th day of each month as described in this
prospectus supplement beginning at page [S-31].
See "Descriptions of the Certificates--Principal" in this prospectus
supplement.
Optional Termination
The master servicer may purchase all of the remaining assets of the trust
after the principal balance of the mortgage loans and real estate owned by the
trust declines below 10% of the principal balance of the mortgage loans on
_____, 2000.
See "Description of the Certificates--Optional Termination" in this
prospectus supplement.
Collection Account; Priority
of Distributions
On each distribution date amounts available in the trust to make distributions
on the certificates will be applied in the following order of priority:
(1) to interest on the interest bearing classes of senior certificates;
(2) to principal of the classes of senior certificates in the manner, order
and priority described under "Description of the Certificates--Principal";
(3) to any deferred amounts payable on the class PO certificates, as
described under "Description of the Certificates--Principal"; and
(4) to interest on and then principal of each class of subordinated
certificates, in order of their numerical class designations, beginning
with the class M certificates, as described under "Description of the
Certificates--Principal".
Advances
The master servicer will make cash advances with respect to delinquent
payments of principal and interest on the mortgage loans to the extent the
master servicer reasonably believes that the cash advances can be repaid from
future payments on the mortgage loans. These cash advances are only intended
to maintain a regular flow of scheduled interest and principal payments on the
certificates and are not intended to guarantee or insure against losses.
See "Servicing of Mortgage Loans--Advances" in this prospectus supplement.
Credit Enhancement
The issuance of senior certificates and subordinated certificates by the trust
is designed to increase the likelihood that senior certificateholders will
receive regular payments of interest and principal.
Subordination
The senior certificates will have a payment priority over the subordinated
certificates. Within the classes of subordinated certificates offered by this
prospectus supplement, the class M certificates will have payment priority
over the class B-1 and B-2 certificates, and the class B-1 certificates will
have a payment priority over the class B-2 certificates. The class B-3, class
B-4 and class B-5 certificates, which are not being offered to the public, are
also subordinated to all of the other certificates, in that order, with the
class B-5 certificates having the lowest priority of payment.
Subordination is designed to provide the holders of certificates with a higher
payment priority with protection against most losses realized when the
remaining unpaid principal balance on a mortgage loan exceeds the amount of
proceeds recovered upon the liquidation of that mortgage loan. In general,
this loss protection is accomplished by allocating the realized losses among
the subordinated certificates, beginning with the subordinated certificates
with the lowest payment priority, before realized losses are allocated to the
senior certificates. However, some losses such as special hazard losses,
bankruptcy losses and fraud losses in excess of the amounts set forth in this
prospectus supplement, are, in general, allocated pro rata to each class of
certificates, other than the class X and class PO certificates, instead of
first being allocated to the subordinated certificates.
See "Description of the Certificates--Allocation of Losses" and "Credit
Enhancement--Subordination".
Tax Status
The trust will elect to be treated, for federal income tax purposes, as a real
estate mortgage investment conduit. The classes of certificates that are
designated as the regular certificates will constitute regular interests in
the REMIC. The class A-R certificates will represent the sole class of
residual interests in the REMIC.
See "Material Federal Income Tax Consequences" in this prospectus supplement
and in the prospectus.
ERISA Considerations
The class A-1 certificates may be purchased by a pension or other employee
benefit plan subject to the Employee Retirement Income Security Act of 1974 or
Section 4975 of the Internal Revenue Code of 1986, so long as a number of
conditions are met.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Legal Investment
The senior certificates and the class M certificates will be mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984 as long as they are rated in one of the two highest rating categories by
at least one nationally recognized statistical rating organization. The class
B-1 and class B-2 certificates will not be rated in one of the two highest
rating categories by a nationally recognized statistical rating organization,
and therefore, will not be mortgage related securities for purposes of that
Act.
See "Legal Investment" in the prospectus.
<PAGE>
Risk Factors
o The following information, which you should carefully consider,
identifies significant sources of risk associated with an investment in
the certificates. You should also carefully consider the information
under "Risk Factors" beginning on page 7 in the prospectus.
Your yield will be affected Borrowers may, at their option, prepay their
by prepayments mortgage loans in whole or in part at any time.
We cannot predict the rate at which borrowers
will repay their mortgage loans. A prepayment
of a mortgage loan, however, will usually result
in a prepayment on the certificates.
The rate and timing of prepayment of the
mortgage loans will affect the yields to
maturity and weighted average lives of the
certificates. Any reinvestment risks from faster
or slower prepayments of mortgage loans will be
borne entirely by the holders of the
certificates.
o If you purchase principal only
certificates or you purchase your
certificates at a discount and
principal is repaid slower than
you anticipate, then your yield
may be lower than you anticipate.
o If you purchase interest only
certificates or you purchase your
certificates at a premium and
principal is repaid faster than
you anticipate, then your yield
may be lower than you anticipate.
o If you purchase interest only
certificates and principal is
repaid faster than you anticipate,
you may lose your initial
investment.
See "Yield, Prepayment and Maturity
Considerations" for a description of
factors that may influence the rate and
timing of prepayments on the mortgage
loans.
Your yield will be affected The timing of principal payments on the
by how distributions are certificates will be affected by a number of
allocated to the factors, including:
certificates
o the extent of prepayments on the mortgage
loans,
o how payments of principal are allocated among
the classes of certificates as specified on
page [S-31],
o whether the master servicer exercises its
right, in its sole discretion, to terminate
the trust fund,
o the rate and timing of payment defaults and
losses on the mortgage loans, and
o repurchases of mortgage loans for material
breaches of representations and warranties.
Since distributions on the certificates are
dependent upon the payments on the mortgage
loans, we cannot guarantee the amount of any
particular payment or the amount of time that
will elapse before the trust is terminated.
See "Description of the Certificates--
Principal," and "--Optional Termination" for
a description of the manner in which principal
will be paid to the certificates. See "The
Mortgage Pool-- Assignment of the Mortgage
Loans" for more information regarding the
repurchase or substitution of mortgage loans.
Credit enhancement may The certificates are not insured by any financial
not be sufficient to protect guaranty insurance policy. The subordination
senior certificates from features are intended to enhance the likelihood
losses that senior certificates will receive
regular payments of interest and principal.
Credit enhancement will be provided for the
certificates, first, by the right of the holders
of certificates to receive payments of principal
before the classes subordinated to them and,
second, by the allocation of realized losses to
subordinated classes in the inverse order of
their priority of payment. This form of credit
enhancement uses collections on the mortgage
loans otherwise payable to holders of
subordinated classes to pay amounts due on more
senior classes. Collections otherwise payable to
subordinated classes comprise the sole source of
funds from which this type of credit enhancement
is provided. Except as described below, realized
losses are allocated to the subordinated
certificates in the reverse order of their
priority of payment, beginning with the
subordinated certificates then outstanding with
the lowest payment priority, until the principal
amount of each class of subordinated
certificates has been reduced to zero.
Accordingly, if the aggregate principal balance
of each subordinated class were to be reduced to
zero, delinquencies and defaults on the mortgage
loans would reduce the amount of funds available
for monthly distributions to holders of the
senior certificates. Furthermore, the
subordinated classes will provide only limited
protection against some categories of losses
such as special hazard losses, bankruptcy losses
and fraud losses in excess of the amounts
specified in this prospectus supplement. Any
losses in excess of those amounts will be
allocated pro rata to each class of
certificates, other than the class PO and class
X certificates), even if the principal balance
of each subordinated class has not been reduced
to zero. Among the subordinated certificates the
class M certificates are the least subordinated,
that is, they have the highest payment priority.
Then come the class B-1, class B-2, class B-3,
class B-4 and class B-5 certificates, in that
order.
See "Credit Enhancement--Subordination".
Certificates may not be The offered certificates may not be an
appropriate for some appropriate investment for investors who do not
investors have sufficient resources or expertise to
evaluate the particular characteristics of each
applicable class of offered certificates. This
may be the case because, among other things:
o The yield to maturity of offered
certificates purchased at a price
other than par will be sensitive
to the uncertain rate and timing
of principal prepayments on the
mortgage loans,
o The rate of principal
distributions on and the weighted
average lives of the offered
certificates will be sensitive to
the uncertain rate and timing of
principal prepayments on the
mortgage loans and the priority of
principal distributions among the
classes of certificates.
Accordingly, the offered
certificates may be an
inappropriate investment if you
require a distribution of a
particular amount of principal on
a specific date or an otherwise
predictable stream of
distributions,
o You may not be able to reinvest
distributions on an offered
certificate, which, in general,
are expected to be greater during
periods of relatively low interest
rates, at a rate at least as high
as the pass-through rate
applicable to your certificate or
o A secondary market for the offered
certificates may not develop or
provide certificateholders with
liquidity of investment.
The return on the One risk associated with investing in
certificates may be mortgage-backed securities is created by
particularly sensitive to any concentration of the related properties in
changes in real estate one or more specific geographic regions.
markets in specific regions Approximately [__%] of the mortgage loans are
located in the State of [_________]. If the
regional economy or housing market weakens
in [__________], or in any other region
having a significant concentration of
properties underlying the mortgage
loans, the mortgage loans in that
region may experience high rates of
loss and delinquency resulting in
losses. A region's economic condition
and housing market may be adversely
affected by hazards which may not be
insured or fully insured, such as
earthquakes, floods, mudslides and
other natural disasters.
You may have difficulty No market for any of the certificates will exist
reselling certificates before they are issued. The underwriter intends
to make a secondary market in the classes of
certificates purchased by it, but has no
obligation to do so. We cannot assure you that a
secondary market will develop or, if it develops,
that it will continue. Consequently, you may not
be able to sell your certificates readily or at
prices that will enable you to realize your
desired yield. The market values of the
certificates are likely to fluctuate; these
fluctuations may be significant and could result
in significant losses to you.
The secondary markets for mortgage backed
securities have experienced periods of
illiquidity and can be expected to do so in the
future. Illiquidity can have a severely adverse
effect on the prices of securities that are
especially sensitive to prepayment risk, credit
risk, or interest rate risk, or that have been
structured to meet the investment requirements
of limited categories of investors.
See "Risk Factors--Nature of Mortgages" in the
prospectus.
Some of the statements contained in or incorporated by reference in this
prospectus supplement and the accompanying prospectus consist of
forward-looking statements relating to future economic performance or
projections and other financial items. These statements can be identified by
the use of forward-looking words such as "may", "will", "should", "expects",
"believes", "anticipates", "estimates", or other comparable words.
Forward-looking statements are affected by a variety of risks and
uncertainties that could cause actual results to differ from the projected
results. Those risks and uncertainties include, among others, general economic
and business conditions, regulatory initiatives and compliance with
governmental regulations, customer preferences and various other matters, many
of which are beyond our control. Because we cannot predict the future, what
actually happens may be very different from what we predict in our
forward-looking statements.
<PAGE>
The Mortgage Pool
General
The depositor, Fleet Mortgage Securities Corp., will purchase the
mortgage loans in the mortgage pool from _____ pursuant to a pooling and
servicing agreement dated as of the cut-off date among Fleet Mortgage Group,
Inc., as seller and master servicer, the depositor and _____, as trustee, and
will cause the mortgage loans to be assigned to the trustee for the benefit of
the holders of the certificates.
Under the pooling and servicing agreement, the seller will make
representations, warranties and covenants to the depositor relating to, among
other things, the due execution and enforceability of the pooling and
servicing agreement and the characteristics of the mortgage loans and, having
regard to the limitations described under "--Assignment of the Mortgage
Loans", will be obligated to repurchase or substitute a similar mortgage loan
for any mortgage loan as to which there exists deficient documentation or as
to which there has been an uncured breach of any representation or warranty
relating to the characteristics of the mortgage loans that materially and
adversely affects the interests of the certificateholders in that mortgage
loan. The seller will represent and warrant to the depositor in the pooling
and servicing agreement that the mortgage loans were selected from among the
outstanding one- to four-family mortgage loans in the seller's portfolio as to
which the representations and warranties set forth in the pooling and
servicing agreement can be made and that the selection was not made in a
manner intended to affect the interests of the certificateholders adversely.
See "Mortgage Loan Program--Representations by Sellers; Repurchases" in the
prospectus. Under the pooling and servicing agreement, the depositor will
assign all its right, title and interest in the representations, warranties
and covenants, including the seller's repurchase or substitution obligation,
to the trustee for the benefit of the certificateholders. The depositor will
make no representations or warranties with respect to the mortgage loans and
will have no obligation to repurchase or substitute mortgage loans with
deficient documentation or which are otherwise defective. Fleet Mortgage
Group, Inc. is selling the mortgage loans without recourse and will have no
obligation with respect to the certificates in its capacity as seller other
than the repurchase or substitution obligation described above. The
obligations of Fleet Mortgage Group, Inc., as master servicer, with respect to
the certificates are limited to the master servicer's contractual servicing
obligations under the pooling and servicing agreement.
Information with respect to the mortgage loans expected to be
included in the mortgage pool is set forth under this heading. Before the
closing date, mortgage loans may be removed from the mortgage pool and other
mortgage loans may be substituted for them. The depositor believes that the
information set forth in this prospectus supplement with respect to the
mortgage pool as presently constituted is representative of the
characteristics of the mortgage pool as it will be constituted at the closing
date, but some characteristics of the mortgage loans in the mortgage pool may
vary. Unless otherwise indicated, information presented in this prospectus
supplement expressed as a percentage, other than rates of interest, are
approximate percentages based on the stated principal balances of the mortgage
loans as of the cut-off date.
As of the cut-off date, the aggregate of the stated principal
balances of the mortgage loans is expected to be approximately $_____, which
is referred to as the cut-off date pool principal balance. The mortgage loans
provide for the amortization of the amount financed over a series of
substantially equal monthly payments. All of the mortgage loans provide that
payments are due on the due date, being the first day of each month. At
origination, substantially all of the mortgage loans had stated terms to
maturity of ___ years. Scheduled monthly payments made by the mortgagors on
the mortgage loans either earlier or later than their scheduled due dates will
not affect the amortization schedule or the relative application of the
payments to principal and interest.
Each mortgage loan was originated on or after _____, 2000.
The latest stated maturity date of any mortgage loan is _______. The
earliest stated maturity date of any mortgage loan is ______.
As of the cut-off date, no mortgage loan was delinquent more than 30
days.
________ mortgage loan[s] will be subject to [a] buydown agreement[s].
______ mortgage loan[s] provide[s] for deferred interest or negative
amortization.
No mortgage loan has a loan-to-value ratio at origination of more
than ___%. Generally, each mortgage loan with a loan-to-value ratio at
origination of greater than ___% is covered by a primary mortgage guaranty
insurance policy issued by a mortgage insurance company acceptable to Fannie
Mae or Freddie Mac. The policy provides coverage in an amount equal to a
specified percentage times the sum of the remaining principal balance of the
related mortgage loan, the accrued interest on it and the related foreclosure
expenses. The specified percentage is either ___% for loan-to-value ratios
between ___% and ___%, ___% for loan-to-value ratios between ___% and ___% and
___% for loan-to-value ratios between ___% and ___%. With respect to ___
mortgage loans, the lender, rather than the borrower, acquired the primary
mortgage guaranty insurance and charged the related borrower an interest
premium. Except for these lender acquired mortgage loans covered by mortgage
insurance, no primary mortgage insurance policy will be required with respect
to any mortgage loan if maintaining the policy is prohibited by applicable law
or after the date on which the related loan-to-value ratio is ___% or less or,
based on a new appraisal, the principal balance of the mortgage loan
represents ___% or less of the new appraised value. The primary mortgage
insurance policy will be maintained on the lender acquired mortgage loans
covered by mortgage insurance, for so long as mortgage insurance may be
required by applicable law.
The loan-to-value ratio of a mortgage loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related mortgage loan at the date of determination and the
denominator of which is
o in the case of a purchase, the lesser of the selling price of the
mortgaged property or its appraised value at the time of sale, or
o in the case of a refinance, the appraised value of the mortgaged
property at the time of the refinance, except in the case of a
mortgage loan underwritten pursuant to _____'s streamlined
documentation program as described under "--Underwriting Process".
With respect to mortgage loans originated pursuant to the streamlined
documentation program
o if the loan-to-value ratio at the time of the origination of the
mortgage loan being refinanced was ___% or less, the loan-to-value
ratio will be the ratio of the principal amount of the mortgage
loan outstanding at the date of determination divided by the
appraised value of the related mortgaged property at the time of
the origination of the mortgage loan being refinanced or
o if the loan-to-value ratio at the time of the origination of the
mortgage loan being refinanced was greater than _____%, then the
loan-to-value ratio will be the ratio of the principal amount of
the mortgage loan outstanding at the date of determination divided
by the appraised value as determined by a limited appraisal report
at the time of the origination of the mortgage loan. See
"--Underwriting Process".
No assurance can be given that the value of any mortgaged property has
remained or will remain at the level that existed on the appraisal or sales
date. If residential real estate values generally or in a particular
geographic area decline, the loan-to-value ratios might not be a reliable
indicator of the rates of delinquencies, foreclosures and losses that could
occur with respect to the mortgage loans.
The following table sets forth information, as of the cut-off date,
as to the mortgage loans. Other than with respect to rates of interest,
approximate percentages are stated by stated principal balance of the mortgage
loans as of the cut-off date and have been rounded in order to total 100%.
Mortgage Rates
Number of Aggregate
Mortgage Principal Balance Percent of
Mortgage Rates (%) Loans Outstanding Mortgage Pool
------------------ ---------- ---------------- -------------
----------------
The lender acquired mortgage loans covered by mortgage insurance are
shown in the preceding table at the mortgage rates net of the interest premium
charged by the related lenders. As of the cut-off date, the weighted average
mortgage rate of the mortgage loans as so adjusted is expected to be
approximately ____%. Without the adjustment, the weighted average mortgage
rate of the mortgage loans is expected to be approximately ____% per annum.
<TABLE>
<CAPTION>
Original Loan-to-Value Ratios
Original Loan-to-Value Number of Aggregate Principal Percent of
Ratios(%) Mortgage Loans Balance Outstanding Mortgage Pool
------------------------------------------------ ------------------ ------------------- -------------
<S> <C> <C> <C>
50.00 and below.......................................
50.01 to 55.00........................................
55.01 to 60.00........................................
60.01 to 65.00........................................
65.01 to 70.00........................................
70.01 to 75.00........................................
75.01 to 80.00........................................
80.01 to 85.00........................................
85.01 to 90.00........................................
90.01 to 95.00........................................
Total........................................ ------------------ ------------------- ----------------
================== ==================== ================
</TABLE>
The weighted average original loan-to-value ratio of the mortgage
loans is expected to be approximately ___%.
<TABLE>
<CAPTION>
Geographic Distribution of Mortgaged Properties
Number of Aggregate Principal Percent of
State Mortgage Loans Balance Outstanding Mortgage Pool
----- -------------- ------------------- -------------
<S> <C> <C> <C>
----------............................................
----------............................................
----------............................................
----------............................................
----------............................................
----------............................................
----------............................................
----------............................................
Other - less than 2%.................................. -------------- ------------------- ------------
Total........................................ ============== =================== ============
</TABLE>
The Other row in the preceding table includes ___ other states with
under 2% concentrations individually. No more than approximately ____ of the
mortgage loans will be secured by mortgaged properties located in any one
postal zip code area.
<TABLE>
<CAPTION>
Purpose of Mortgage Loans
Number of Aggregate Principal Percent of
Loan Purpose Mortgage Loans Balance Outstanding Mortgage Pool
------------ -------------- ------------------- --------------
<S> <C> <C> <C>
Purchase..............................................
Refinance - rate/term.................................
Refinance - cash out..................................
Total........................................
============== ===================== ==============
</TABLE>
<TABLE>
<CAPTION>
Current Mortgage Loan Principal Balances
Number of Aggregate Principal Percent of
Current Mortgage Loan Amounts Mortgage Loans Balance Outstanding Mortgage Pool
------------------------------------------------------ --------------- ------------------- -------------
<S> <C> <C> <C>
$50,001 - $100,000....................................
$100,001 - $150,000...................................
$150,001 - $200,000...................................
$200,001 - $250,000...................................
$250,001 - $300,000...................................
$300,001 - $350,000...................................
$350,001 - $400,000...................................
$400,001 - $450,000...................................
$450,001 - $500,000...................................
$500,001 - $550,000...................................
$550,001 - $600,000...................................
$600,001 - $650,000...................................
$650,001 - $700,000...................................
$700,001 - $750,000...................................
$750,001 - $1,000,000.................................
$1,000,001 - $1,500,000............................... --------------- ------------------- ------------
Total........................................ =============== =================== =============
</TABLE>
As of the Cut-off Date, the average current mortgage loan principal balance is
expected to be approximately $______________.
<TABLE>
<CAPTION>
Documentation Program for Mortgage Loans
Number of Aggregate Principal Percent of
Type of Program Mortgage Loans Balance Outstanding Mortgage Pool
--------------- -------------- ------------------- -------------
<S> <C> <C> <C>
Full..................................................
Alternative...........................................
Limited...............................................
Stated income.........................................
Streamlined
Total........................................ ============== =================== ==============
</TABLE>
<TABLE>
<CAPTION>
Types of Mortgaged Properties
Number of Aggregate
Mortgage Principal Balance Percent of
Property Type Loans Outstanding Mortgage Pool
------------- --------- ------------------ -------------
<S> <C> <C> <C>
Occupancy Types
Number of Aggregate Principal
Mortgage Balance Percent of
Occupancy Types Loans Outstanding Mortgage Pool
--------------- --------- -------------------- -------------
<S> <C> <C> <C>
Remaining Terms to Maturity
Number of Aggregate Principal
Remaining Term to Mortgage Balance Percent of
Maturity (Months) Loans Outstanding Mortgage Pool
------------------ --------- -------------------- -------------
<S> <C> <C> <C>
</TABLE>
----------------------
As of the cut-off date, the weighted average remaining term to
maturity of the mortgage loans in the preceding table is expected to be
approximately _____ months.
Assignment of the Mortgage Loans
Pursuant to the pooling and servicing agreement, the depositor on the
closing date will sell, transfer, assign, set over and otherwise convey
without recourse to the trustee in trust for the benefit of the
certificateholders all right, title and interest of the depositor in and to
each mortgage loan and all right, title and interest in and to all other
assets included in _____ Mortgage Pass-Through Trust _____, including all
principal and interest received on or with respect to the mortgage loans, but
not any principal and interest due on or before the cut-off date.
In connection with the transfer and assignment of the mortgage loans
to the trustee, the depositor will deliver or cause to be delivered to the
trustee the mortgage file for each mortgage loan which shall include:
o the original mortgage note endorsed without recourse in blank
or a certificate signed by an officer of the master servicer
certifying that the related original mortgage note has been
lost;
o the original or a certified copy of the mortgage with evidence
of recording indicated thereon (except for any mortgage not
returned from the public recording office, which will be
delivered to the trustee, or a custodian for the trustee, as
soon as the same is available to the depositor);
o an assignment of the mortgage in blank in recordable form; and
o if applicable, any riders or modifications to such mortgage
note and mortgage.
Assignments of the mortgage loans to the trustee (or its nominee)
will not be recorded unless deemed necessary in connection with the
foreclosure on a mortgage loan or other enforcement action. With respect to
any mortgage that has been recorded in the name of the MERS(R) System or its
designee, no mortgage assignment in favor of the trustee will be required to
be prepared or delivered. Instead, the master servicer will be required to
take all actions as are necessary to cause the trust to be shown as the owner
of the related mortgage loan on the records of MERS for purposes of the system
of recording transfers of beneficial ownership of mortgages maintained by
MERS.
The trustee will review each mortgage file within 90 days of the
closing date, or promptly after the trustee's receipt of any document
permitted to be delivered after the closing date, and if any document in a
mortgage file is found to be missing or defective in a material respect and
the seller does not cure the defect within 90 days of notice of the defect
from the trustee, or within a longer period not to exceed 120 days after the
closing date as provided in the pooling and servicing agreement in the case of
missing documents not returned from the public recording office, the seller
will be obligated to repurchase the related mortgage loan from the trust fund.
Rather than repurchase the mortgage loan as provided above, the seller may
remove the mortgage loan, referred to as a deleted mortgage loan, from the
trust fund and substitute in its place another mortgage loan, referred to as a
replacement mortgage loan. However, this substitution is permitted only within
two years of the closing date and may not be made unless an opinion of counsel
is provided to the trustee to the effect that this substitution will not
disqualify the REMIC or result in a prohibited transaction tax under the tax
code. Any replacement mortgage loan generally will, on the date of
substitution, among other characteristics set forth in the pooling and
servicing agreement,
o have a principal balance, after deduction of all scheduled
payments due in the month of substitution, not in excess of,
and not more than ___% less than, the stated principal balance
of the deleted mortgage loan - the amount of any shortfall to
be deposited by the seller in the certificate account and held
for distribution to the certificateholders on the related
distribution date,
o have a mortgage rate not lower than, and not more than ___% per
annum higher than, that of the deleted mortgage loan,
o have a loan-to-value ratio not higher than that of the deleted
mortgage loan,
o have a remaining term to maturity not greater than, and not
more than one year less than, that of the deleted mortgage
loan, and
o comply with all of the representations and warranties set forth
in the pooling and servicing agreement as of the date of
substitution.
This cure, repurchase or substitution obligation constitutes the sole remedy
available to certificateholders or the trustee for omission of, or a material
defect in, a mortgage loan document.
Underwriting Process
General
All mortgage loans must meet credit, appraisal and underwriting
standards acceptable to _____. _____'s underwriting standards are applied in
accordance with applicable federal and state laws and regulations. Except as
otherwise provided in this prospectus supplement, the underwriting procedures
are consistent with those identified under "Mortgage Loan
Program--Underwriting Process" in the prospectus.
Sometimes the underwriting analysis may be conducted for _____ by a
third party, particularly for mortgage loans originated through a loan
correspondent or mortgage broker. In those instances, the determination as to
whether a mortgage loan complies with _____'s underwriting guidelines may be
made by an independent company hired to perform underwriting services on
behalf of _____. In addition, _____ may acquire mortgage loans from approved
correspondent lenders under a program pursuant to which _____ delegates to the
correspondent the obligation to underwrite the mortgage loans to _____'s
standards. Under these circumstances, the underwriting of a mortgage loan may
not have been reviewed by _____ before acquisition of the mortgage loan and
the correspondent represents that _____'s underwriting standards have been
met. After purchasing mortgage loans under those circumstances, _____ conducts
a quality control review of a sample of the mortgage loans. The number of
loans reviewed in the quality control process varies based on a variety of
factors, including _____'s prior experience with the correspondent lender and
the results of the quality control review process itself.
_____'s underwriting standards are applied by or on behalf of _____
to evaluate the prospective borrower's credit standing and repayment ability
and the value and adequacy of the mortgaged property as collateral. Under
those standards, a prospective borrower must generally demonstrate that the
ratio of:
o the borrower's monthly housing expenses, including principal
and interest on the proposed mortgage loan and, as applicable,
the related monthly portion of property taxes, hazard insurance
and mortgage insurance, to
o the borrower's monthly gross income and the debt-to-income
ratio, namely, the ratio of total monthly debt to the monthly
gross income,
are within acceptable limits. If the prospective borrower has applied for an
adjustable rate loan and the loan-to-value ratio is less than or equal to
___%, the interest component of the monthly housing expense is calculated
based on the initial loan interest rate. If the loan-to-value ratio exceeds
___%, the interest component of the monthly housing expense calculation is
based on the maximum possible interest rate payable in the second year of the
mortgage loan. The maximum acceptable debt-to-income ratio, which is
determined on a loan-by-loan basis varies depending on a number of
underwriting criteria, including, but not limited to, the loan-to-value ratio,
loan purpose, occupancy type, loan amount and credit history of the borrower.
In addition to meeting the debt-to-income ratio guidelines, each prospective
borrower is required to have sufficient cash resources to pay the down payment
and closing costs. Exceptions to _____'s underwriting guidelines may be made
if compensating factors are demonstrated by a prospective borrower.
The nature of the information that a borrower is required to disclose
and whether the information is verified depends, in part, on the documentation
program used in the origination process. In general under the full
documentation loan program, each prospective borrower is required to complete
an application which includes information with respect to the applicant's
assets, liabilities, income, credit history, employment history and other
personal information. Self-employed individuals are generally required to
submit their two most recent federal income tax returns. Under the full
documentation loan program, the information contained in the application
relating to employment, income, assets or mortgages is verified.
A prospective borrower may be eligible for a loan approval process
that limits or eliminates _____'s standard disclosure or verification
requirements or both. _____ offers the following documentation programs as
alternatives to its full documentation loan program:
o an alternative documentation loan program,
o a limited documentation loan program,
o a stated income documentation program, and
o a streamlined documentation loan program.
_____ obtains a credit report relating to the applicant from a credit
reporting company. The credit report typically contains information relating
to matters such as credit history with local and national merchants and
lenders, installment debt payments and any record of defaults, bankruptcy,
repossession, suits or judgments. Adverse information in the credit report may
be required to be explained by the prospective borrower depending on the
significance of the derogatory information and/or FICO credit score.
Except with respect to its streamlined documentation loan program,
_____ obtains appraisals from independent appraisers or appraisal service
providers for properties that are to secure mortgage loans. The appraisers
inspect and appraise the proposed mortgaged property and verify that the
property is in acceptable condition. Following each appraisal, the appraiser
prepares a report which includes a market data analysis based on recent sales
of comparable homes in the area and, when deemed appropriate, a replacement
cost analysis based on the current cost of constructing a similar home. All
appraisals are required to conform to Fannie Mae or Freddie Mac appraisal
standards then in effect. Every independent appraisal or a summary report is
underwritten by or on behalf of _____ underwriter before the loan is approved.
_____ requires title insurance on all of its mortgage loans secured
by first liens on real property. _____ also requires that fire and extended
coverage casualty insurance be maintained on the mortgaged property in an
amount at least equal to the principal balance of the related single-family
mortgage loan or the replacement cost of the mortgaged property, whichever is
less.
In addition to _____'s standard underwriting guidelines, which are
consistent in many respects with the guidelines applied to mortgage loans
purchased by Fannie Mae and Freddie Mac, _____ uses underwriting guidelines
featuring expanded criteria. The standard underwriting guidelines and the
expanded underwriting guidelines are described further under the next two
headings.
Standard Underwriting Guidelines
_____'s standard underwriting guidelines generally allow
loan-to-value ratios at origination of up to __% for purchase money or rate
and term refinance mortgage loans with original principal balances of up to
$_______, up to ___% for mortgage loans with original principal balances of up
to $__________, up to ___% for mortgage loans with original principal balances
of up to $_________, up to ___% for mortgage loans with original principal
balances of up to $__________, up to ___% for mortgage loans with original
principal balances of up to $__________ and up to ___% for mortgage loans with
original principal balances of up to $_________.
For cash out refinance mortgage loans with original principal
balances of up to $_________, _____'s standard underwriting guidelines
generally allow loan-to-value ratios at origination of up to ___%. The maximum
cash-out amount permitted is $__________ and is based in part on the original
loan-to-value ratio of the related mortgage loan. As used in this prospectus
supplement, a refinance mortgage loan is classified as a cash-out refinance
mortgage loan by _____ if the borrower retains greater than ___% of the entire
amount of the proceeds from the refinancing of the existing loan.
Under its standard underwriting guidelines, _____ generally permits a
debt-to-income ratio based on the borrower's monthly housing expenses of up to
___% and a debt-to-income ratio based on the borrower's total monthly debt of
up to ___%.
In connection with the standard underwriting guidelines, _____
originates or acquires mortgage loans under the full documentation loan
program, the alternative documentation loan program, the limited documentation
loan program or the streamlined documentation loan program.
The alternative documentation loan program permits a borrower to
provide W-2 forms instead of employment verifications covering the most recent
two years, permits bank statements in lieu of verification of deposits and
permits three repository in-file credit reports instead of residential
mortgage credit reports. Mortgage loans which have been originated under the
alternative documentation loan program may be eligible for sale to Fannie Mae
or Freddie Mac.
Under the limited documentation loan program, some underwriting
documentation concerning income and employment verification is waived. _____
obtains from a prospective borrower either a verification of deposit or bank
statements for the two-month period immediately before the date of the
mortgage loan application. Since information relating to a prospective
borrower's income and employment is not verified, the borrower's
debt-to-income ratios are calculated based on the information provided by the
borrower in the mortgage loan application. The maximum loan-to-value ratio,
including secondary financing, ranges up to ___ maximum.
The streamlined documentation loan program is available for borrowers
who are refinancing an existing mortgage loan provided that, among other
things, the mortgage loan has not been more than 30 days delinquent in payment
during the previous twelve-month period. [Under the streamlined documentation
loan program, a new appraisal is obtained only if the original appraisal is
twenty-four months or older. A re-certification of value or "drive-by"
appraisal is required if the original appraisal report is less than
twenty-four months old.] In addition, under the streamlined documentation loan
program, a credit report, current paystub or most recent year's tax returns,
in the case of a self-employed borrower, are required. Asset verification is
required if funds are needed for closing. The maximum loan-to-value ratio
under the streamlined documentation loan program ranges up to ____%.
All of the mortgage loans in the mortgage pool were underwritten
pursuant to _____'s standard underwriting guidelines.
Expanded Underwriting Guidelines
Mortgage loans which are underwritten pursuant to the expanded
underwriting guidelines may have higher loan-to-value ratios, higher loan
amounts and different documentation requirements than those associated with
the standard underwriting guidelines. The expanded underwriting guidelines
also permit higher debt-to-income ratios than mortgage loans underwritten
pursuant to the standard underwriting guidelines.
_____'s expanded underwriting guidelines generally allow
loan-to-value ratios at origination of up to ____% for purchase money or rate
and term refinance mortgage loans with original principal balances of up to
$_________, up to ___% for mortgage loans with original principal balances of
up to $__________, up to ___% for mortgage loans with original principal
balances of up to $__________, up to ___% for mortgage loans with original
principal balances of up to $_________, up to ___% for mortgage loans with
original principal balances of up to $__________, up to ___% for mortgage
loans with original principal balances of up to $__________ and up to ___% for
mortgage loans with original principal balances of up to $_________.
For cash-out refinance mortgage loans with original principal
balances of up to $_______'s expanded underwriting guidelines generally allow
loan-to-value ratios at origination of up to __%. The maximum cash-out amount
permitted is $______ and is based in part on the original loan-to-value ratio
of the related mortgage loan.
Under its expanded underwriting guidelines, _____ generally permits a
debt-to-income ratio based on the borrower's monthly housing expenses of up to
___% and a debt-to-income ratio based on the borrower's total monthly debt of
up to ___%; provided, however, that if the loan-to-value ratio exceeds ___%,
the maximum permitted debt-to-income ratios are ___% and ___%, respectively.
In connection with the expanded underwriting guidelines, _____
originates or acquires mortgage loans under the stated income documentation
program.
Under the stated income documentation program, underwriting
documentation concerning income and employment verification is waived. ______
obtains from a prospective borrower either a verification of deposit or bank
statements for the two-month period immediately before the date of the
mortgage loan application. Since information relating to a prospective
borrower's income and employment is not verified, the borrower's
debt-to-income ratios are calculated based on the information provided by the
borrower in the mortgage loan application. The maximum loan-to-value ratio,
including secondary financing, ranges up to ___% maximum.
<PAGE>
Servicing of Mortgage Loans
General
The master servicer will service the mortgage loans in accordance
with the terms set forth in the pooling and servicing agreement. The master
servicer may perform any of its obligations under the pooling and servicing
agreement through one or more subservicers. Notwithstanding any subservicing
arrangement, the master servicer will remain liable for its servicing duties
and obligations under the pooling and servicing agreement as if the master
servicer alone were servicing the mortgage loans.
The Master Servicer
Fleet Mortgage Group, Inc. will act as master servicer for the
mortgage loans pursuant to the pooling and servicing agreement. The master
servicer is engaged primarily in the mortgage banking business, and as such,
originates, purchases, sells and services mortgage loans. It originates
mortgage loans through a retail branch system, through a consumer direct
telemarketing channel, and through mortgage loan brokers and correspondents
nationwide. Its mortgage loans are principally first-lien, fixed or adjustable
rate mortgage loans secured by single-family residences.
As of _____, 2000, the master servicer provided servicing for
approximately $_____ billion aggregate principal amount of mortgage loans,
substantially all of which are being serviced for unaffiliated persons.
The principal executive offices of the master servicer are located at
1333 Main Street, Columbia, South Carolina 29201.
The master servicer initially services substantially all of the
mortgage loans it originates or acquires. In addition, it has purchased in
bulk the rights to service mortgage loans originated by other lenders.
Servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow or impound funds for payment of taxes
and insurance, making inspections as required of the mortgaged premises,
contacting delinquent mortgagors, supervising foreclosures in the event of
unremedied defaults and generally administering the loans, for which the
master servicer receives servicing fees. The master servicer has in the past
and may in the future sell to other mortgage bankers a portion of its
portfolio of loan servicing rights. In addition, see "The Pooling and
Servicing Agreement--Evidence as to Compliance" in the prospectus for a
description of the annual servicing report and the report of the independent
public accountants required to be provided by the master servicer under the
pooling and servicing agreement.
Mortgage Loan Production
The following table sets forth, by number and dollar amount of
mortgage loans, _____'s residential mortgage loan production for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended ____________ Period Ended
--------------------------------------------------- ------------
1996 1997 1998 1999 _____, 2000
---- ---- ---- ---- ------------
Dollar Amounts in Millions, Except Average Loan Balance
<S> <C> <C> <C> <C> <C>
FHA/VA Loans
Number of Loans
Volume of Loans
Conventional Loans
Number of Loans
Volume of Loans
Other Loans
Number of Loans
Volume of Loans
Total Loans
Number of Loans
Volume of Loans
Average Loan Balance
</TABLE>
Foreclosure, Delinquency and Loss Experience
The delinquency and foreclosure experience on the portfolios of one-
to four-family first mortgage loans serviced by the master servicer are set
forth in the following table. The portfolio of mortgage loans serviced by the
master servicer includes both fixed and adjustable interest rate mortgage
loans, including "buydown" mortgage loans, loans with stated maturities of 5
to 40 years and other types of mortgage loans having a variety of payment
characteristics, and includes mortgage loans secured by mortgaged properties
in geographic locations that may not be representative of the geographic
distribution or concentration of the mortgaged properties securing the
mortgage loans that are assets of the trust. There can be no assurance that
the delinquency and foreclosure experience set forth below will be similar to
the results that may be experienced with respect to the trust's mortgage
loans.
<TABLE>
<CAPTION>
At ___________
------------------------------------- At May 31,
1996 1997 1998 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Delinquent Mortgage Loans and Pending Foreclosures at Period End:
30-59 days
60-89 days
90 days or more - excluding pending foreclosures
Total of delinquencies
Foreclosures pending
Total delinquencies and foreclosures pending
</TABLE>
Servicing Compensation and Payment of Expenses
The expense fees with respect to the mortgage pool are payable out of
the interest payments on each mortgage loan. The expense fees will be _____%
per annum of the stated principal balance of each mortgage loan. The expense
fees consist of (a) servicing compensation payable to the master servicer in
respect of its master servicing activities and (b) fees payable to the trustee
in respect of its activities as trustee under the pooling and servicing
agreement. The master servicing fee will be _____% per annum of the stated
principal balance of each mortgage loan. The master servicer is obligated to
pay some but not all ongoing expenses associated with the trust fund and
incurred by the master servicer in connection with its responsibilities under
the pooling and servicing agreement and those amounts will be paid by the
master servicer out of the master servicing fee. The amount of the master
servicing fee is subject to adjustment with respect to prepaid mortgage loans,
as described under "--Adjustment to Master Servicing Fee in Connection with
Prepaid Mortgage Loans". The master servicer is also entitled to receive, as
additional servicing compensation, all late payment fees, prepayment
penalties, assumption fees and other similar charges [ancillary fees] and all
reinvestment income earned on amounts on deposit in the certificate account
and distribution account. The net mortgage rate of a mortgage loan is its
mortgage rate, net of the interest premium charged by the related lenders for
the lender acquired mortgage insurance mortgage loans, less the expense fees
on the mortgage loan, expressed as a per annum percentage of its stated
principal balance.
Adjustment to Master Servicing Fee in Connection with Prepaid Mortgage Loans
When a mortgage loan is subject to a partial prepayment or is prepaid
in full between due dates, the mortgagor is required to pay interest on the
amount prepaid only to the date of prepayment in the case of a prepayment in
full or to the due date in the month in which a partial prepayment is made. No
interest will be paid by the mortgagor on the amount prepaid after those
dates. Prepayments will be distributed to certificateholders on the
distribution date in the month following the month of receipt.
Under the pooling and servicing agreement, the aggregate master
servicing fee payable to the master servicer for any month will be reduced,
but not below zero, by an amount sufficient to pass through to the trust on
the distribution date 30 days' interest at the mortgage interest rate (less
the master servicing fee rate) on the amount of each prepayment of a mortgage
loan. Any shortfalls in interest as a result of prepayments in excess of the
master servicing fee for a month will reduce the amount of interest available
to be distributed to certificateholders from what would have been the case in
the absence of prepayments. See "Description of Certificates - Interest" in
this prospectus supplement.
Advances
On or before each distribution date, the master servicer will be
required to advance an amount equal to the aggregate of payments of principal
and interest on the mortgage loans, net of the master servicing fee, which
were due on the related due date and which were delinquent on the related
determination date, together with an amount equivalent to interest on each
mortgage loan as to which the related mortgaged property has been acquired by
the trust fund through foreclosure or deed-in-lieu of foreclosure. Advances by
the master servicer will be made either from its own funds, from funds
advanced by sub-servicers or from funds held in the certificate account for
future distributions to certificateholders. The master servicer will make
advances only to the extent they are, in the judgement of the master servicer,
recoverable from future payments and collections or insurance payments or
proceeds of liquidation of the related mortgage loan. Advances are intended to
maintain a regular flow of scheduled interest and principal payments on the
certificates rather than to guarantee or insure against losses. If advances
are made by, or if reimbursements for prior advances are made to, the master
servicer from cash being held for future distribution to certificateholders,
the master servicer will replace the funds on or before any future
distribution date to the extent that funds in the certificate account on the
distribution date would be less than the amount required to be available for
distributions to certificateholders on the distribution date. However, the
master servicer will not repay the trust for any reimbursements to it on
account of advances that it has determined are not ultimately recoverable from
the mortgage loans with respect to which the advances were made.
If the master servicer determines on any determination date to make
an advance, the advance will be included with the distribution to
certificateholders on the related distribution date. The determination date is
the 22nd day of each month or, if that day is not a business day, the
preceding business day; provided that the determination date in each month
will be at least two business days before the related distribution date. Any
failure by the master servicer to make an advance when required will
constitute an event of default under the pooling and servicing agreement if
the failure remains unremedied for five days after written notice of it. If
the master servicer is terminated as a result of the occurrence of an event of
default, the trustee or the successor master servicer will be obligated to
make any the advance, in accordance with the terms of the pooling and
servicing agreement.
Description of the Certificates
General
The certificates will be issued pursuant to the pooling and servicing
agreement. The following summaries of the material terms pursuant to which the
certificates will be issued do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
pooling and servicing agreement. When particular provisions or terms used in
the pooling and servicing agreement are referred to, the actual provisions,
including definitions of terms, are incorporated by reference. The
certificates represent obligations of the trust only and do not represent an
interest in or obligation of Fleet Mortgage Securities Corp., _____ or any of
their affiliates.
The Mortgage Pass-Through Certificates, Series _____ will consist of:
o senior certificates - class A-1, class PO, class X and class
A-R certificates; and
o subordinated certificates - class M, class B-1, class B-2,
class B-3, class B-4 and class B-5 certificates.
Only the classes of certificates listed on the cover page are offered
by this prospectus supplement. The class B-3, class B-4 and class B-5
certificates are not offered by this prospectus supplement. Their class
certificate balances are expected to be approximately $_____, $_____ and
$_____, respectively and their pass-through rates will be _____% per annum.
The classes of offered certificates will have the respective initial class
certificate balances or initial notional amount and pass-through rates set
forth on the cover page or described in this prospectus supplement under
"--Interest" below. The initial class certificate balances may vary in the
aggregate by plus or minus 5%.
The class certificate balance of any class of certificates as of any
distribution date is the initial class certificate balance of the class
reduced by the sum of:
o all amounts previously distributed to holders of certificates
of the class as payments of principal,
o the amount of realized losses, including excess losses,
allocated to the class, and
o in the case of any class of subordinated certificates, any
amounts allocated to the class in reduction of its class
certificate balance in respect of payments of class PO deferred
amounts, as described under "--Allocation of Losses".
In addition, the class certificate balance of the class of subordinated
certificates then outstanding with the highest numerical class designation
will be reduced if and to the extent that the aggregate of the class
certificate balances of all classes of certificates, following all
distributions and the allocation of realized losses on a distribution date,
exceeds the pool principal balance as of the due date occurring in the month
of the distribution date. The notional amount certificates do not have
principal balances and are not entitled to any distributions in respect of
principal of the mortgage loans.
The notional amount of the class X certificates for any distribution
date will be equal to the aggregate of the stated principal balances of the
non-discount mortgage loans with respect to the distribution date. The initial
notional amount of the class X certificates will be equal to the aggregate of
the stated principal balance of the non-discount mortgage loans as of the
cut-off date and is expected to be approximately $_____.
The senior certificates will have an initial aggregate principal
balance of approximately $_____ and will evidence in the aggregate an initial
beneficial ownership interest of approximately _____% in the trust fund. The
class M, class B-1, class B-2, class B-3, class B-4 and class B-5 certificates
will each evidence in the aggregate an initial beneficial ownership interest
of approximately _____%, _____%, _____%, _____%, _____% and _____%,
respectively, in the trust fund.
The class A-R, class B-3, class B-4 and class B-5 certificates will
be issued in fully registered certificated form. All of the remaining classes
will be represented by book-entry certificates. The book-entry certificates
will be issuable in book-entry form only. The class A-R certificates will be
issued as a single certificate in a denomination of $100.
Book-Entry Certificates
The class A-1, class PO, class X, class M, class B-1 and class B-2
certificates will be issued as book-entry certificates. Each class of
book-entry certificates will be issued as one or more certificates which equal
the aggregate initial class certificate balance of each class of certificates
and which will be held by a depository, initially a nominee of The Depository
Trust Company. Beneficial interests in the book-entry certificates will be
held indirectly by investors through the book-entry facilities of the
depository, as described in this prospectus supplement. Investors may hold the
beneficial interests in the book-entry certificates in minimum denominations
representing an original principal amount of $______ and integral multiples of
$______ in excess of that. One investor of each class of book-entry
certificates may hold a beneficial interest in them that is not an integral
multiple of $______. The depositor has been informed by the depository that
its nominee will be CEDE & Co. Accordingly, CEDE is expected to be the holder
of record of the book-entry certificates. Except as described in the
prospectus under "Description of the Certificates--Book-Entry Certificates",
no beneficial owner acquiring a book-entry certificate will be entitled to
receive a physical certificate representing the certificate.
Unless and until definitive certificates are issued, it is
anticipated that the only certificateholder of the book-entry certificates
will be CEDE, as nominee of the depository. Beneficial owners of the
book-entry certificates will not be certificateholders, as that term is used
in the pooling and servicing agreement. Beneficial owners are only permitted
to exercise the rights of certificateholders indirectly through financial
intermediaries and the depository. Monthly and annual reports on the trust
fund provided to CEDE, as nominee of the depository, may be made available to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting the depository, and to the financial
intermediaries to whose depository accounts the book-entry certificates of the
beneficial owners are credited.
For a description of the procedures generally applicable to the
book-entry certificates, see "Description of the Certificates--Book-Entry
Certificates" in the prospectus.
Payments on Mortgage Loans; Accounts
On or before the closing date, the master servicer will establish a
certificate account, which will be maintained in trust for the benefit of the
certificateholders. The master servicer will deposit or cause to be deposited
in the certificate account all amounts required to be deposited in it, within
two business days after receipt, or, on a daily basis, if the long-term credit
rating of the master servicer has been reduced below the rating specified in
the pooling and servicing, agreement. Funds credited to the certificate
account may be invested for the benefit and at the risk of the master servicer
in permitted investments, as defined in the pooling and servicing agreement,
that are scheduled to mature on or before the business day preceding the next
distribution date. On or before the business day immediately preceding each
distribution date, the master servicer will withdraw from the certificate
account the amount of available funds and will deposit the available funds in
the distribution account established and maintained with the trustee on behalf
of the certificateholders.
Distributions
Distributions on the certificates will be made by the trustee on each
distribution date being the 25th day of each month or, if that day is not a
business day, on the first business day after that day, commencing in _____,
2000, to the persons in whose names the certificates are registered at the
close of business on the last business day of the month preceding the month of
the distribution date.
Distributions on each distribution date will be made by check mailed
to the address of the person entitled to it as it appears on the applicable
certificate register or, in the case of a certificateholder who holds 100% of
a class of certificates or who holds certificates with an aggregate initial
certificate balance of $1,000,000 or more or who holds an interest only
certificate and who has so notified the trustee in writing in accordance with
the pooling and servicing agreement, by wire transfer in immediately available
funds to the account of the certificateholder at a bank or other depository
institution having appropriate wire transfer facilities; provided, however,
that the final distribution in retirement of the certificates will be made
only upon presentment and surrender of the certificates at the corporate trust
office of the trustee.
Priority of Distributions Among Certificates
As more fully described in this prospectus supplement, distributions
will be made on each distribution date from available funds in the following
order of priority:
o to interest on each interest bearing class of senior
certificates,
o to principal on the classes of senior certificates then
entitled to receive distributions of principal, in the order
and governed by the priorities set forth under "Description of
the Certificates--Principal", in each case in an aggregate
amount up to the maximum amount of principal to be distributed
on the classes on the distribution date,
o to any class PO deferred amounts with respect to the class PO
certificates, but only from amounts that would otherwise be
distributed on the distribution date as principal of the
subordinated certificates, and
o to interest on and then principal of each class of subordinated
certificates, in the order of their numerical class
designations, beginning with the class M certificates, in each
case having regard to the limitations set forth under
"Description of the Certificates--Principal".
The available funds for any distribution date will be equal to the sum of:
o all scheduled installments of interest, net of the related
expense fees, and principal due on the due date in the month in
which the distribution date occurs and received before the
related determination date, together with any advances with
respect to them,
o all proceeds of any primary mortgage insurance policies and any
other insurance policies with respect to the mortgage loans, to
the extent the proceeds are not applied to the restoration of
the related mortgaged property or released to the mortgagor in
accordance with the master servicer's normal servicing
procedures and all other cash amounts received and retained in
connection with the liquidation of defaulted mortgage loans, by
foreclosure or otherwise during the calendar month preceding
the month of the distribution date, in each case, net of
unreimbursed expenses incurred in connection with a liquidation
or foreclosure and unreimbursed advances, if any,
o all partial or full prepayments received during the related
prepayment period, and
o amounts received with respect to the distribution date as the
Substitution Adjustment Amount or purchase price in respect of
a deleted mortgage loan or a mortgage loan repurchased by the
seller or the master servicer as of the distribution date,
reduced by amounts in reimbursement for advances previously
made and other amounts as to which the master servicer is
entitled to be reimbursed from the certificate account pursuant
to the pooling and servicing agreement.
Interest
The classes of offered certificates will have the respective
pass-through rates set forth on the cover page of this prospectus supplement
or described below.
The pass-through rate for the class X certificates for any
distribution date will be equal to the excess of the average of the net
mortgage rates of the non-discount mortgage loans, weighted on the basis of
their stated principal balances, over _____% per annum. The pass-through rate
for the class X certificates for the first distribution date is expected to be
approximately _____% per annum. The net mortgage rate for each mortgage loan
is its mortgage rate, net of the interest premium charged by the related
lenders for the lender acquired mortgage insurance mortgage loans, less the
expense fee rate for the mortgage loan.
On each distribution date, to the extent of funds available, each
interest bearing class of certificates will be entitled to receive an amount
allocable to interest for the related interest accrual period. This interest
distribution amount for any interest bearing class will be equal to the sum of
(a) interest at the applicable pass-through rate on the related class
certificate balance or notional amount, as the case may be, and (b) the sum of
the amounts, if any, by which the amount described in clause (a) above on each
prior distribution date exceeded the unpaid interest amounts being the amounts
actually distributed as interest on the prior distribution dates and not
subsequently distributed. The class PO certificates are principal only
certificates and will not bear interest.
With respect to each distribution date, for all classes of interest
bearing certificates the interest accrual period for each interest bearing
class of certificates will be the calendar month preceding the month of the
distribution date.
The interest entitlement described above for each class of
certificates for any distribution date will be reduced by the amount of net
interest shortfalls for the distribution date. With respect to any
distribution date, the net interest shortfall is equal to:
o any net prepayment interest shortfalls for the distribution
date, and
o the amount of interest that would otherwise have been received
with respect to any mortgage loan that was the subject of a
Relief Act reduction or a special hazard loss, fraud loss, debt
service reduction or deficient valuation, after the exhaustion
of the respective amounts of coverage provided by the
subordinated certificates for those types of losses.
A Relief Act reduction is a reduction in the amount of the monthly interest
payment on a mortgage loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940. See "Material Legal Aspects of the Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act" in the prospectus. With respect to any distribution
date, a net prepayment interest shortfall is the amount by which the aggregate
of prepayment interest shortfalls during the portion of the prepayment period
occurring in the calendar month preceding the month of the distribution date
exceeds the aggregate amount payable on the distribution date by the master
servicer as described under "Servicing of Mortgage Loans--Adjustment to Master
Servicing Fee in Connection with Prepaid Mortgage Loans." A prepayment
interest shortfall is the amount by which interest paid by a borrower in
connection with a prepayment of principal on a mortgage loan is less than one
month's interest at the related mortgage rate on the stated principal balance
of the mortgage loan. Each class' pro rata share of the net interest
shortfalls will be based on the amount of interest the class otherwise would
have been entitled to receive on the distribution date.
Interest will be calculated and payable on the basis of a 360-day
year divided into twelve 30-day months.
If on a particular distribution date, available funds in the
certificate account applied in the order described above under "--Priority
of Distributions Among Certificates" are not sufficient to make a full
distribution of the interest entitlement on the certificates, interest will be
distributed on each class of certificates of equal priority based on the
amount of interest it would otherwise have been entitled to receive in the
absence of the shortfall. Any unpaid interest amount will be carried forward
and added to the amount holders of each class of certificates will be entitled
to receive on the next distribution date. A shortfall could occur, for
example, if losses realized on the mortgage loans were exceptionally high or
were concentrated in a particular month. Any unpaid interest amount so carried
forward will not bear interest.
Principal
General. All payments and other amounts received in respect of
principal of the mortgage loans will be allocated between the class PO
certificates, on the one hand, and the senior certificates, other than the
notional amount certificates and the class PO certificates, and the
subordinated certificates, on the other hand, in each case based on the
applicable PO percentage and the applicable non-PO percentage, respectively,
of those amounts.
The non-PO percentage with respect to a discount mortgage loan -
namely any mortgage loan with a net mortgage rate less than _____% - will be
equal to the net mortgage rate divided by _____%. The non-PO percentage with
respect to a non-discount mortgage loan - namely any mortgage loan with a net
mortgage rate equal to or greater than _____% - will be 100%. The PO
percentage with respect to any discount mortgage loan will be equal to _____%
minus the net mortgage rate and then divided by _____%. The PO percentage with
respect to any non-discount mortgage loan will be 0%.
Non-PO Formula Principal Amount. On each distribution date, the
non-PO formula principal amount will be distributed as principal of the senior
certificates, other than the notional amount certificates and the class PO
certificates, in an amount up to the senior principal distribution amount and
as principal of the subordinated certificates, in an amount up to the
subordinated principal distribution amount.
The non-PO formula principal amount for any distribution date will
equal the sum of the applicable non-PO percentage of:
(a) all monthly payments of principal due on each mortgage loan on
the related due date,
(b) the principal portion of the purchase price of each mortgage
loan that was repurchased by the seller or another person
pursuant to the pooling and servicing agreement as of the
distribution date,
(c) the Substitution Adjustment Amount in connection with any
deleted mortgage loan received with respect to the distribution
date,
(d) any insurance proceeds or liquidation proceeds allocable to
recoveries of principal of mortgage loans that are not yet
liquidated mortgage loans received during the calendar month
preceding the month of the distribution date,
(e) with respect to each mortgage loan that became a liquidated
mortgage loan during the calendar month preceding the month of
the distribution date, the amount of the liquidation proceeds
allocable to principal received with respect to the mortgage
loan, and
(f) all partial and full principal prepayments by borrowers
received during the related prepayment period.
Senior Principal Distribution Amount. On each distribution date, the
non-PO formula principal amount, up to the amount of the senior principal
distribution amount for the distribution date, will be distributed as
principal of the following classes of senior certificates, in the following
order of priority:
o to the class A-R certificates, until their class certificate
balance is reduced to zero and
o to the class A-1 certificates, until their class certificate
balance is reduced to zero.
The prepayment period means the period from the sixteenth day of a
calendar month, or in the case of the first distribution date, from the
cut-off date, through the fifteenth day of the following calendar month.
The senior principal distribution amount for any distribution date
will equal the sum of:
o the senior percentage of the applicable non-PO percentage of
all amounts described in clauses (a) through (d) of the
description of non-PO formula principal amount above for the
distribution date,
o for each mortgage loan that became a liquidated mortgage loan
during the calendar month preceding the month of the
distribution date, the lesser of:
o the senior percentage of the applicable non-PO percentage
of the stated principal balance of the mortgage loan, and
o either:
o the senior prepayment percentage, or
o if an excess loss was sustained on the liquidated
mortgage loan during the preceding calendar month,
the senior percentage of the applicable non-PO
percentage of the amount of the liquidation proceeds
allocable to principal received on the mortgage loan,
and
o the senior prepayment percentage of the applicable non-PO
percentage of amounts described in clause (f) of the
description of non-PO formula principal amount above for the
distribution date;
provided, however, that if a bankruptcy loss that is an excess loss is
sustained on a mortgage loan that is not a liquidated mortgage loan, the
senior principal distribution amount will be reduced on the related
distribution date by the senior percentage of the applicable non-PO percentage
of the principal portion of the bankruptcy loss.
The stated principal balance means for any mortgage loan and due
date, the unpaid principal balance of the mortgage loan as of the due date, as
specified in its amortization schedule at the time, before any adjustment to
the amortization schedule for any moratorium or similar waiver or grace
period, after giving effect to any previous partial prepayments and
liquidation proceeds received and to the payment of principal due on the due
date and irrespective of any delinquency in payment by the related mortgagor.
The pool principal balance with respect to any distribution date equals the
aggregate of the stated principal balances of the mortgage loans outstanding
on the due date in the month preceding the month of the distribution date.
The senior percentage for any distribution date is the percentage
equivalent of a fraction the numerator of which is the aggregate of the class
certificate balances of each class of senior certificates, other than the
class PO certificates, immediately before the distribution date and the
denominator of which is the aggregate of the class certificate balances of all
classes of certificates, other than the class PO certificates, immediately
before the distribution date. The subordinated percentage for any distribution
date will be calculated as the difference between 100% and the senior
percentage for the distribution date.
The senior prepayment percentage for any distribution date occurring
during the five years beginning on the first distribution date will equal
100%. After that five years, the senior prepayment percentage will be
gradually reduced as described in the following paragraph. This
disproportionate allocation of unscheduled payments of principal will have the
effect of accelerating the amortization of the senior certificates, other than
the class PO certificates, which receive these unscheduled payments of
principal while, in the absence of realized losses, increasing the interest in
the pool principal balance evidenced by the subordinated certificates.
Increasing the respective interest of the subordinated certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinated certificates. The subordinated
prepayment percentage as of any distribution date will be calculated as the
difference between 100% and the senior prepayment percentage.
The senior prepayment percentage for any distribution date occurring
on or after the fifth anniversary of the first distribution date will be as
follows:
o for any distribution date in the first year after the fifth
anniversary, the senior percentage plus _____% of the
subordinated percentage for the distribution date,
o for any distribution date in the second year after the fifth
anniversary, the senior percentage plus _____% of the
subordinated percentage for the distribution date,
o for any distribution date in the third year after the fifth
anniversary, the senior percentage plus _____% of the
subordinated percentage for the distribution date,
o for any distribution date in the fourth year after the fifth
anniversary, the senior percentage plus _____% of the
subordinated percentage for the distribution date, and
o for any distribution date after the fifth anniversary, the
senior percentage for the distribution date, unless on any
distribution date the senior percentage exceeds the initial
senior percentage, in which case the senior prepayment
percentage for the distribution date will once again equal
100%.
Notwithstanding the foregoing, no decrease in the senior prepayment
percentage will occur unless both of the step down conditions listed below are
satisfied:
o the outstanding principal balance of all mortgage loans
delinquent 60 days or more, averaged over the preceding six
month period, as a percentage of the aggregate principal
balance of the subordinated certificates on the distribution
date, does not equal or exceed ____%, and
o cumulative realized losses on the mortgage loans do not exceed:
o for the distribution date on the fifth anniversary of the first
distribution date, _____% of the aggregate of the principal
balances of the subordinated certificates as of the cut-off
date,
o for the distribution date on the sixth anniversary of the first
distribution date, _____% of the aggregate of the principal
balances of the subordinated certificates as of the cut-off
date,
o for the distribution date on the seventh anniversary of the
first distribution date, _____% of the aggregate of the
principal balances of the subordinated certificates as of the
cut-off date,
o for the distribution date on the eighth anniversary of the
first distribution date, _____% of the aggregate of the
principal balances of the subordinated certificates as of the
cut-off date, and
o for the distribution date on the ninth anniversary of the first
distribution date, _____% of the aggregate of the principal
balances of the subordinated certificates as of the cut-off
date.
If on any distribution date the allocation to the class or classes of
senior certificates, other than the class PO certificates, then entitled to
distributions of principal of full and partial principal prepayments and other
amounts in the percentage required above would reduce the outstanding class
certificate balance of the class or classes below zero, the distribution to
the class or classes of certificates of the senior prepayment percentage of
those amounts for the distribution date will be limited to the percentage
necessary to reduce the related class certificate balances to zero.
Subordinated Principal Distribution Amount. On each distribution
date, to the extent of available funds, the non-PO formula principal amount,
up to the amount of the subordinated principal distribution amount for the
distribution date, will be distributed as principal of the subordinated
certificates. Except as provided in the next paragraph, each class of
subordinated certificates will be entitled to receive its pro rata share of
the subordinated principal distribution amount, based on its respective class
certificate balance, in each case to the extent of the amount available from
available funds for distribution of principal. Distributions of principal of
the subordinated certificates will be made sequentially to the classes of
subordinated certificates in the order of their numerical class designations,
beginning with the class M certificates, until their respective class
certificate balances are reduced to zero.
With respect to each class of subordinated certificates, if:
o on any distribution date the applicable credit support
percentage, i.e. sum of the related class subordination
percentages of the class and all classes of subordinated
certificates which have higher numerical class designations
than the class, is less than
o the original applicable credit support percentage, i.e. the
applicable credit support percentage for the class on the date
of issuance of the certificates,
then no distribution of partial principal prepayments and principal
prepayments in full will be made to any of those classes -- these classes
referred to as the restricted classes -- and the amount of partial principal
prepayments and principal prepayments in full otherwise distributable to the
restricted classes will be allocated among the remaining classes of
subordinated certificates, pro rata, based upon their respective class
certificate balances, and distributed in the sequential order described above.
The class subordination percentage with respect to any distribution
date and each class of subordinated certificates, will equal the fraction,
expressed as a percentage, the numerator of which is the class certificate
balance of the class of subordinated certificates immediately before the
distribution date and the denominator of which is the aggregate of the class
certificate balances of all classes of certificates immediately before the
distribution date.
The approximate original applicable credit support percentages for
the subordinated certificates on the date of issuance of the certificates are
expected to be as follows:
Class M........................ %
Class B-1...................... %
Class B-2...................... %
Class B-3...................... %
Class B-4...................... %
Class B-5...................... %
For purposes of calculating the applicable credit support percentages
of the subordinated certificates, the class M certificates will be considered
to have a lower numerical class designation than each other class of
subordinated certificates.
The subordinated principal distribution amount for any distribution
date will equal:
o the sum of:
o the subordinated percentage of the applicable non-PO
percentage of all amounts described in clauses (a) through
(d) of the description of non-PO formula principal amount
on [S-33] for the distribution date,
o for each mortgage loan that became a liquidated mortgage
loan during the calendar month preceding the month of the
distribution date, the applicable non-PO percentage of the
liquidation proceeds allocable to principal received on
the mortgage loan, after application of the amounts
pursuant to the second bulleted item of the description of
senior principal distribution on page [S-32] amount up to
the subordinated percentage of the applicable non-PO
percentage of the stated principal balance of the mortgage
loan, and
o the subordinated prepayment percentage of the applicable
non-PO percentage of the amounts described in clause (f)
of the description of non-PO formula principal amount on
[S-33] for the distribution date,
o reduced by the amount of any payments in respect of class PO
deferred amounts on the related distribution date.
Residual Certificates. The class A-R certificates will remain
outstanding for so long as the trust fund shall exist, whether or not they are
receiving current distributions of principal or interest. In addition to
distributions of interest and principal as described above, on each
distribution date, the holders of the class A-R certificates will be entitled
to receive any available funds remaining after payment of interest and
principal on the senior certificates and class PO deferred amounts on the
class PO certificates and interest and principal on the subordinated
certificates, as described above. It is not anticipated that there will be any
significant amounts remaining for that distribution.
Class PO Principal Distribution Amount. On each distribution date,
distributions of principal of the class PO certificates will be made in an
amount equal to the lesser of (x) the PO formula principal amount for the
distribution date and (y) the product of:
o available funds remaining after distribution of interest on the
senior certificates, and
o a fraction, the numerator of which is the PO formula principal
amount and the denominator of which is the sum of the PO
formula principal amount and the senior principal distribution
amount.
If the class PO principal distribution amount on a distribution date
is calculated as provided in clause (y) above, principal distributions to
holders of the senior certificates, other than the class PO certificates will
be in an amount equal to the product of available funds remaining after
distribution of interest on the senior certificates and a fraction, the
numerator of which is the senior principal distribution amount and the
denominator of which is the sum of the senior principal distribution amount
and the PO formula principal amount.
The PO formula principal amount for any distribution date will equal
the sum of the applicable PO percentage of:
o all monthly payments of principal due on each mortgage loan on
the related due date,
o the principal portion of the purchase price of each mortgage
loan that was repurchased by the seller or another person
pursuant to the pooling and servicing agreement as of the
distribution date,
o the Substitution Adjustment Amount in connection with any
deleted mortgage loan received for the distribution date,
o any insurance proceeds or liquidation proceeds allocable to
recoveries of principal of mortgage loans that are not yet
liquidated mortgage loans received during the calendar month
preceding the month of the distribution date,
o for each mortgage loan that became a liquidated mortgage loan
during the calendar month preceding the month of the
distribution date, the amount of liquidation proceeds allocable
to principal received on the mortgage loan, and
o all partial and full principal prepayments by borrowers
received during the related prepayment period;
provided, however, that if a bankruptcy loss that is an excess loss is
sustained on a discount mortgage loan that is not a liquidated mortgage loan,
the PO formula principal amount will be reduced on the related distribution
date by the applicable PO percentage of the principal portion of the
bankruptcy loss.
Allocation of Losses
On each distribution date, the applicable PO percentage of any
realized loss, including any excess loss, on a discount mortgage loan will be
allocated to the class PO certificates until their class certificate balance
is reduced to zero. The amount of any realized loss, other than an excess
loss, allocated on or before the senior credit support depletion date will be
treated as a class PO deferred amount. To the extent funds are available on
the distribution date or on any future distribution date from amounts that
would otherwise be allocable to the subordinated principal distribution
amount, class PO deferred amounts will be paid on the class PO certificates
before distributions of principal on the subordinated certificates. Any
distribution of available funds in respect of unpaid class PO deferred amounts
will not further reduce the class certificate balance of the class PO
certificates. The class PO deferred amounts will not bear interest. The class
certificate balance of the class of subordinated certificates then outstanding
with the highest numerical class designation will be reduced by the amount of
any payments in respect of class PO deferred Amounts. After the senior credit
support depletion date, no new class PO deferred amounts will be created.
For purposes of allocating losses to the subordinated certificates,
the class M certificates will be considered to have a lower numerical class
designation than each other class of subordinated certificates.
The senior credit support depletion date is the date on which the
class certificate balance of each class of subordinated certificates has been
reduced to zero.
On each distribution date, the applicable non-PO percentage of any
realized loss, other than any excess loss, will be allocated first to the
subordinated certificates, in the reverse order of their numerical class
designations, beginning with the class of subordinated certificates then
outstanding with the highest numerical class designation, in each case until
the class certificate balance of the respective class of certificates has been
reduced to zero, and then to the senior certificates other than the notional
amount certificates and the class PO certificates pro rata, based upon their
respective class certificate balances.
On each distribution date, the applicable non-PO percentage of excess
losses will be allocated pro rata among the classes of senior certificates,
other than the notional amount certificates and the class PO certificates, and
the subordinated certificates based upon their respective class certificate
balances.
Because principal distributions are paid to some classes of
certificates, other than the class PO certificates, before other classes of
certificates, holders of the certificates that are entitled to receive
principal later bear a greater risk of being allocated realized losses on the
mortgage loans than holders of classes that are entitled to receive principal
earlier.
In general, a realized loss means, for a liquidated mortgage loan,
the amount by which the remaining unpaid principal balance of the mortgage
loan exceeds the amount of liquidation proceeds applied to the principal
balance of the related mortgage loan. Excess losses are special hazard losses
in excess of the special hazard loss coverage amount, bankruptcy losses in
excess of the bankruptcy loss coverage amount and fraud losses in excess of
the fraud loss coverage amount. Bankruptcy losses are losses that are incurred
as a result of debt service reductions and deficient valuations. Special
hazard losses are realized losses in respect of special hazard mortgage loans.
Fraud losses are losses sustained on a liquidated mortgage loan by reason of a
default arising from fraud, dishonesty or misrepresentation. See "Credit
Enhancement--Subordination".
A liquidated mortgage loan is a defaulted mortgage loan as to which
the master servicer has determined that all recoverable liquidation and
insurance proceeds have been received. A special hazard mortgage loan is a
liquidated mortgage loan as to which the ability to recover the full amount
due under it was substantially impaired by a hazard not insured against under
a standard hazard insurance policy of the type described in the prospectus
under "Credit Enhancement--Special Hazard Insurance Policies". See "Credit
Enhancement--Subordination".
Structuring Assumptions
Unless otherwise specified, the information in the tables in this
prospectus supplement has been prepared on the basis of the following assumed
characteristics of the mortgage loans and the following additional
assumptions, which combined are the structuring assumptions:
o the mortgage pool consists of two mortgage loans with the
following characteristics:
<TABLE>
<CAPTION>
Remaining
Original Term Term to
Net to Maturity Maturity
Principal Balance Mortgage Rate Mortgage Rate (in months) (in months)
----------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
$ ............ % %
$ ............ % %
</TABLE>
o the mortgage loans prepay at the specified constant percentages
of Standard Prepayment Assumption, or SPA,
o no defaults in the payment by mortgagors of principal of and
interest on the mortgage loans are experienced,
o scheduled payments on the mortgage loans are received on the
first day of each month commencing in the calendar month
following the closing date and are computed before giving
effect to prepayments received on the last day of the prior
month,
o prepayments are allocated as described in this prospectus
supplement without giving effect to loss and delinquency tests,
o there are no net interest shortfalls and prepayments represent
prepayments in full of individual mortgage loans and are
received on the last day of each month, commencing in the
calendar month of the closing date,
o the scheduled monthly payment for each mortgage loan has been
calculated such that each mortgage loan will amortize in
amounts sufficient to repay the current balance of the mortgage
loan by its respective remaining term to maturity,
o the initial class certificate balance or notional amount, as
applicable, of each class of certificates is as set forth on
the cover page of this prospectus supplement or as described
under "Description of the Certificates--General",
o interest accrues on each interest bearing class of certificates
at the applicable interest rate set forth or described on the
cover page of this prospectus supplement or as described in
this prospectus supplement,
o distributions in respect of the certificates are received in
cash on the 25th day of each month commencing in the calendar
month following the closing date,
o the closing date of the sale of the certificates is _____,
2000,
o the seller is not required to repurchase or substitute for any
mortgage loan,
o the master servicer does not exercise the option to repurchase
the mortgage loans described under "--Optional Purchase of
Defaulted Loans" and "--Optional Termination," and
o no class of certificates becomes a restricted class.
While it is assumed that each of the mortgage loans prepays at the specified
constant percentages of SPA, this is not likely to be the case. Moreover,
discrepancies may exist between the characteristics of the actual mortgage
loans which will be delivered to the trustee and characteristics of the
mortgage loans used in preparing the tables.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this prospectus supplement is
the SPA, which represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans. SPA does not
purport to be either a historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the mortgage loans. 100%
SPA assumes prepayment rates of _____% per annum of the then unpaid principal
balance of the pool of mortgage loans in the first month of the life of the
mortgage loans and an additional _____% per annum in each month after the
first month, for example, _____% per annum in the second month, until the 30th
month. Beginning in the 30th month and in each month after the 30th month
during the life of the mortgage loans, 100% SPA assumes a constant prepayment
rate of _____% per annum. Multiples may be calculated from this prepayment
rate sequence. For example, 250% SPA assumes prepayment rates will be _____%
per annum in month one, _____% per annum in month two, and increasing by
_____% in each succeeding month until reaching a rate of _____% per annum in
month 30 and remaining constant at _____% per annum after month 30. 0% SPA
assumes no prepayments. There is no assurance that prepayments will occur at
any SPA rate or at any other constant rate.
Optional Purchase of Defaulted Loans
The master servicer may, at its option, purchase from the trust fund
any mortgage loan which is delinquent in payment by 91 days or more. Any
purchase shall be at a price equal to 100% of the stated principal balance of
the mortgage loan plus accrued interest on it at the applicable mortgage rate
from the date through which interest was last paid by the related mortgagor or
advanced, and not reimbursed, to the first day of the month in which the
amount is to be distributed.
Optional Termination
If the pool principal balance of the mortgage loans and foreclosed or
otherwise repossessed properties at the time of repurchase being less than 10%
of the cut-off date pool principal balance, the master servicer will have the
right to repurchase all remaining mortgage loans and foreclosed or otherwise
repossessed properties in the mortgage pool and thus effect early retirement
of the certificates. If the master servicer exercises the option, the purchase
price distributed with respect to each certificate will be 100% of its then
outstanding principal balance plus any class PO deferred amounts in the case
of the class PO certificates and, in the case of an interest bearing
certificate, any unpaid accrued interest on it at the applicable pass-through
rate, in each case reduced as provided in the pooling and servicing agreement
if the purchase price is based in part on the appraised value of any
foreclosed or otherwise repossessed properties and the appraised value is less
than the stated principal balance of the related mortgage loans. Distributions
on the certificates in respect of any optional termination will first be paid
to the senior certificates and then to the subordinated certificates. The
proceeds from any optional termination distribution may not be sufficient to
distribute the full amount to which each class of certificates is entitled if
the purchase price is based in part on the appraised value of any foreclosed
or otherwise repossessed property and the appraised value is less than the
stated principal balance of the related mortgage loan.
The Trustee
_____ will be the trustee under the pooling and servicing agreement.
The depositor and the master servicer may maintain other banking relationships
in the ordinary course of business with _____. Offered certificates may be
surrendered at the ___________________, Attention: _____ or at any other
address the trustee designates from time to time.
Restrictions on Transfer of the Class A-R Certificates
The class A-R certificates will be affected by the restrictions on
transfer described in the prospectus under "Material Federal Income Tax
Consequences--REMIC Certificates--Tax-Related Restrictions on Transfers of
Residual Certificates--Disqualified Organizations", "--Noneconomic Residual
Interests" and "--Foreign Investors". The pooling and servicing agreement
provides that the class A-R certificates, in addition to other ERISA
restricted classes of certificates, may not be acquired by an ERISA plan. See
"ERISA Considerations." Each class A-R certificate will contain a legend
describing the foregoing restrictions.
<PAGE>
Yield, Prepayment and Maturity Considerations
General
The effective yield to the holders of each interest bearing class of
certificates will be lower than the yield otherwise produced by the applicable
rate at which interest is passed through to the holders and the purchase price
of the certificates because monthly distributions will not be payable to the
holders until the 25th day, or, if that day is not a business day, the
following business day, of the month following the month in which interest
accrues on the mortgage loans, without any additional distribution of interest
or earnings on them for the delay.
Delinquencies on the mortgage loans which are not advanced by or on
behalf of the master servicer -- because amounts, if advanced, would be
nonrecoverable -- will adversely affect the yield on the certificates. Because
of the priority of distributions, shortfalls resulting from delinquencies not
so advanced will be borne first by the subordinated certificates, in the
reverse order of their numerical class designations, and then by the senior
certificates, pro rata. If, as a result of the shortfalls, the aggregate of
the class certificate balances of all classes of certificates exceeds the pool
principal balance, the class certificate balance of the class of subordinated
certificates then outstanding with the highest numerical class designation
will be reduced by the amount of the excess.
Net interest shortfalls will adversely affect the yields on the
classes of offered certificates. In addition, although all losses initially
will be borne by the subordinated certificates, in the reverse order of their
numerical class designations, either directly or through distributions in
respect of class PO deferred amounts on the class PO certificates, excess
losses will be borne by all classes of certificates, other than the notional
amount certificates, on a pro rata basis. Moreover, since the subordinated
principal distribution amount for each distribution date will be reduced by
the amount of any distributions on the distribution date in respect of class
PO deferred amounts, the amount distributable as principal on each
distribution date to each class of subordinated certificates then entitled to
a distribution of principal will be less than it otherwise would be in the
absence of the class PO deferred amounts. As a result, the yields on the
offered certificates will depend on the rate and timing of realized losses,
including excess losses. Excess losses could occur at a time when one or more
classes of subordinated certificates are still outstanding and otherwise
available to absorb other types of realized losses.
For purposes of allocating losses and shortfalls resulting from
delinquencies to the subordinated certificates, the class M certificates will
be considered to have a lower numerical class designation than each other
class of subordinated certificates.
Prepayment Considerations and Risks
The rate of principal payments on the offered certificates, the
aggregate amount of distributions on the offered certificates and the yield to
maturity of the offered certificates will be related to the rate and timing of
payments of principal on the mortgage loans. The rate of principal payments on
the mortgage loans will in turn be affected by the amortization schedules of
the mortgage loans and by the rate of principal prepayments, including for
this purpose prepayments resulting from refinancing, liquidations of the
mortgage loans due to defaults, casualties, condemnations and repurchases by
the seller or master servicer. The mortgage loans are affected by the
"due-on-sale" provisions included in them. See "The Mortgage Pool".
Prepayments, liquidations and purchases of the mortgage loans will
result in distributions on the offered certificates of principal amounts which
would otherwise be distributed over the remaining terms of the mortgage loans.
This includes any optional purchase by the master servicer of defaulted
mortgage loans and any optional repurchase of the remaining mortgage loans in
connection with the termination of the trust fund, in each case as described
in this prospectus supplement. Since the rate of payment of principal of the
mortgage loans will depend on future events and a variety of factors, no
assurance can be given as to the rate of payment of principal of the mortgage
loans or the rate of principal prepayments. The extent to which the yield to
maturity of a class of offered certificates may vary from the anticipated
yield will depend upon the degree to which the offered certificate is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of
the mortgage loans. Further, an investor should consider the risk that, in the
case of the principal only certificates and any other offered certificate
purchased at a discount, a slower than anticipated rate of principal payments,
including prepayments, on the mortgage loans could result in an actual yield
to the investor that is lower than the anticipated yield and, in the case of
the interest only certificates and any other offered certificate purchased at
a premium, a faster than anticipated rate of principal payments could result
in an actual yield to the investor that is lower than the anticipated yield.
Investors in the interest only certificates should carefully consider the risk
that a rapid rate of principal payments on the mortgage loans could result in
the failure of the investors to recover their initial investments.
The rate of principal payments, including prepayments, on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes
in mortgagors' housing needs, job transfers, unemployment, mortgagors' net
equity in the mortgaged properties, servicing decisions, as well as the
characteristics of the mortgage loans included in the mortgage pool as
described under "The Mortgage Pool--General" and "--Underwriting Process".
In addition, _____'s streamlined documentation program may affect the rate of
prepayments on the mortgage loans. In general, if prevailing interest rates
were to fall significantly below the mortgage rates on the mortgage loans, the
mortgage loans could experience higher prepayment rates than if prevailing
interest rates were to remain at or above the mortgage rates on the mortgage
loans. Conversely, if prevailing interest rates were to rise significantly,
the rate of prepayments on the mortgage loans would generally be expected to
decrease. No assurances can be given as to the rate of prepayments on the
mortgage loans in stable or changing interest rate environments. Furthermore,
with respect to up to _____% of the mortgage loans, the depositor may deliver
all or a portion of each related mortgage file to the trustee not later than
thirty days after the closing date. Should the seller fail to deliver all or a
portion of any mortgage files to the depositor or other designee of the
depositor or, at the depositor's direction, to the trustee, within that
period, the seller will be required to use its best efforts to deliver a
substitute mortgage loan for the related delayed delivery mortgage loan or
repurchase the related delayed delivery mortgage loan. Any repurchases
pursuant to this provision would also have the effect of accelerating the rate
of prepayments on the mortgage loans.
As described under "Description of the Certificates--Principal", the
senior prepayment percentage of the applicable non-PO percentage of all
principal prepayments will be initially distributed to the classes of senior
certificates, other than the class PO certificates, then entitled to receive
principal prepayment distributions. This may result in all, or a
disproportionate percentage, of the principal prepayments being distributed to
holders of the classes of senior certificates and none, or less than their pro
rata share, of the principal prepayments being distributed to holders of the
subordinated certificates during the periods of time described in the
description of senior prepayment percentage on page [S-34].
The timing of changes in the rate of prepayments on the mortgage
loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal payments is consistent with an investor's
expectation. In general, the earlier a prepayment of principal on the mortgage
loans, the greater the effect on an investor's yield to maturity. The effect
on an investor's yield as a result of principal payments occurring at a rate
higher, or lower, than the rate anticipated by the investor during the period
immediately following the issuance of the offered certificates may not be
offset by a subsequent like decrease, or increase, in the rate of principal
payments.
The tables in the "Yield, Prepayment and Maturity Considerations"
section indicate the sensitivity of the pretax corporate bond equivalent
yields to maturity of the illustrated classes of certificates to various
constant percentages of SPA. The yields set forth in the tables were
calculated by determining the monthly discount rates that, when applied to the
assumed streams of cash flows to be paid on the applicable classes of
certificates, would cause the discounted present value of the assumed streams
of cash flows to equal the assumed aggregate purchase prices of the applicable
classes and converting the monthly rates to corporate bond equivalent rates.
Those calculations do not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by
them as distributions on the certificates and consequently do not purport to
reflect the return on any investment in any class of certificates when the
reinvestment rates are considered.
Sensitivity of the Class X Certificates
As indicated in the following table, the yield to investors in the
class X certificates will be sensitive to the rate of principal payments,
including prepayments, of the non-discount mortgage loans, particularly those
with high net mortgage rates, which generally can be prepaid at any time. On
the basis of the assumptions described under this heading, the yield to
maturity on the class X certificates would be approximately _____% if
prepayments were to occur at a constant rate of approximately _____% SPA. If
the actual prepayment rate of the non-discount mortgage loans were to exceed
the foregoing level for as little as one month while equaling the level for
the remaining months, the investors in the class X certificates would not
fully recoup their initial investments.
As described under "Description of the Certificates--General", the
pass-through rate of the class X certificates in effect from time to time is
calculated by reference to the net mortgage rates of the non-discount mortgage
loans. The non-discount mortgage loans will have higher net mortgage rates,
and higher mortgage rates, than the other mortgage loans. In general, mortgage
loans with higher mortgage rates tend to prepay at higher rates than mortgage
loans with relatively lower mortgage rates in response to a given change in
market interest rates. As a result, the non-discount mortgage loans may prepay
at higher rates, which will reduce the pass-through rate and notional amount
of the class X certificates.
The information set forth in the following table has been prepared on
the basis of the structuring assumptions and on the assumption that the
purchase price of the class X certificates, expressed as a percentage of its
initial notional amount, is as follows:
Class Price
----- -----
Class X.................................... %
The price in the above table does not include accrued interest.
Accrued interest has been added to the price in calculating the yields in the
following table.
<TABLE>
<CAPTION>
Sensitivity of the Class X Certificates to Prepayments
Pre-Tax Yields to Maturity
Percentage off SPA
Class 0% 100% 250% 400% 500%
----- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Class X....................... % % % % %
</TABLE>
It is unlikely that the non-discount mortgage loans will have the
precise characteristics described in this prospectus supplement or that the
non-discount mortgage loans will all prepay at the same rate until maturity or
that all of the non-discount mortgage loans will prepay at the same rate or
time. As a result of these factors, the pretax yields on the class X
certificates are likely to differ from those shown in the table above, even if
all of the non-discount mortgage loans prepay at the indicated percentages of
SPA. No representation is made as to the actual rate of principal payments on
the non-discount mortgage loans for any period or over the life of the class X
certificates or as to the yield on the class X certificates. Investors must
make their own decisions as to the appropriate prepayment assumptions to be
used in deciding whether to purchase the class X certificates.
Sensitivity of the Principal Only Certificates
The class PO certificates will be principal only certificates and
will not bear interest. As indicated in the following table, a lower than
anticipated rate of principal payments, including prepayments, on the discount
mortgage loans with respect to the class PO certificates will have a negative
effect on the yield to investors in the principal only certificates.
As described above under "Description of the
Certificates--Principal", the class PO principal distribution amount is
calculated by reference to the principal payments, including prepayments, on
the discount mortgage loans. The discount mortgage loans will have lower net
mortgage rates, and lower mortgage rates, than the other mortgage loans. In
general, mortgage loans with higher mortgage rates tend to prepay at higher
rates than mortgage loans with relatively lower mortgage rates in response to
a given change in market interest rates. As a result, the discount mortgage
loans may prepay at lower rates, which will reduce the rate of payment of
principal and the resulting yield of the class PO certificates.
The information set forth in the following table has been prepared on
the basis of the structuring assumptions and on the assumption that the
aggregate purchase price of the principal only certificates, expressed as a
percentage of its initial class certificate balance, is as follows:
Class Price
----- -----
Class PO...................................... %
<TABLE>
<CAPTION>
Sensitivity of the Principal Only Certificates to Prepayments
Pre-Tax Yields to Maturity
Percentage off SPA
Class 0% 100% 250% 400% 500%
----- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Class PO...................... % % % % %
</TABLE>
It is unlikely that the discount mortgage loans will have the precise
characteristics described in this prospectus supplement or that the discount
mortgage loans will all prepay at the same rate until maturity or that all of
the discount mortgage loans will prepay at the same rate or time. As a result
of these factors, the pre-tax yield on the principal only certificates is
likely to differ from those shown in the table above, even if all of the
discount mortgage loans prepay at the indicated percentages of SPA. No
representation is made as to the actual rate of principal payments on the
discount mortgage loans for any period or over the life of the principal only
certificates or as to the yield on the principal only certificates. Investors
must make their own decisions as to the appropriate prepayment assumptions to
be used in deciding whether to purchase principal only certificates.
Additional Information
The depositor intends to file additional yield tables and other
computational materials with respect to one more classes of offered
certificates with the Securities and Exchange Commission in a report on Form
8-K. The tables and materials were prepared by the underwriter at the request
of prospective investors, based on assumptions provided by, and satisfying,
their special requirements. The tables and assumptions may be based on
assumptions that differ from the structuring assumptions. Accordingly, the
tables and other materials may not be relevant to or appropriate for investors
other than those specifically requesting them.
Weighted Average Lives of the Offered Certificates
The weighted average life of an offered certificate is determined by
(a) multiplying the amount of the net reduction, if any, of the class
certificate balance of the certificate on each distribution date by the number
of years from the date of issuance to the distribution date, (b) summing the
results and (c) dividing the sum by the aggregate amount of the net reductions
in class certificate balance of the certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of
payments, including prepayments, of the mortgage loans, see "--Prepayment
Considerations and Risks" in this prospectus supplement and "Yield and
Prepayment Considerations" in the prospectus.
In general, the weighted average lives of the offered certificates
will be shortened if the level of prepayment of principal of the mortgage
loans increases. However, the weighted average lives of the offered
certificates will depend upon a variety of other factors, including the timing
of changes in the rate of principal payments, the priority sequence of
distributions of principal of the classes of certificates. See "Description of
the Certificates--Principal".
The interaction of the foregoing factors may have different effects
on various classes of offered certificates and the effects on any class may
vary at different times during the life of the class. Accordingly, no
assurance can be given as to the weighted average life of any class of offered
certificates. Further, to the extent the prices of the offered certificates
represent discounts or premiums to their respective original class certificate
balances, variability in the weighted average lives of the classes of offered
certificates will result in variability in the related yields to maturity. For
an example of how the weighted average lives of the classes of offered
certificates may be affected at various constant percentages of SPA, see the
decrement tables under the next heading.
Decrement Tables
The following tables indicate the percentages of the initial class
certificate balances of the classes of offered certificates, other than the
class X certificates, that would be outstanding after each of the dates shown
at various constant percentages of SPA and the corresponding weighted average
lives of the classes. The tables have been prepared on the basis of the
structuring assumptions. It is not likely that the mortgage loans will have
the precise characteristics described in this prospectus supplement or all of
the mortgage loans will prepay at the constant percentages of SPA specified in
the tables or at any other constant rate. Moreover, the diverse remaining
terms to maturity of the mortgage loans could produce slower or faster
principal distributions than indicated in the tables, which have been prepared
using the specified constant percentages of SPA, even if the remaining term to
maturity of the mortgage loans is consistent with the remaining terms to
maturity of the mortgage loans specified in the structuring assumptions.
<PAGE>
<TABLE>
<CAPTION>
Percent of Initial Class Certificate Balances outstanding
Class A-1 Class PO
Percentage of SPA Percentage of SPA
----------------------------------- ------------------------------------
Distribution Date 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
June 2000
June 2001
June 2002
June 2003
June 2004
June 2005
June 2006
June 2007
June 2008
June 2009
June 2010
June 2011
June 2012
June 2013
June 2014
June 2015
June 2016
June 2017
June 2018
June 2019
June 2020
June 2021
June 2022
June 2023
June 2024
June 2025
June 2026
June 2027
June 2028
June 2029
Weighted Average Life
in years
-------------------------
</TABLE>
In the above table, the percent of initial class certificate balances
outstanding are rounded to the nearest whole percentage and the weighted
average life is determined as specified under "Weighted Average Lives of the
Offered Certificates" in this prospectus supplement.
<PAGE>
<TABLE>
<CAPTION>
Percent of Initial Class Certificate Balances outstanding
Class A-R Class M, Class B-1 and Class B-2
Percentage of SPA Percentage of SPA
----------------------------------- ------------------------------------
Distribution Date 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
----------------- -- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
June 2000
June 2001
June 2002
June 2003
June 2004
June 2005
June 2006
June 2007
June 2008
June 2009
June 2010
June 2011
June 2012
June 2013
June 2014
June 2015
June 2016
June 2017
June 2018
June 2019
June 2020
June 2021
June 2022
June 2023
June 2024
June 2025
June 2026
June 2027
June 2028
June 2029
Weighted Average Life
in years
</TABLE>
-------------------------
In the above table, the percent of initial class certificate balances
outstanding are rounded to the nearest whole percentage and the weighted
average life is determined as specified under "Weighted Average Lives of the
Offered Certificates" in this prospectus supplement.
Last Scheduled Distribution Date
The last scheduled distribution date for each class of offered
certificates is the distribution date in _____, which is the distribution date
in the month following the month of the latest scheduled maturity date for any
of the mortgage loans. Since the rate of distributions in reduction of the
class certificate balance or notional amount of each class of offered
certificates will depend on the rate of payment, including prepayments, of the
mortgage loans, the class certificate balance or notional amount of any class
could be reduced to zero significantly earlier or later than the last
scheduled distribution date. The rate of payments on the mortgage loans will
depend on their particular characteristics, as well as on prevailing interest
rates from time to time and other economic factors, and no assurance can be
given as to the actual payment experience of the mortgage loans. See "Yield,
Prepayment and Maturity Considerations--Prepayment Considerations and Risks"
and "--Weighted Average Lives of the Offered Certificates" in this prospectus
supplement and "Yield and Prepayment Considerations" in the prospectus.
The Subordinated Certificates
The weighted average life of, and the yield to maturity on, the
subordinated certificates, in increasing order of their numerical class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the mortgage loans.
In particular, the rate and timing of mortgagor defaults and the severity of
ensuing losses on the mortgage loans may be affected by the characteristics of
the mortgage loans included in the mortgage pool as described under "The
Mortgage Pool--General" and "--Underwriting Process". If the actual rate and
severity of losses on the mortgage loans is higher than those assumed by a
holder of a subordinated certificate, the actual yield to maturity of the
certificate may be lower than the yield expected by the holder based on the
holder's assumptions. The timing of losses on mortgage loans will also affect
an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the mortgage pool are consistent with an
investor's expectations. In general, the earlier a loss occurs, the greater
the effect on an investor's yield to maturity. Realized losses on the mortgage
loans will reduce the class certificate balances of the applicable class of
subordinated certificates to the extent of any losses allocated to it, as
described under "Description of the Certificates--Allocation of Losses",
without the receipt of cash attributable to the reduction. In addition,
shortfalls in cash available for distributions on the subordinated
certificates will result in a reduction in the class certificate balance of
the class of subordinated certificates then outstanding with the highest
numerical class designation if and to the extent that the aggregate of the
class certificate balances of all classes of certificates, following all
distributions and the allocation of realized losses on a distribution date,
exceeds the pool principal balance as of the due date occurring in the month
of the distribution date. As a result of the reductions, less interest will
accrue on the class of subordinated certificates than otherwise would be the
case. The yield to maturity of the subordinated certificates will also be
affected by the disproportionate allocation of principal prepayments to the
senior certificates, net interest shortfalls, other cash shortfalls in
available funds and distribution of funds to class PO certificateholders
otherwise available for distribution on the subordinated certificates to the
extent of reimbursement for class PO deferred amounts. See "Description of the
Certificates--Allocation of Losses".
If on any distribution date, the applicable credit support percentage
for any class of subordinated certificates is less than its original
applicable credit support percentage, all partial principal prepayments and
principal prepayments in full available for distribution on the subordinated
certificates will be allocated solely to that class and all other classes of
subordinated certificates with lower numerical class designations, which will
accelerate their amortization relative to that of the restricted classes and
reducing the weighted average lives of the classes of subordinated
certificates receiving the distributions. Accelerating the amortization of the
classes of subordinated certificates with lower numerical class designations
relative to the other classes of subordinated certificates is intended to
preserve the availability of the subordination provided by the other classes.
For purposes of allocating losses and prepayments to the subordinated
certificates, the class M certificates will be considered to have a lower
numerical class designation than each other class of subordinated
certificates.
<PAGE>
Credit Enhancement
Subordination
The rights of the holders of the subordinated certificates to receive
distributions with respect to the mortgage loans will be subordinated to the
rights of the holders of the senior certificates and the rights of the holders
of each class of subordinated certificates, other than the class M
certificates, to receive the distributions will be further subordinated to the
rights of the class or classes of subordinated certificates with lower
numerical class designations, in each case only to the extent described in
this prospectus supplement. The subordination of the subordinated certificates
to the senior certificates and the subordination of the classes of
subordinated certificates with higher numerical class designations to those
with lower numerical class designations is intended to increase the likelihood
of receipt, respectively, by the senior certificateholders and the holders of
subordinated certificates with lower numerical class designations of the
maximum amount to which they are entitled on any distribution date and to
provide the holders protection against realized losses, other than excess
losses. In addition, the subordinated certificates will provide limited
protection against special hazard losses, bankruptcy losses and fraud losses
up to the special hazard loss coverage amount, bankruptcy loss coverage amount
and fraud loss coverage amount, respectively, as described in the following
paragraphs. The applicable non-PO percentage of realized losses, other than
excess losses, will be allocated to the class of subordinated certificates
then outstanding with the highest numerical class designation. In addition,
the class certificate balance of the class of subordinated certificates will
be reduced by the amount of distributions on the class PO certificates in
reimbursement for class PO deferred amounts.
For purposes of allocating losses to the subordinated certificates,
the class M certificates will be considered to have a lower numerical class
designation than each other class of subordinated certificates.
The subordinated certificates will provide limited protection to the
classes of certificates of higher relative priority against:
o special hazard loss coverage amount-- special hazard losses in
an initial amount expected to be up to approximately $_____,
o bankruptcy loss coverage amount-- bankruptcy losses in an
initial amount expected to be up to approximately $_____, and
o fraud loss coverage amount-- fraud losses in an initial amount
expected to be up to approximately $_____.
The special hazard loss coverage amount will be reduced, from time to
time, to be an amount equal on any distribution date to the lesser of:
o the special hazard loss coverage amount as of the closing date
less the amount, if any, of losses attributable to special
hazard mortgage loans incurred since the closing date, or
o the greatest of:
o __% of the aggregate of the principal balances of the
mortgage loans,
o twice the principal balance of the largest mortgage loan,
and
o the aggregate principal balances of the mortgage loans
secured by mortgaged properties located in the single [ ]
postal zip code area having the highest aggregate
principal balance of any zip code area.
All principal balances for the purpose of this definition will be calculated
as of the first day of the month before the month in which the distribution
date occurs after giving effect to scheduled installments of principal and
interest on the mortgage loans then due, whether or not paid.
The fraud loss coverage amount will be reduced, from time to time, by
the amount of fraud losses allocated to the certificates. In addition, the
fraud loss coverage amount will be reduced on the fifth anniversary of the
cut-off date, to zero and on the first, second, third and fourth anniversaries
of the cut-off date, to an amount equal to the lesser of (a) _____% of the
then current pool principal balance in the case of each of the first and
second anniversaries and (b) _____% of the then current pool principal balance
in the case of each of the third and fourth anniversaries and the excess of
the fraud loss coverage amount as of the preceding anniversary of the cut-off
date over the cumulative amount of fraud losses allocated to the certificates
since the preceding anniversary.
The bankruptcy loss coverage amount will be reduced, from time to
time, by the amount of bankruptcy losses allocated to the certificates.
The amount of coverage provided by the subordinated certificates for
special hazard losses, bankruptcy losses and fraud losses may be cancelled or
reduced from time to time for each of the risks covered, provided that the
then current ratings of the certificates assigned by the rating agencies are
not adversely affected as a result. In addition, a reserve fund or other form
of credit enhancement may be substituted for the protection provided by the
subordinated certificates for special hazard losses, bankruptcy losses and
fraud losses.
A deficient valuation is a bankruptcy proceeding whereby the
bankruptcy court may establish the value of the mortgaged property at an
amount less than the then outstanding principal balance of the mortgage loan
secured by the mortgaged property or may reduce the outstanding principal
balance of a mortgage loan. In the case of a reduction in that value of the
related mortgaged property, the amount of the secured debt could be reduced to
that value, and the holder of the mortgage loan thus would become an unsecured
creditor to the extent the outstanding principal balance of the mortgage loan
exceeds the value so assigned to the mortgaged property by the bankruptcy
court. In addition, other modifications of the terms of a mortgage loan can
result from a bankruptcy proceeding, including a debt service reduction being
a reduction of the amount of the monthly payment on the related mortgage loan.
However, none of these shall be considered a debt service reduction or
deficient valuation so long as the master servicer is pursuing any other
remedies that may be available with respect to the related mortgage loan and
either the mortgage loan has not incurred payment default or scheduled monthly
payments of principal and interest are being advanced by the master servicer
without giving effect to any debt service reduction or deficient valuation.
Use of Proceeds
We expect the proceeds to the depositor from the sale of the offered
certificates to be approximately $_____, plus accrued interest, before
deducting issuance expenses payable by the depositor. The depositor will apply
the net proceeds of the sale of the certificates against the purchase price of
the mortgage loans.
Material Federal Income Tax Consequences
For federal income tax purposes, an election will be made to treat
the trust fund as a REMIC. The Residual Certificates will constitute the sole
class of residual interests in the REMIC.
The Regular Certificates will be treated as debt instruments Issued
by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting. Under the
accrual method of accounting, interest income may be required to be included
in a holder's gross income in advance of the holder's actual receipt of that
interest income.
The principal only certificates will be treated for federal income
tax purposes as having been issued with an amount of original issue discount,
or OID, equal to the difference between their principal balance and their
issue price. Although the tax treatment is not entirely certain, notional
amount certificates will be treated as having been issued with OID for federal
income tax purposes equal to the excess of all expected payments of interest
on the certificates over their issue price. Although unclear, a holder of a
notional amount certificate may be entitled to deduct a loss to the extent
that its remaining basis exceeds the maximum amount of future payments to
which the certificateholder would be entitled if there were no further
prepayments of the mortgage loans. The remaining classes of Regular
Certificates, depending on their respective issue prices, as described in the
prospectus under "Material Federal Income Tax Consequences", may be treated as
having been issued with OID for federal income tax purposes. For purposes of
determining the amount and rate of accrual of OID and market discount, the
trust fund intends to assume that there will be prepayments on the mortgage
loans at a rate equal to _____% SPA. No representation is made as to whether
the mortgage loans will prepay at the foregoing rate or any other rate. See
"Yield and Prepayment Considerations" and "Material Federal Income Tax
Consequences" in the prospectus. Computing accruals of OID in the manner
described in the prospectus may, depending on the actual rate of prepayments
during the accrual period, result in the accrual of negative amounts of OID on
the certificates issued with OID in an accrual period. Holders will be
entitled to offset negative accruals of OID only against future OID accrual on
their certificates.
If the holders of any Regular Certificates are treated as holding
their certificates at a premium, the holders are encouraged to consult their
tax advisors regarding the election to amortize bond premium and the method to
be employed. See "Material Federal Income Tax Consequences--REMIC
Certificates--Regular Certificates" in the prospectus.
As is described more fully under "Material Federal Income Tax
Consequences" in the prospectus, the offered certificates will represent
qualifying assets under Sections 856(c)(4)(A) and 7701(a)(19)(C) of the Code,
and net interest income attributable to the offered certificates will be
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, to the extent the assets of the
trust fund are assets described in those sections. The Regular Certificates
will represent qualifying assets under Section 860G(a)(3) if acquired by a
REMIC within the prescribed time periods of the Code.
The holders of the Residual Certificates must include the taxable
income of the REMIC in their federal taxable income. The resulting tax
liability of the holders may exceed cash distributions to them during some
periods. All or a portion of the taxable income from a Residual Certificate
recognized by a holder may be treated as "excess inclusion" income, which with
limited exceptions, is subject to U.S. federal income tax.
In computing alternative minimum taxable income, the special rule
providing that taxable income cannot be less than the sum of the taxpayer's
excess inclusions for the year does not apply. However, a taxpayer's
alternative minimum taxable income cannot be less than the sum of the
taxpayer's excess inclusions for the year. In addition, the amount of any
alternative minimum tax net operating loss is determined without regard to any
excess inclusions.
Purchasers of a Residual Certificate are encouraged to consider
carefully the tax consequences of an investment in Residual Certificates
discussed in the prospectus and consult their own tax advisors with respect to
those consequences. See "Material Federal Income Tax Consequences--REMIC
Certificates--Residual Certificates" in the prospectus. Specifically,
prospective holders of Residual Certificates should consult their tax advisors
regarding whether, at the time of acquisition, a Residual Certificate will be
treated as a "noneconomic" residual interest, a "non-significant value"
residual interest and a "tax avoidance potential" residual interest. See
"Material Federal Income Tax Consequences--Tax-Related Restrictions on
Transfer of Residual Certificates--Noneconomic Residual Certificates",
"Material Federal Income Tax Consequences--Residual Certificates--Mark to
Market Rules", "--Excess Inclusions" and "Material Federal Income Tax
Consequences--Tax Related Restrictions on Transfers of Residual
Certificates--Foreign Investors" in the prospectus. Additionally, for
information regarding prohibited transactions and treatment of realized
losses, see "Material Federal Income Tax Consequences--Prohibited Transactions
and Other Taxes" and "--REMIC Certificates--Regular Certificates--Treatment of
Realized Losses" in the prospectus.
ERISA Considerations
Any fiduciary of a Plan that proposes to cause the Plan to acquire
any of the offered certificates is encouraged to consult with its counsel with
respect to the potential consequences of the Plan's acquisition and ownership
of the certificates under ERISA and Section 4975 of the tax code. See "ERISA
Considerations" in the prospectus. Section 406 of ERISA prohibits "parties in
interest" with respect to an employee benefit plan subject to ERISA from
engaging in various types of transactions involving the Plan and its assets
unless a statutory, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes excise taxes on prohibited
transactions involving "disqualified persons" and Plans described under that
Section. ERISA authorizes the imposition of civil penalties for prohibited
transactions involving Plans not subject to the requirements of Section 4975
of the tax code.
Some employee benefit plans, including governmental plans and some
church plans, are not subject to ERISA's requirements. Accordingly, assets of
those plans may be invested in the offered certificates without regard to the
ERISA considerations described in this prospectus supplement and in the
prospectus, subject to the provisions of other applicable federal and state
law. Any of those plans that is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the tax code may nonetheless be subject to the
prohibited transaction rules set forth in Section 503 of the tax code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. A fiduciary that
decides to invest the assets of a Plan in the offered certificates should
consider, among other factors, the extreme sensitivity of the investment to
the rate of principal payments, including prepayments, on the mortgage loans.
The U.S. Department of Labor has granted an individual administrative
exemption to ______________, Prohibited Transaction Exemption _____, Exemption
Application No. D-_____, __ Fed. Reg. _____ (____), from some of the
prohibited transaction rules of ERISA and the related excise tax provisions of
Section 4975 of the tax code with respect to the initial purchase, the holding
and the subsequent resale by Plans of certificates in pass-through trusts that
consist of specified receivables, loans and other obligations that meet the
conditions and requirements of the exemption. The exemption applies to
mortgage loans such as the mortgage loans in the trust fund. For a general
description of the exemption and the conditions that must be satisfied for the
exemption to apply, see "ERISA Considerations" in the prospectus.
It is expected that the exemption discussed above will apply to the
acquisition and holding by Plans of the class A-1 certificates and that all
conditions of the exemption other than those within the control of the
investors will be met. In addition, as of the date of this prospectus
supplement, there is no single mortgagor that is the obligor on 5% of the
mortgage loans included in the trust fund by aggregate unamortized principal
balance of the assets of the trust fund. Because the class PO and class X
certificates are not being purchased by any underwriter to whom an exemption
similar to the exemption discussed above has been granted, those classes of
certificates do not currently meet the requirements of the exemption discussed
above or any comparable individual administrative exemption granted to any
underwriter. Consequently, the class PO and class X certificates may be
transferred only if the conditions in the first or third bullet points in the
next paragraph are met.
Because the characteristics of the class M, class B-1, class B-2 and
class A-R certificates may not meet the requirements of Prohibited Transaction
Class Exemption 83-1, the exemption discussed above, or any other issued
exemption under ERISA, a Plan may have engaged in a prohibited transaction or
incur excise taxes or civil penalties if it purchases and holds class M, class
B-1, class B-2 and class A-R certificates. Consequently, transfers of the
class M, class B-1, class B-2 and class A-R certificates will not be
registered by the trustee unless the trustee receives:
o a representation from the transferee of the certificate,
acceptable to and in form and substance satisfactory to the
trustee, that the transferee is not a Plan, or a person acting
on behalf of a Plan or using a Plan's assets to effect the
transfer,
o if the purchaser is an insurance company, a representation that
the purchaser is an insurance company which is purchasing the
certificates with funds contained in an "insurance company
general account" as defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 and that the purchase and
holding of the certificates are covered under Sections I and
III of Prohibited Transaction Class Exemption 95-60, or
o an opinion of counsel satisfactory to the trustee that the
purchase and holding of the certificate by a Plan, or any
person acting on behalf of a Plan or using a Plan's assets,
will not result in the assets of the trust fund being deemed to
be "plan assets" and subject to the prohibited transaction
requirements of ERISA and the tax code and will not subject the
trustee to any obligation in addition to those undertaken in
the pooling and servicing agreement.
This representation shall be considered to have been made to the trustee by
the transferee's acceptance of a class M, class B-1, or class B-2 certificate.
If the representation is not true, or any attempt to transfer to a plan or
person acting on behalf of a Plan or using the Plan's assets is initiated
without the required opinion of counsel, the attempted transfer or acquisition
shall be void.
Prospective Plan investors are encouraged to consult with their legal
advisors concerning the impact of ERISA and the tax code, the applicability of
the exemption discussed above and PTE 83-1 described in the prospectus, and
the potential consequences in their specific circumstances, before making an
investment in any of the offered certificates. Moreover, each Plan fiduciary
is encouraged to determine whether, under the general fiduciary standards of
investment prudence and diversification, an investment in any of the offered
certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
Method of Distribution
Based on the terms and conditions set forth in the underwriting
agreement between the depositor and the underwriter, _____, the depositor has
agreed to sell the offered certificates, other than the class PO and class X
certificates, to the underwriter, and the underwriter has agreed to purchase
from the depositor the offered certificates, other than the class PO and class
X certificates. Distribution of the offered certificates, other than the class
PO and class X certificates, will be made by the underwriter from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. In connection with the sale of the offered certificates,
other than the class PO and class X certificates, the underwriter may be
deemed to have received compensation from the depositor in the form of
underwriting discounts.
The underwriter intends to make a secondary market in the offered
certificates purchased by it, but has no obligation to do so. There can be no
assurance that a secondary market for the offered certificates will develop
or, if it does develop, that it will continue or that it will provide
certificateholders with a sufficient level of liquidity of investment.
The depositor has agreed to indemnify the underwriter against, or
make contributions to the underwriter with respect to, liabilities,
customarily indemnified against, including liabilities under the Securities
Act of 1933, as amended.
The class PO and class X certificates may be offered by the seller or
the depositor from time to time directly or through underwriters or agents,
either of which may include _____, an affiliate of the depositor, the seller
and the master servicer, in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale, in one or more
separate transactions at prices to be negotiated at the time of each sale. Any
underwriters or agents that participate in the distribution of the class PO
and class X certificates may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933 and any profit on the sale of those certificates
by them and any discounts, commissions, concessions or other compensation
received by any of them may be deemed to be underwriting discounts and
commissions under the Securities Act.
Legal Matters
The validity of the certificates, including their material federal
income tax consequences, will be passed upon for the depositor by Brown & Wood
LLP, San Francisco, California. _____, _____, _____, will pass upon legal
matters on behalf of the underwriter.
Ratings
It is a condition to the issuance of the class A-1 and class A-R
certificates that they be rated _____ by [ ] and _____ by [ ]. It is a
condition to the issuance of the class PO and class X certificates that they
be rated _____ by [ ] and _____ by [ ]. It is a condition to the issuance of
the class M, class B-1 and class B-2 certificates that they be rated at least
_____, _____, and _____, respectively, by [ ].
The ratings assigned by [ ] to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage
loans by the related certificateholders under the agreements pursuant to which
the certificates are issued. [ ]'s ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make the
payments required by the certificates.
[ ]'s ratings on the certificates do not, however, constitute a
statement regarding frequency of prepayments of the mortgage loans. The "r"
symbol is appended to the rating by [ ] of those certificates that [ ]
believes may experience high volatility or high variability in expected
returns due to non-credit risks. The absence of an "r" symbol in the ratings
of the other offered certificates should not be taken as an indication that
the certificates will exhibit no volatility or variability in total return.
The ratings of [ ] on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
the certificateholders are entitled. [ ]'s rating opinions address the
structural and legal aspects associated with the certificates, including the
nature of the underlying mortgage loans. [ ]'s ratings on pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments and consequently any adverse effect the timing of the
prepayments could have on an investor's anticipated yield. Further, the rating
on the class X certificates does not address whether investors will recoup
their initial investment. The rating assigned by [ ] to the class PO
certificates only addresses the return of its class certificate balance. The
rating assigned by [ ] to the class A-R certificates only addresses the return
of its class certificate balance and interest thereon at its pass-through
rate.
The ratings of the rating agencies do not address the possibility
that, as a result of principal prepayments, certificateholders may receive a
lower than anticipated yield.
The security ratings assigned to the offered certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and
may be revised or withdrawn at any time by the rating agencies.
The depositor has not requested a rating of the offered certificates
by any rating agency other than the rating agencies; there can be no
assurance, however, as to whether any other rating agency will rate the
offered certificates or, if it does, what rating would be assigned by the
other rating agency. The rating assigned by the other rating agency to the
offered certificates could be lower than the respective ratings assigned by
the rating agencies.
<PAGE>
Glossary
"Code" means the Internal Revenue Code of 1986, as amended.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Plan" means an employee benefit or other plan or arrangement, such
as an individual retirement plan or Keogh plan, that is subject to ERISA, or
to Section 4975 of the Code.
"Regular Certificate" means all classes of the certificates except
the class A-R certificates.
"REMIC" means a "real estate mortgage investment conduit" under the
Code.
"Residual Certificate" means the class A-R certificates.
"Substitution Adjustment Amount" means the amount of any shortfall to
be deposited by the seller in the certificate account and held for
distribution to the certificateholders on the related distribution date,
referred to on page S-27 of this prospectus supplement.
<PAGE>
Information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities, and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Preliminary, Subject to Change, Dated August 17, 2000
PROSPECTUS
FLEET MORTGAGE SECURITIES CORP.
Depositor
Mortgage Pass-Through Certificates
(Issuable in Series)
Please carefully consider our discussion of some of the risks of investing in
the certificates under "Risk Factors" beginning on page 7.
The certificates represent obligations of the trust only and do not represent
an interest in or obligation of Fleet Mortgage Securities Corp. or any of its
affiliates.
This prospectus may be used to offer and sell the securities only if
accompanied by a prospectus supplement.
The Trusts
Each trust will be established to hold assets in a trust fund transferred to
it by Fleet Mortgage Securities Corp. The assets in each trust fund will be
specified in the prospectus supplement for the particular trust and will
generally consist of:
o first lien mortgage loans secured by one- to four-family residential
properties or participations in that type of loan, or
o private mortgage-backed securities backed by first lien mortgage loans
secured by one- to four-family residential properties or participations
in that type of loan.
The Certificates
Fleet Mortgage Securities Corp. will sell the certificates pursuant to a
prospectus supplement. The certificates will be grouped into one or more
series, each having its own distinct designation. Each series will be issued
in one or more classes and each class will evidence beneficial ownership of a
specified portion of future payments on the assets in the trust fund that the
series relates to. A prospectus supplement for a series will specify all of
the terms of the series and of each of the classes in the series.
Offers of Certificates
The certificates may be offered through several different methods,
including offerings through underwriters.
-----------------------------------
The SEC and state securities regulators have not approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
________________, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Important Notice About Information in this Prospectus and Each Accompanying Prospectus Supplement.................6
Risk Factors......................................................................................................7
Limited source of payments--no recourse to sellers, depositor or servicer......................................7
Credit enhancement may not be sufficient to protect you from losses...........................................8
Losses on balloon payment mortgages are borne by you..........................................................8
Nature of mortgages...........................................................................................9
You could be adversely affected by violations of environmental laws..........................................11
Ratings of the certificates does not assure their payment....................................................12
Book-entry registration......................................................................................13
Bankruptcy or insolvency may affect the timing and amount of distributions on the certificates...............14
The Trust Fund...................................................................................................16
The Mortgage Loans...........................................................................................17
Private Mortgage-Backed Securities...........................................................................20
Substitution of Mortgage Assets..............................................................................22
Use of Proceeds..................................................................................................23
The Depositor....................................................................................................23
Mortgage Loan Program............................................................................................23
Underwriting Process.........................................................................................23
Qualifications of Sellers....................................................................................24
Representations by Sellers; Repurchases......................................................................24
Description of the Certificates..................................................................................26
General......................................................................................................28
Distributions on Certificates................................................................................30
Advances.....................................................................................................32
Reports to Certificateholders................................................................................33
Categories of Classes of Certificates........................................................................34
Indices Applicable to Floating Rate and Inverse Floating Rate Classes........................................37
Book-Entry Certificates......................................................................................42
Credit Enhancement...............................................................................................44
General......................................................................................................44
Subordination................................................................................................44
Mortgage Pool Insurance Policies.............................................................................45
Special Hazard Insurance Policies............................................................................46
Bankruptcy Bonds.............................................................................................47
Reserve Fund.................................................................................................48
Cross Support................................................................................................49
Insurance Policies, Surety Bonds and Guaranties..............................................................49
Over-Collateralization.......................................................................................50
Yield and Prepayment Considerations..............................................................................50
The Pooling and Servicing Agreement..............................................................................51
Assignment of Mortgage Assets................................................................................51
Payments on Mortgage Assets; Deposits to Certificate Account.................................................53
Collection Procedures........................................................................................56
Hazard Insurance.............................................................................................57
Forced Placed Insurance......................................................................................59
Realization Upon Defaulted Mortgage Loans....................................................................59
Servicing and Other Compensation and Payment of Expenses.....................................................63
Evidence as to Compliance....................................................................................64
List of Certificateholders...................................................................................65
Matters Regarding the Master Servicer and the Depositor......................................................65
Events of Default............................................................................................66
Rights Upon Event of Default.................................................................................67
Amendment....................................................................................................67
Termination; Optional Termination............................................................................68
The Trustee..................................................................................................69
Material Legal Aspects of the Mortgage Loans.....................................................................69
General......................................................................................................69
Foreclosure and Repossession.................................................................................71
Rights of Redemption.........................................................................................73
Anti-Deficiency Legislation and Other Limitations on Lenders.................................................73
Environmental Risks..........................................................................................75
Due-on-Sale Clauses..........................................................................................76
Prepayment Charges...........................................................................................76
Soldiers' and Sailors' Civil Relief Act......................................................................77
The Title I Program..........................................................................................77
Material Federal Income Tax Consequences.........................................................................81
General......................................................................................................81
Non-REMIC Certificates.......................................................................................81
a. Single Class of Certificates.........................................................................82
b. Multiple Classes of Certificates.....................................................................86
c. Sale or Exchange of a Certificate....................................................................89
d. Non-U.S. Persons.....................................................................................90
e. Information Reporting and Backup Withholding.........................................................91
REMIC Certificates...........................................................................................91
a. Regular Certificates.................................................................................93
b. Residual Certificates...............................................................................107
Prohibited Transactions and Other Taxes.....................................................................107
Liquidation and Termination.................................................................................108
Administrative Matters......................................................................................109
Tax-Exempt Investors........................................................................................109
Non-U.S. Persons............................................................................................109
Tax-Related Restrictions on Transfers of Residual Certificates..............................................110
State Tax Considerations........................................................................................112
ERISA Considerations............................................................................................112
Legal Investment................................................................................................117
Method of Distribution..........................................................................................118
Legal Matters...................................................................................................119
Financial Information...........................................................................................119
Rating..........................................................................................................119
Where You Can Find More Information.............................................................................119
Incorporation of Certain Documents by Reference.................................................................120
Glossary........................................................................................................121
</TABLE>
<PAGE>
Important Notice About Information in this Prospectus and Each
Accompanying Prospectus Supplement
Information about each series of certificates is contained in two
separate documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the certificates of that
series.
The prospectus supplement will contain information about a particular
series that supplements the information contained in this prospectus, and you
should rely on that supplementary information in the prospectus supplement.
You should rely only on the information in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement.
There is a Glossary on page 121 where you will find definitions of
the capitalized terms used in this prospectus.
This prospectus and any applicable prospectus supplement do not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the certificates offered by this prospectus and the
prospectus supplement nor an offer of the certificates to any person in any
state or other jurisdiction in which the offer would be unlawful.
-----------------------------------
If you require additional information, the mailing address of our
principal executive offices is Fleet Mortgage Securities Corp., 1333 Main
Street, Columbia, South Carolina 29201 and the telephone number is (803)
929-7900. For other means of acquiring additional information about us or a
series of securities, see "Incorporation of Certain Documents by Reference"
beginning on page 120.
<PAGE>
Risk Factors
You should carefully consider the following information since it
identifies significant risks associated with an investment in the
certificates.
Limited source of payments-- Typically, certificates will be payable
no recourse to sellers, solely from their associated trust
depositor or servicer fund. If the trust fund does not have
sufficient assets to distribute the
full amount due to you as a
certificateholder, your yield will be
impaired, and perhaps even the return
of your principal may be impaired,
without you having recourse to anyone
else. Furthermore, at the times
specified in the applicable prospectus
supplement, some of the assets of the
trust fund may be released and paid
out to other people, such as the
depositor, a servicer, a credit
enhancement provider or any other
person entitled to payments from the
trust fund. Those assets will no
longer be available to make payments
to you.
You will not have any recourse against
the depositor or any servicer if you
do not receive a required distribution
on the certificates. Nor will you have
recourse against the assets of the
trust fund of any other series of
certificates.
The certificates will not represent an
interest in the depositor, any
servicer, any seller to the depositor
or any one else except the trust fund.
The only obligation of the depositor
to a trust fund comes from particular
representations and warranties made by
it about assets transferred to the
trust fund. If these representations
and warranties turn out to be untrue,
the depositor may be required to
repurchase some of the transferred
assets. Fleet Mortgage Securities
Corp., which is the depositor, does
not have significant assets and is
unlikely to have significant assets in
the future. So if the depositor were
required to repurchase a loan because
of a breach of a representation, its
only sources of funds for the
repurchase would be:
o funds obtained from enforcing a
corresponding obligation of a seller
or originator of the loan, or
o funds from a reserve fund or similar
credit enhancement established to
pay for loan repurchases.
The only obligations of the master
servicer to a trust fund, other than
its master servicing obligations,
comes from particular representations
and warranties made by it in
connection with its loan servicing
activities. If these representations
and warranties turn out to be untrue,
the master servicer may be required to
repurchase some of the loans. However,
the master servicer may not have the
financial ability to make the required
repurchase.
The only obligations to a trust fund
of a seller of loans to the depositor
comes from particular representations
and warranties made by it in
connection with its sale of the loans
and some document delivery
requirements. If these representations
and warranties turn out to be untrue,
or the seller fails to deliver
required documents, it may be required
to repurchase some of the loans.
However, the seller may not have the
financial ability to make the required
repurchase.
Credit enhancement may not be Credit enhancement is intended to
sufficient to protect you from reduce the effect of loan losses. But
losses credit enhancement may benefit only
some classes of a series of
certificates and the amount of any
credit enhancement will be limited as
described in the applicable prospectus
supplement. Furthermore, the amount of
a credit enhancement may decline or be
eliminated over time pursuant to a
schedule or formula or otherwise, and
could be depleted from payments or for
other reasons before the certificates
covered by the credit enhancement are
paid in full. In addition, a credit
enhancement may not cover all
potential sources of loss. For
example, a credit enhancement may or
may not cover fraud or negligence by a
loan originator or other parties.
Also, the trustee may be permitted to
reduce, substitute for or even
eliminate all or a portion of a credit
enhancement so long as the rating
agencies that have rated the
certificates at the request of the
depositor indicate that that would not
cause them to change adversely their
rating of the certificates.
Consequently, certificateholders may
suffer losses even though a credit
enhancement exists and its provider
does not default.
Losses on balloon payment Some of the underlying loans may not
mortgages are borne by you be fully amortizing over their terms
to maturity and, thus, will require
substantial principal payments, that
is, balloon payments, at their stated
maturity. Loans with balloon payments
involve a greater degree of risk than
fully amortizing loans because
typically the borrower must be able to
refinance the loan or sell the
property to make the balloon payment
at maturity. The ability of a borrower
to do this will depend on factors like
mortgage rates at the time of sale or
refinancing, the borrower's equity in
the property, the relative strength of
the local housing market, the
financial condition of the borrower
and applicable tax laws. Losses on
these loans that are not otherwise
covered by a credit enhancement will
be borne by the holders of one or more
classes of certificates.
Nature of Mortgages
Declines in property values The value of the properties underlying
may adversely affect you the loans held in the trust adversely
affect you fund may decline over time.
Among the factors that could adversely
affect the value of the properties
are:
o an overall decline in the
residential real estate market in
the areas in which they are
located,
o a decline in their general
condition from the failure of
borrowers to maintain their
property adequately, and
o natural disasters that are not
covered by insurance, such as
earthquakes and floods.
If property values decline, the actual
rates of delinquencies, foreclosures,
and losses on all underlying loans
could be higher than those currently
experienced in the mortgage lending
industry in general. These losses, to
the extent not otherwise covered by a
credit enhancement, will be borne by
the holder of one or more classes of
certificates.
Delays in liquidation Even if the properties underlying the
may adversely affect you loans held in the trust fund affect
you provide adequate security for the
loans, substantial delays could occur
before defaulted loans are liquidated
and their proceeds are forwarded to
investors. Property foreclosure
actions are regulated by state
statutes and rules and are subject to
many of the delays and expenses of
other lawsuits if defenses or
counterclaims are made, sometimes
requiring several years to complete.
Furthermore, in some states, if the
proceeds of the foreclosure are
insufficient to repay the loan, the
borrower is not liable for the
deficit. Thus, if a borrower defaults,
these restrictions may impede the
trust's ability to dispose of the
property and obtain sufficient
proceeds to repay the loan in full. In
addition, the servicer will be
entitled to deduct from liquidation
proceeds all expenses reasonably
incurred in attempting to recover on
the defaulted loan, including legal
fees and costs, real estate taxes and
property maintenance and preservation
expenses.
Disproportionate effect of Liquidation expenses of defaulted
liquidation expenses may loans generally do not vary directly
aversely affect you expenses may adversely affect you with
the outstanding principal balance of
the loan at the time of default.
Therefore, if a servicer takes the
same steps for a defaulted loan having
a small remaining principal balance as
it does for a defaulted loan having a
large remaining principal balance, the
amount realized after expenses have
been paid is smaller as a percentage
of the outstanding principal balance
of the small loan than it is for the
defaulted loan having a large
remaining principal balance.
Consumer protection laws State laws generally regulate interest
may adversely affect you rates and other charges, affect you
require disclosures and require
licensing of mortgage loan originators
and servicers. In addition, most
states have other laws and public
policies for the protection of
consumers that prohibit unfair and
deceptive practices in the
origination, servicing and collection
of mortgage loans. Depending on the
particular law and the specific facts
involved, violations may limit the
ability to collect all or part of the
principal or interest on the
underlying loans held in the trust
fund. In some cases, the borrower may
even be entitled to a refund of
amounts previously paid.
The loans held in the trust fund may
also be subject to federal laws,
including:
o the Federal Truth in Lending
Act and its regulations, which
require disclosures to the
borrowers regarding the terms of
any mortgage loan,
o the Equal Credit Opportunity
Act and its regulations, which
prohibit discrimination in the
extension of credit on the basis
of age, race, color, sex,
religion, marital status,
national origin, receipt of
public assistance, or the
exercise of any right under the
Consumer Credit Protection Act,
and
o the Fair Credit Reporting Act,
which regulates the use and
reporting of information related
to the borrower's credit
experience.
Some violations of these federal laws
may limit the ability to collect the
principal or interest on the loans
held in the trust fund, and in
addition could subject the trust fund
to damages and administrative
enforcement. Losses on loans from the
application of those laws that are not
otherwise covered by a credit
enhancement will be borne by the
holders of one or more classes of
certificates.
The Riegle Act. Some mortgage loans
may be subject to the Riegle Community
Development and Regulatory Improvement
Act of 1994, known as the Riegle Act,
which incorporates the Home Ownership
and Equity Protection Act of 1994.
These provisions impose additional
disclosure and other requirements on
creditors with respect to non-purchase
money mortgage loans with high
interest rates or high up-front fees
and charges. The provisions of the
Riegle Act apply on a mandatory basis
to all mortgage loans originated on or
after October 1, 1995. These
provisions can impose specific
statutory liabilities upon creditors
who fail to comply with their
provisions and may affect the
enforceability of the related loans.
In addition, any assignee of the
creditor would generally be subject to
all claims and defenses that the
consumer could assert against the
creditor, including the right to
rescind the mortgage loan.
Some violations of these federal laws
may limit the ability to collect the
principal or interest on the loans
held in the trust fund, and in
addition could subject the trust fund
to damages and administrative
enforcement. Losses on loans from the
application of those laws that are not
otherwise covered by a credit
enhancement will be borne by the
holders of one or more classes of
securities.
You could be adversely affected Federal, state and local laws and
by violations of environmental regulations impose a wide range of
laws requirements on activities that may
affect the environment, health and
safety. In some circumstances, these
laws and regulations impose
obligations on owners or operators of
residential properties such as those
that secure the loans held in the
trust fund. Failure to comply with
these laws and regulations can result
in fines and penalties that could be
assessed against the trust as owner of
the related property.
In some states, a lien on the property
due to contamination has priority over
the lien of an existing mortgage.
Also, a mortgage lender may be held
liable as an "owner" or "operator" for
costs associated with the release of
petroleum from an underground storage
tank under particular circumstances.
If the trust is considered the owner
or operator of a property, it will
suffer losses as a result of any
liability imposed for environmental
hazards on the property.
Ratings of the certificates does Any classe of certificates issued
not assure their payment under this prospectus and the
accompanying prospectus supplement
will be rated in one of the four
highest rating categories of at least
one nationally recognized rating
agency. A rating is based on the
adequacy of the value of the trust
assets and any credit enhancement for
that class, and reflects the rating
agency's assessment of how likely it
is that holders of the class of
certificates will receive the payments
to which they are entitled. A rating
does not constitute an assessment of
how likely it is that principal
prepayments on the underlying loans
will be made, the degree to which the
rate of prepayments might differ from
that originally anticipated, or the
likelihood that the certificates will
be redeemed early. A rating is not a
recommendation to purchase, hold or
sell certificates because it does not
address the market price of the
certificates or the suitability of the
certificates for any particular
investor.
A rating may not remain in effect for
any given period of time and the
rating agency could lower or withdraw
the rating entirely in the future. For
example, the rating agency could lower
or withdraw its rating due to:
o a decrease in the adequacy of
the value of the trust assets or
any related credit enhancement,
o an adverse change in the
financial or other condition of a
credit enhancement provider, or
o a change in the rating of the
credit enhancement provider's
long-term debt.
The amount, type and nature of credit
enhancement established for a class of
certificates will be determined on the
basis of criteria established by each
rating agency rating classes of the
certificates. These criteria are
sometimes based upon an actuarial
analysis of the behavior of similar
loans in a larger group. That analysis
is often the basis upon which each
rating agency determines the amount of
credit enhancement required for a
class. The historical data supporting
any actuarial analysis may not
accurately reflect future experience,
and the data derived from a large pool
of similar loans may not accurately
predict the delinquency, foreclosure
or loss experience of any particular
pool of mortgage loans. Mortgaged
properties may not retain their
values. If residential real estate
markets experience an overall decline
in property values so that the
outstanding principal balances of the
loans held in a particular trust fund
and any secondary financing on the
related mortgaged properties become
equal to or greater than the value of
the mortgaged properties, the rates of
delinquencies, foreclosures and losses
could be higher than those now
generally experienced in the mortgage
lending industry. In addition, adverse
economic conditions may affect timely
payment by mortgagors on their loans
whether or not the conditions affect
real property values and, accordingly,
the rates of delinquencies,
foreclosures and losses in any trust
fund. Losses from this that are not
covered by a credit enhancement will
be borne, at least in part, by the
holders of one or more classes of
certificates.
Book-entry registration Certificates issued in book-entry form
may have only limited liquidity in the
Limit on liquidity resale market, since investors may be
unwilling to purchase certificates for
which they cannot obtain physical
instruments.
Limit on ability to transfer or Transactions in book-entry
pledge certificates can be effected only
through The Depository Trust Company,
its participating organizations, its
indirect participants and particular
banks. Therefore, your ability to
transfer or pledge certificates issued
in book-entry form may be limited
Delays in distribution You may experience some delay in the
receipt of distributions on book-entry
certificates since the distributions
will be forwarded by the trustee to
The Depository Trust Company for it to
credit the accounts of its
participants. In turn, these
participants will then credit the
distributions to your account either
directly or indirectly through
indirect participants.
Bankruptcy or insolvency may The seller and the depositor will
affect the timing and amount of treat the transfer of the loans held
distributions on the certificates in the trust fund by the seller to the
depositor as a sale for accounting
purposes. The depositor and the trust
fund will treat the transfer of the
loans from the depositor to the trust
fund as a sale for accounting
purposes. If these characterizations
are correct, then if the seller were
to become bankrupt, the loans would
not be part of the seller's bankruptcy
estate and would not be available to
the seller's creditors. On the other
hand, if the seller becomes bankrupt,
its bankruptcy trustee or one of its
creditors may attempt to
recharacterize the sale of the loans
as a borrowing by the seller, secured
by a pledge of the loans. Presenting
this position to a bankruptcy court
could prevent timely payments on the
certificates and even reduce the
payments on the certificates.
Similarly, if the characterizations of
the transfers as sales are correct,
then if the depositor were to become
bankrupt, the loans would not be part
of the depositor's bankruptcy estate
and would not be available to the
depositor's creditors. On the other
hand, if the depositor becomes
bankrupt, its bankruptcy trustee or
one of its creditors may attempt to
recharacterize the sale of the loans
as a borrowing by the depositor,
secured by a pledge of the loans.
Presenting this position to a
bankruptcy court could prevent timely
payments on the certificates and even
reduce the payments on the
certificates.
If the master servicer becomes
bankrupt, the bankruptcy trustee may
have the power to prevent the
appointment of a successor master
servicer. The period during which cash
collections may be commingled with the
master servicer's own funds before
each distribution date for
certificates will be specified in the
applicable prospectus supplement. If
the master servicer becomes bankrupt
and cash collections have been
commingled with the master servicer's
own funds for at least ten days, the
trust fund will likely not have a
perfected interest in those
collections. In this case the trust
might be an unsecured creditor of the
master servicer as to the commingled
funds and could recover only its share
as a general creditor, which might be
nothing. Collections commingled less
than ten days but still in an account
of the master servicer might also be
included in the bankruptcy estate of
the master servicer even though the
trust may have a perfected security
interest in them. Their inclusion in
the bankruptcy estate of the master
servicer may result in delays in
payment and failure to pay amounts due
on the certificates.
Federal and state statutory provisions
affording protection or relief to
distressed borrowers may affect the
ability of the secured mortgage lender
to realize 7upoon its security in
other situations as well. For example,
in a proceeding under the federal
bankruptcy code, a lender may not
foreclose on a mortgaged property
without the permission of the
bankruptcy court. In certain
instances, a bankruptcy court may
allow a borrower to reduce the monthly
payments, change the rate of interest
and alter the mortgage loan repayment
schedule for under-collateralized
mortgage loans. The effect of these
types of proceedings can be to cause
certificates and even to reduce the
aggregate amount of payments on the
loans underlying certificates.
The Trust Fund
This prospectus relates to mortgage pass-through certificates. These
certificates may be sold from time to time in one or more series by the
depositor, Fleet Mortgage Securities Corp., on terms determined at the time of
sale and described in this prospectus and the related prospectus supplement.
Each series will be issued under a separate pooling and servicing agreement to
be entered into with respect to each series. The certificates of a series will
evidence beneficial ownership of a trust fund. The assets of each trust fund
will consist of one or more types of the following mortgage assets:
o a pool of first lien mortgage loans or participation interests in
them, secured by one- to four-family residential properties, or
o private mortgage-backed securities, being other mortgage
pass-through certificates or collateralized mortgage obligations
evidencing an interest in, or secured by, mortgage loans of the type
that would otherwise be eligible to be mortgage loans.
The mortgage assets will be acquired by the depositor, either
directly or indirectly, from one or more institutions, which may be affiliates
of the depositor, and conveyed by the depositor to the related trust fund. The
trustee and the master servicer for each series of certificates will be
specified in the related prospectus supplement. See "The Pooling and Servicing
Agreement" for a description of the trustee's rights and obligations. See "The
Pooling and Servicing Agreement--Matters Regarding the Master Servicer and the
Depositor" for, among other things, a description of the master servicer's
rights and obligations.
The mortgage loans will be secured by first mortgage liens on one- to
four-family residential properties and, if so specified in the related
prospectus supplement, may include cooperative apartment loans secured by
security interests in shares issued by private, nonprofit, cooperative housing
corporations and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the
cooperatives' buildings. In addition, the mortgage assets of the related trust
fund may include mortgage participation certificates evidencing interests in
mortgage loans. The mortgage loans may be conventional loans, i.e., loans that
are not insured or guaranteed by any governmental agency, insured by the FHA
or partially guaranteed by the VA as specified in the related prospectus
supplement.
The certificates will be entitled to payment from the assets of the
related trust fund or other assets pledged for the benefit of the holders of
the certificates as specified in the related prospectus supplement. The
certificates will not be entitled to payments in respect of the assets of any
other trust fund established by the depositor. Typically, the mortgage assets
of any trust fund will consist of mortgage loans or private mortgage-backed
securities but not a combination of them. Mortgage loans acquired by the
depositor will generally have been originated in accordance with the
underwriting criteria specified below under "Mortgage Loan
Program--Underwriting Process." Further details of the mortgage loans are set
out in the related prospectus supplement.
The obligations of the master servicer with respect to the mortgage
loans will consist principally of its contractual servicing obligations under
the related pooling and servicing agreement, including its obligation to
enforce the obligations of the sub-servicers or sellers, or both, as more
fully described under "Mortgage Loan Program--Representations by Sellers;
Repurchases" and its obligation to make cash advances upon delinquencies in
payments on or with respect to the mortgage loans in the amounts described
under "Description of the Certificates--Advances". The obligations of the
master servicer to make advances may be subject to limitations, to the extent
provided in this prospectus and in the related prospectus supplement. The
master servicer may also be a seller in which case a breach of its obligations
in one capacity will not constitute a breach of its obligations in the other
capacity.
The master servicer named in the related prospectus supplement will
service the mortgage loans, either directly or through sub-servicers, pursuant
to the pooling and servicing agreement, and will receive a fee for its
services. See "Mortgage Loan Program" and "The Pooling and Servicing
Agreement". With respect to mortgage loans serviced by the master servicer
through a sub-servicer, the master servicer will remain liable for its
servicing obligations under the related pooling and servicing agreement as if
the master servicer alone were servicing the mortgage loans.
The following is a brief description of the mortgage assets expected
to be included in the trust funds. If specific information about the mortgage
assets is not known at the time the related series of certificates initially
is offered, more general information of the nature described below will be
provided in the related prospectus supplement, and specific information will
be set forth in a report on Form 8-K to be filed with the SEC within 15 days
after the initial issuance of the certificates. A maximum of 5% of the
mortgage assets as they will be constituted at the time that the applicable
detailed description of mortgage assets is filed will deviate in any material
respect from the mortgage asset pool characteristics described in the related
prospectus supplement, other than the aggregate number or amount of mortgage
loans. A schedule of the mortgage assets relating to the series will be
attached to the pooling and servicing agreement delivered to the trustee upon
delivery of the certificates.
The Mortgage Loans
General. The mortgaged properties will be located in any one of the
fifty states or the District of Columbia. Mortgage loans with particular
loan-to-value ratios or particular principal balances or both may be covered
wholly or partially by primary mortgage insurance policies. The existence,
extent and duration of coverage will be described in the applicable prospectus
supplement.
In general, all of the mortgage loans in a mortgage pool will have
monthly payments due on the first day of each month. However, the related
prospectus supplement may specify a different day on which monthly payments
will be due. The payment terms of the mortgage loans to be included in a trust
fund will be described in the related prospectus supplement and may include
one or more of the following features or other features described in the
related prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index, which will be specified in the
related prospectus supplement, a rate that is fixed for a period of
time or under limited circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that
is convertible from an adjustable rate to a fixed rate. Changes to
an adjustable rate may be subject to periodic limitations, maximum
rates, minimum rates or a combination of the limitations. Accrued
interest may be deferred and added to the principal of a loan for
the periods and under the circumstances as may be specified in the
related prospectus supplement.
o Principal may be payable on a level debt service basis to fully
amortize the mortgage loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate
that is different from the interest rate specified in its mortgage
note or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may
be due on maturity -- a balloon payment. Principal may include
interest that has been deferred and added to the principal balance
of the mortgage loan.
o Monthly payments of principal and interest may be fixed for the life
of the mortgage loan, may increase over a specified period of time
or may change from period to period. The terms of a mortgage loan
may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of
monthly payments.
o The mortgage loans generally may be prepaid at any time without the
payment of any prepayment fee. If so specified in the related
prospectus supplement, some prepayments of principal may be subject
to a prepayment fee, which may be fixed for the life of the mortgage
loan or may decline over time, and may be prohibited for the life of
the mortgage loan or for particular lockout periods. Some mortgage
loans may permit prepayments after expiration of the applicable
lockout period and may require the payment of a prepayment fee in
connection with any subsequent prepayment. Other mortgage loans may
permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The loans may include
"due-on-sale" clauses that permit the mortgagee to demand payment of
the entire mortgage loan in connection with the sale or some
transfers of the related mortgaged property. Other mortgage loans
may be assumable by persons meeting the then applicable underwriting
standards of the seller.
A trust fund may contain buydown loans that include provisions for a
third party to subsidize the monthly payments of the obligors on the mortgage
loans during the early years of the mortgage loans, the difference to be made
up from a buydown fund contributed by the third party at the time of
origination of the mortgage loan. A buydown fund will be in an amount equal
either to the discounted value or full aggregate amount of future payment
subsidies. Buydown funds are then applied to the applicable mortgage loan upon
receipt by the master servicer of the mortgagor's portion of the monthly
payment on the mortgage loan. The master servicer administers the buydown fund
to ensure that the monthly allocation from the buydown fund combined with the
monthly payment received from the mortgagor equals the scheduled monthly
payment on the applicable mortgage loan. The underlying assumption of buydown
plans is that the income of the mortgagor will increase during the buydown
period as a result of normal increases in compensation and inflation, so that
the mortgagor will be able to meet the full mortgage payments at the end of
the buydown period. To the extent that this assumption as to increased income
is not fulfilled, the possibility of defaults on buydown loans is increased.
The related prospectus supplement will contain information with respect to any
buydown loan concerning limitations on the interest rate paid by the mortgagor
initially, on annual increases in the interest rate and on the length of the
buydown period.
The mortgage loans will be secured by mortgages or deeds of trust or
other similar security instruments creating a lien on a mortgaged property.
The mortgaged properties will consist of detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units
in planned unit developments, and other dwelling units. These single family
properties may include vacation and second homes, investment properties and
leasehold interests. In the case of leasehold interests, the term of the
leasehold will at least equal the scheduled term of the loan.
The aggregate principal balance of loans secured by mortgaged
properties that are owner-occupied will be disclosed in the related prospectus
supplement. Typically the basis for a representation that a given percentage
of the loans is secured by single family properties that are owner-occupied
will be either (i) the making of a representation by the borrower at
origination of the loan that the borrower intends to use the property as a
primary residence or (ii) a finding that the address of the underlying
property is the borrower's mailing address.
The loan-to-value ratio measures the amount of a mortgage loan as a
percentage of the value of the related mortgaged property. It represents the
ratio expressed as a percentage, of the original principal balance of the
related mortgage loan to the collateral value of the related mortgaged
property. Generally, the collateral value of the mortgaged property is the
lesser of the sales price for the property and the appraised value determined
in an appraisal obtained by the originator at origination of the mortgage
loan. However, the applicable prospectus supplement may specify how the
collateral value of a mortgaged property will be calculated.
Conventional loans with particular loan-to-value ratios and/or
particular principal balances may be covered wholly or partially by primary
mortgage guaranty insurance policies. The existence, extent and duration of
any coverage will be described in the applicable prospectus supplement.
No assurance can be given that values of the mortgaged properties
have remained or will remain at their levels on the dates of origination of
the related mortgage loans. If the residential real estate market should
experience an overall decline in property values causing the sum of the
outstanding principal balances of the mortgage loans and any secondary
financing on the mortgaged properties, as applicable, in a particular mortgage
pool to become equal to or greater than the value of the mortgaged properties,
the actual rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors, which may or may not
affect real property values, may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the mortgage loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to any mortgage pool. To the extent that the losses are not covered by
subordination provisions or alternative arrangements, the losses will be
borne, at least in part, by the holders of the certificates of the related
series.
Additional Information. Each prospectus supplement will contain
information, as of the date of the prospectus supplement and to the extent
then specifically known to the depositor, with respect to the mortgage loans
contained in the related mortgage pool, including:
o the aggregate outstanding principal balance and the average
outstanding principal balance of the mortgage loans as of the
first day of the month of issuance of the related series of
certificates or the applicable cut-off date,
o the type of property securing the mortgage loans--e.g.,
separate residential properties, individual units in
condominium apartment buildings or in buildings owned by
cooperatives,
o the original terms to maturity of the mortgage loans,
o the largest principal balance and the smallest principal
balance of any of the mortgage loans,
o the earliest origination date and latest maturity date of any
of the mortgage loans,
o the loan-to-value ratios at origination,
o the maximum and minimum per annum mortgage rates, and
o the geographical distribution of the mortgage loans.
If specific information respecting the mortgage loans is not known to the
depositor at the time the related certificates are initially offered, more
general information of the nature described above will be provided in the
related prospectus supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the SEC within 15 days after the initial
issuance of the certificates.
Private Mortgage-Backed Securities
Private mortgage-backed securities may consist of (a) mortgage
pass-through certificates or participation certificates evidencing an
undivided interest in a pool of mortgage loans, or (b) collateralized mortgage
obligations secured by mortgage loans. Private mortgage-backed securities may
include stripped mortgage-backed securities representing an undivided interest
in all or a part of either the principal distributions, but not the interest
distributions, or the interest distributions, but not the principal
distributions, or in some specified portion of the principal and interest
distributions, but not all the distributions, on some mortgage loans. Private
mortgage-backed securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement. The applicable
prospectus supplement may provide that the seller/servicer of the underlying
mortgage loans will not have entered into a pooling and servicing agreement
with a private trustee. Typically, the seller/servicer of the underlying
mortgage loans will have entered into the pooling and servicing agreement with
a private trustee. The private trustee or its agent, or a custodian, will
possess the mortgage loans underlying the private mortgage-backed security.
Mortgage loans underlying a private mortgage-backed security will be serviced
by a private servicer directly or by one or more subservicers who may be
subject to the supervision of the private servicer.
The issuer of the private mortgage-backed securities will be a
financial institution or other entity engaged generally in the business of
mortgage lending, a public agency or instrumentality of a state, local or
federal government, or a limited purpose corporation organized for the purpose
of, among other things, establishing trusts and acquiring and selling housing
loans to the trusts and selling beneficial interests in the trusts. If so
specified in the related prospectus supplement, the issuer of private
mortgage-backed securities may be an affiliate of the depositor. The
obligations of the issuer of private mortgage-backed securities will generally
be limited to particular representations and warranties with respect to the
assets conveyed by it to the related trust fund. The issuer of private
mortgage-backed securities will not have guaranteed any of the assets conveyed
to the related trust fund or any of the private mortgage-backed securities
issued under the pooling and servicing agreement. Additionally, although the
mortgage loans underlying the private mortgage-backed securities may be
guaranteed by an agency or instrumentality of the United States, the private
mortgage-backed securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the private
mortgage-backed securities on the dates specified in the related prospectus
supplement. The private mortgage-backed securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the private
mortgage-backed securities by the private trustee or the private servicer. The
issuer of private mortgage-backed securities or the private servicer may have
the right to repurchase assets underlying the private mortgage-backed
securities after a particular date or under other circumstances specified in
the related prospectus supplement.
The mortgage loans underlying the private mortgage-backed securities
may consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buydown loans, adjustable rate mortgage loans or loans
having balloon or other special payment features. The mortgage loans may be
secured by single family property or by an assignment of the proprietary lease
or occupancy agreement relating to a specific dwelling within a cooperative
and the related shares issued by the cooperative.
The prospectus supplement for a series for which the trust fund
includes private mortgage-backed securities will specify:
o the aggregate approximate principal amount and type of the
private mortgage-backed securities to be included in the trust
fund;
o some of the characteristics of the mortgage loans that comprise
the underlying assets for the private mortgage-backed
securities including:
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if known, of
underlying mortgage loans insured or guaranteed by a
governmental entity,
o the servicing fee or range of servicing fees with respect
to the mortgage loans, and
o the minimum and maximum stated maturities of the
underlying mortgage loans at origination;
o the maximum original term-to-stated maturity of the private
mortgage-backed securities;
o the weighted average term-to stated maturity of the private
mortgage-backed securities;
o pass-through or certificate rate of the private mortgage-backed
securities;
o the weighted average pass-through or certificate rate of the
private mortgage-backed securities;
o the issuer of private mortgage-backed securities, the private
servicer, if other than the issuer of private mortgage-backed
securities, and the private trustee for the private
mortgage-backed securities;
o some of the characteristics of credit support, if any, the
reserve funds, insurance policies, surety bonds, letters of
credit or guaranties relating to the mortgage loans underlying
the private mortgage-backed securities or to the private
mortgage-backed securities themselves;
o the terms on which the underlying mortgage loans for the
private mortgage-backed securities may, or are required to, be
purchased before their stated maturity or the stated maturity
of the private mortgage-backed securities; and
o the terms on which mortgage loans may be substituted for those
originally underlying the private mortgage-backed securities.
Private mortgage-backed securities included in the trust fund for a
series of certificates that were issued by an issuer of private
mortgage-backed securities that is not affiliated with the depositor must be
acquired in bona fide secondary market transactions or either have been
previously registered under the Securities Act of 1933 or have been held for
at least the holding period required to be eligible for sale under Rule 144(k)
under the Securities Act of 1933.
Substitution of Mortgage Assets
Substitution of mortgage assets will be permitted if there are
breaches of representations and warranties with respect to any original
mortgage asset or if the documentation with respect to any mortgage asset is
determined by the trustee to be incomplete. The period during which the
substitution will be permitted generally will be indicated in the related
prospectus supplement. The related prospectus supplement will describe any
other conditions upon which mortgage assets may be substituted for mortgage
assets initially included in the trust fund.
Use of Proceeds
The net proceeds to be received from the sale of the certificates
offered by the prospectus and the related prospectus supplement will be
applied by the depositor to the purchase of the related mortgage assets. The
depositor expects to sell certificates in series from time to time, but the
timing and amount of offerings of certificates will depend on a number of
factors, including the volume of mortgage assets acquired by the depositor,
prevailing interest rates, availability of funds and general market
conditions.
The Depositor
The depositor maintains its principal office at 1333 Main Street,
Columbia, South Carolina 29201. Its telephone number is (803) 929-7900.
The obligations of the depositor with respect to a series of
certificates will be limited to assigning its rights in the mortgage assets to
the trustee for the series of certificates, obtaining particular
representations and warranties as to the mortgage assets from the sellers and
assigning to the trustee the depositor's rights with respect to the
representations and warranties. However, the applicable prospectus supplement
may provide for additional or alternative obligations of the depositor. See
"The Pooling and Servicing Agreement--Assignment of Mortgage Assets".
Neither the depositor nor any of the depositor's affiliates will
ensure or guarantee distributions on the certificates of any series.
Mortgage Loan Program
The mortgage loans will have been purchased by the depositor, either
directly or through affiliates, from sellers. The mortgage loans acquired by
the depositor will normally have been originated in accordance with the
underwriting criteria specified below. However, you should also refer to the
applicable prospectus supplement which may specify additional or different
origination criteria.
Underwriting Process
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value
and adequacy of the mortgaged property as collateral. In general, a
prospective borrower applying for a mortgage loan is required to fill out a
detailed application providing pertinent credit information. As part of the
description of the borrower's financial condition, the borrower generally is
required to provide a current list of assets and liabilities and a statement
of income and expenses, as well as an authorization to apply for a credit
report which summarizes the borrower's credit history with merchants and
lenders and any record of bankruptcy. In addition, an employment verification
may be obtained from an independent source, typically the borrower's employer.
If a prospective borrower is self-employed, the borrower may be required to
submit copies of signed tax returns. The borrower may also be required to
authorize verification of deposits at financial institutions where the
borrower has demand or savings accounts.
The underwriting standards applied in some cases allow for loans to
be supported by alternative documentation. For alternatively documented loans,
a borrower may demonstrate income and employment directly by providing
alternative documentation in the form of copies of the borrower's own records
relating to income and employment, rather than having the lender obtain
independent verifications from third parties.
In determining the adequacy of the mortgaged property as collateral,
an appraisal is made of each property considered for financing. The appraiser
is required to verify that the property is in good condition and that
construction, if new, has been completed. The appraisal is based on various
factors including the market value of comparable homes, the estimated rental
income (if considered applicable by the appraiser) and the cost of replacing
the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available to meet monthly housing
expenses, other financial obligations and monthly obligations on the proposed
mortgage loan, generally determined on the basis of the monthly payments due
in the year of origination, and other expenses related to the mortgaged
property such as property taxes and hazard insurance. The underwriting
standards applied by sellers, particularly with respect to the level of loan
documentation and the mortgagor's income and credit history, may be varied in
appropriate cases where factors such as low loan-to-value ratios or other
favorable credit factors exist.
In the case of a mortgage loan secured by a leasehold interest in
real property, the title to which is held by a third party lessor, the seller
will represent and warrant, among other things, that the remaining term of the
lease and any sublease is at least as long as the remaining term on the loan
agreement or promissory note for the mortgage loan.
Some of the mortgage loans that may be included in a trust fund may
involve additional uncertainties not present in traditional types of loans.
For example, some of the mortgage loans may provide for escalating or variable
payments by the mortgagor. These types of mortgage loans may be underwritten
on the basis of a judgement that the mortgagors have the ability to make the
monthly payments required initially. In some instances, however, a mortgagor's
income may not be sufficient to permit continued loan payments as the payments
increase. These types of mortgage loans may also be underwritten primarily on
the basis of loan-to-value ratios or other favorable credit factors.
Qualifications of Sellers
Each seller must be an institution experienced in originating and
servicing mortgage loans of the type contained in the related mortgage pool
and must maintain satisfactory facilities to originate and service those
mortgage loans.
Representations by Sellers; Repurchases
Each seller will have made representations and warranties in respect
of the mortgage loans sold by it and evidenced by a series of certificates.
The representations and warranties may include, among other things:
o except in the case of cooperative loans, that title insurance,
or in the case of mortgaged properties located in areas where
title insurance policies are generally not available, an
attorney's certificate of title, or another form of coverage in
lieu of title insurance as specified in the related prospectus
supplement, and any required hazard insurance policy and
primary mortgage insurance policy were effective at the
origination of each mortgage loan and that each policy, or
certificate of title as applicable, remained in effect on the
date of purchase of the mortgage loan from the seller by or on
behalf of the depositor;
o that the seller had good title to each mortgage loan and each
mortgage loan was subject to no valid offsets, defenses,
counterclaims or rights of rescission, except as may be
provided under the Soldiers' and Sailors' Civil Relief Act of
1940 and except to the extent that any buydown agreement exists
for a buydown loan;
o that each mortgage loan constituted a valid first lien on, or a
perfected security interest with respect to, the mortgaged
property, subject only to permissible title insurance
exceptions, if applicable, and some other exceptions described
in the pooling and servicing agreement;
o that there were no delinquent tax or assessment liens against
the mortgaged property; and
o that each mortgage loan was made in compliance with, and is
enforceable under, all applicable local, state and federal laws
and regulations in all material respects.
However, the prospectus supplement relating to a series of certificates may
contain additional or different representations and warranties for the
mortgage loans in the related trust fund.
As to any mortgage loan insured by the FHA or partially guaranteed by
the VA, the seller will represent that it has complied with underwriting
policies of the FHA or the VA, as the case may be.
As indicated in the related pooling and servicing agreement, the
representations and warranties of a seller in respect of a mortgage loan will
be made as of the date of initial issuance of the series of certificates, the
related cut-off date, the date on which the seller sold the mortgage loan to
the depositor or one of its affiliates, or the date of origination of the
related mortgage loan, as the case may be. If representations and warranties
are made as of a date other than the closing date or cut-off date, a
substantial period of time may have elapsed between the other date and the
date of initial issuance of the series of certificates evidencing an interest
in the mortgage loan. Since the representations and warranties of a seller do
not address events that may occur following the sale of a mortgage loan by the
seller or following the origination of the mortgage loan, as the case may be,
its repurchase obligation described in this prospectus will not arise if the
relevant event that would otherwise have given rise to a repurchase obligation
with respect to a mortgage loan occurs after the date of sale of the mortgage
loan by the seller to the depositor or its affiliates or after the origination
of the mortgage loan, as the case may be. In addition, particular
representations, including the condition of the related mortgaged property,
will be limited to the extent the seller has knowledge and the seller will be
under no obligation to investigate the substance of the representation.
However, the depositor will not include any mortgage loan in the trust fund
for any series of certificates if it has actual knowledge of any facts that
would cause it to believe that the representations and warranties of a seller
will not be accurate and complete in all material respects in respect of the
mortgage loan as of the date of initial issuance of the related series of
certificates. If the master servicer is also a seller of mortgage loans with
respect to a particular series, the representations will be in addition to the
representations and warranties made by the master servicer in its capacity as
the master servicer.
The trustee, if the master servicer is the seller, or the master
servicer will promptly notify the relevant seller of any breach of any
representation or warranty made by it in respect of a mortgage loan that
materially and adversely affects the interests of the certificateholders in
the mortgage loan. If the seller cannot cure the breach within 90 days after
notice from the master servicer or the trustee, as the case may be, or any
other time period specified in the related prospectus supplement, then the
seller will be obligated to repurchase the mortgage loan from the trust fund
at a price equal to 100% of the outstanding principal balance of the mortgage
as of the date of the repurchase plus accrued interest on it to the first day
of the month in which the purchase price is to be distributed at the mortgage
rate, less any unreimbursed advances or amounts payable as related to
servicing expenses if the seller is the master servicer with respect to the
mortgage loan. If an election compensation is to be made to treat a trust fund
or designated portions of it as a "real estate mortgage investment conduit" as
defined in the tax code, the master servicer or a holder of the related
residual certificate will be obligated to pay any prohibited transaction tax
that may arise in connection with the repurchase. The applicable prospectus
supplement may provide that the master servicer will be entitled to
reimbursement for that payment from the assets of the related trust fund or
from any holder of the related residual certificate. See "Description of the
Certificates--General" and in the related prospectus supplement. Except in
those cases in which the master servicer is the seller, the master servicer
will be required under the applicable pooling and servicing agreement to
enforce this obligation for the benefit of the trustee and the
certificateholders, following the practices it would employ in its good faith
business judgment were it the owner of the mortgage loan. This repurchase
obligation will constitute the sole remedy available to certificateholders or
the trustee for a breach of representation by a seller.
Neither the depositor nor the master servicer will be obligated to
purchase a mortgage loan if a seller defaults on its obligation to do so, and
no assurance can be given that sellers will carry out their respective
repurchase obligations with respect to mortgage loans. However, to the extent
that a breach of a representation and warranty of a seller may also constitute
a breach of a representation made by the master servicer, the master servicer
may have a repurchase obligation as described under "The Pooling and Servicing
Agreement--Assignment of Mortgage Assets".
Description of the Certificates
The prospectus supplement relating to the certificates of each series
to be offered under this prospectus will, among other things, set forth for
the certificates, as appropriate:
o a description of the class or classes of certificates and the
rate at which interest will be passed through to holders of
each class of certificates entitled to interest or the method
of determining the amount of interest, if any, to be passed
through to each class;
o the initial aggregate certificate balance of each class of
certificates included in the series, the dates on which
distributions on the certificates will be made and, if
applicable, the initial and final scheduled distribution dates
for each class;
o information as to the assets comprising the trust fund,
including the general characteristics of the mortgage assets
included in the trust fund and, if applicable, the insurance,
surety bonds, guaranties, letters of credit or other
instruments or agreements included in the trust fund, and the
amount and source of any reserve fund;
o the circumstances, if any, under which the trust fund may be
subject to early termination;
o the method used to calculate the amount of principal to be
distributed with respect to each class of certificates;
o order of application of distributions to each of the classes
within the series, whether sequential, pro rata, or otherwise;
o the distribution dates with respect to the series;
o additional information with respect to the plan of distribution
of the certificates;
o whether one or more REMIC elections will be made and
designation of the regular interests and residual interests;
o the aggregate original percentage ownership interest in the
trust fund to be evidenced by each class of certificates;
o information as to the nature and extent of subordination with
respect to any class of certificates that is subordinate in
right of payment to any other class; and
o information as to the seller, the master servicer and the
trustee.
Each series of certificates will be issued pursuant to a pooling and
servicing agreement, dated as of the related cut-off date, among the
depositor, the master servicer and the trustee for the benefit of the holders
of the certificates of the series. The provisions of each pooling and
servicing agreement will vary depending upon the nature of the certificates to
be issued under it and the nature of the related trust fund. A form of pooling
and servicing agreement is an exhibit to the registration statement of which
this prospectus is a part.
The following are descriptions of the material provisions that may
appear in each pooling and servicing agreement. The prospectus supplement for
a series of certificates will describe more fully the provisions of the
pooling and servicing agreement relating to the series. The descriptions are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the pooling and servicing agreement for each series of
certificates and the applicable prospectus supplement. The depositor will
provide a copy of the pooling and servicing agreement, without exhibits,
relating to any series without charge upon written request of a holder of
record of a certificate of the series addressed to Fleet Mortgage Securities
Corp., 1333 Main Street, Columbia, South Carolina 29201, Attention: Secretary.
General
The certificates of each series will be issued in either fully
registered or book-entry form in the authorized denominations specified in the
related prospectus supplement. The certificates will evidence specified
beneficial ownership interests in the related trust fund created pursuant to
the related pooling and servicing agreement and will not be entitled to
payments in respect of the assets included in any other trust fund established
by the depositor. The mortgage assets may include mortgage loans that are
insured or guaranteed as set forth in the related prospectus supplement but,
in general, the mortgage assets will not be insured or guaranteed by any
governmental entity or other person. Each trust fund will consist of, to the
extent provided in the related pooling and servicing agreement,
o the mortgage assets that are included from time to time in the
related trust fund, exclusive of any retained interest
described in the related prospectus supplement;
o the assets required to be deposited in the related certificate
account from time to time;
o property that secured a mortgage loan and that is acquired on
behalf of the certificateholders by foreclosure or deed in lieu
of foreclosure; and
o any primary mortgage insurance policies, FHA insurance and VA
guaranties, and any other insurance policies or other forms of
credit enhancement required to be maintained pursuant to the
related pooling and servicing agreement.
If so specified in the related prospectus supplement, a trust fund
may also include one or more of the following: reinvestment income on payments
received on the mortgage assets, a reserve fund, a mortgage pool insurance
policy, a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a surety bond, guaranties or similar instruments or other
agreements.
Each series of certificates will be issued in one or more classes.
Each class of certificates of a series will evidence beneficial ownership of a
specified percentage or portion of future interest payments and a specified
percentage or portion of future principal payments on the mortgage assets in
the related trust fund. These specified percentages may be 0%. A series of
certificates may include one or more classes that are senior in right to
payment to one or more other classes of certificates of the series. A series
or classes of certificates may be covered by insurance policies, surety bonds
or other forms of credit enhancement, in each case as described in this
prospectus and in the related prospectus supplement. One or more classes of
certificates of a series may be entitled to receive distributions of
principal, interest or any combination of principal and interest.
Distributions on one or more classes of a series of certificates may be made
before one or more other classes, after the occurrence of specified events, in
accordance with a schedule or formula, on the basis of collections from
designated portions of the mortgage assets in the related trust fund, or on a
different basis, in each case as specified in the related prospectus
supplement. The timing and amounts of the distributions may vary among classes
or over time as specified in the related prospectus supplement.
Distributions of either or both of principal and interest on the
related certificates will be made by the trustee on each distribution date,
which may be monthly, quarterly, semiannually or at other intervals and on the
dates specified in the prospectus supplement. Distribution of either or both
of principal and interest will be made in proportion to the percentages
specified in the related prospectus supplement. Distributions will be made to
the persons in whose names the certificates are registered at the close of
business on the dates specified in the related prospectus supplement.
Distributions will be made in the manner specified in the related prospectus
supplement to the persons entitled to distributions at the address appearing
in the certificates register; provided, however, that the final distribution
in retirement of the certificates will be made only upon presentation and
surrender of the certificates at the office or agency of the trustee or other
person specified in the notice to certificateholders of the final
distribution.
The certificates will be freely transferable and exchangeable at the
corporate trust office of the trustee as set forth in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of certificates of any series, but the trustee may require payment of
a sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding by or on behalf of any
employee benefit plan or other retirement arrangement, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
in which the plans, accounts or arrangements are invested, subject to
provisions of ERISA or the tax code may result in "prohibited transactions"
within the meaning of ERISA and the tax code. See "ERISA Considerations". Each
applicable prospectus supplement may identify one or more classes of
securities that are restricted from purchases by a plan. The transfer of the
certificates will not be registered unless the transferee (i) represents that
it is not, and is not purchasing on behalf of, a plan, account or other
retirement arrangement or (ii) provides an opinion of counsel satisfactory to
the trustee and the depositor that the purchase of the certificates by or on
behalf of a plan, account or other retirement arrangement is permissible under
applicable law and will not subject the trustee, the master servicer or the
depositor to any obligation or liability in addition to those undertaken in
the pooling and servicing agreement.
As to each series, an election may be made to treat the related trust
fund or designated portions of it as a REMIC as defined in the tax code. The
related prospectus supplement will specify whether a REMIC election is to be
made. Alternatively, the pooling and servicing agreement for a series may
provide that a REMIC election may be made at the discretion of the depositor
or the master servicer and may be made only if specified conditions are
satisfied. The terms applicable to the making of a REMIC election, as well as
any material federal income tax consequences to certificateholders not
described in this prospectus, will be set forth in the related prospectus
supplement. If a REMIC election is made with respect to a series, one of the
classes will be designated as evidencing the sole class of residual interests
in the related REMIC, as defined in the tax code. All other classes of
certificates in the series will constitute "regular interests" in the related
REMIC, as defined in the tax code. As to each series with respect to which a
REMIC election is to be made, the master servicer or a holder of the related
residual certificate will be obligated to take all actions required to comply
with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. The master servicer may be entitled to
reimbursement for any payment in respect of prohibited transaction taxes from
the assets of the trust fund or from any holder of the related residual
certificate if so specified in the related prospectus supplement.
Distributions on Certificates
General. In general, the method of determining the amount of
distributions on a particular series of certificates will depend on the type
of credit support, if any, that is used with respect to the series. See
"Credit Enhancement" in this prospectus and in the related prospectus
supplement. Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the certificates of a
particular series. The prospectus supplement for each series of certificates
will describe the method to be used in determining the amount of distributions
on the certificates of its series.
Distributions allocable to principal of and interest on the
certificates will be made by the trustee out of, and only to the extent of,
funds in the related certificate account, including any funds transferred from
any reserve fund. As between certificates of different classes and as between
distributions of principal, and, if applicable, between distributions of
principal prepayments and scheduled payments of principal, and interest,
distributions made on any distribution date will be applied as specified in
the related prospectus supplement. A prospectus supplement will also describe
the method for allocating the distributions among certificates of a particular
class.
Available Funds. All distributions on the certificates of each series
on each distribution date will be made from the available funds, in accordance
with the terms described in the related prospectus supplement and specified in
the pooling and servicing agreement. Available funds for each distribution
date will generally equal the amount on deposit in the related certificate
account on the distribution date, net of related fees and expenses payable by
the related trust fund, other than amounts to be held in the certificate
account for distribution on future distribution dates.
Distributions of Interest. Interest will accrue on the aggregate
original balance of the certificates or, in the case of certificates entitled
only to distributions allocable to interest, the aggregate notional amount of
each class of certificates entitled to interest at the pass-through rate from
the date and for the periods specified in the prospectus supplement. This rate
may be a fixed rate or a rate adjustable as specified in the prospectus
supplement. To the extent funds are available, interest accrued during the
specified period on each class of certificates entitled to interest, other
than a class of certificates that provides for interest that accrues, but is
not currently payable, will be distributable on the distribution dates
specified in the related prospectus supplement until the aggregate class
certificate balance of that class has been distributed in full or, in the case
of certificates entitled only to distributions allocable to interest, until
the aggregate notional amount of the certificates is reduced to zero or for
the period of time designated in the related prospectus supplement. The
original class certificate balance of each certificate will equal the
aggregate distributions allocable to principal to which that certificate is
entitled. Distributions allocable to interest on each certificate that is not
entitled to distributions allocable to principal will generally be calculated
based on the notional amount of the certificate. The notional amount of a
certificate will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing
the calculation of interest and for some other purposes.
With respect to any class of accrual certificates, any interest that
has accrued but is not paid on a given distribution date will be added to the
class certificate balance of the class of certificates on that distribution
date. The applicable prospectus supplement may specify the basis for the
distributions of interest on each class of accrual certificates, distributions
of interest on each class of accrual certificates will commence only after the
occurrence of the events specified in the prospectus supplement and, before
that time, the beneficial ownership interest of the class of accrual
certificates in the trust fund, as reflected in the class certificate balance
of the class of accrual certificates, will increase on each distribution date
by the amount of interest that accrued on the class of accrual certificates
during the preceding interest accrual period but that was not required to be
distributed to the class on the distribution date. Afterwards, the class of
accrual certificates will accrue interest on its outstanding class certificate
balance as so adjusted.
Distributions of Principal. The related prospectus supplement will
specify the method by which the amount of principal to be distributed on the
certificates on each distribution date will be calculated and the manner in
which that amount will be allocated among the classes of certificates entitled
to distributions of principal. The aggregate class certificate balance of any
class of certificates entitled to distributions of principal will be the
aggregate original class certificate balance of the class of certificates
specified in the prospectus supplement, reduced by all distributions reported
to the holders of the certificates as allocable to principal and, (1) in the
case of accrual certificates, unless otherwise specified in the related
prospectus supplement, increased by all interest accrued but not then
distributable on the accrual certificates and (2) in the case of adjustable
rate certificates, reduced by the effect of negative amortization, if
applicable. The related prospectus supplement will specify the method by which
the amount of principal to be distributed on the certificates on each
distribution date will be calculated and the manner in which that amount will
be allocated among the classes of certificates entitled to distributions of
principal.
If so provided in the related prospectus supplement, one or more
classes of senior certificates will be entitled to receive all or a
disproportionate percentage of the payments of principal that are received
from borrowers, which are received in advance of their scheduled due dates and
are not accompanied by amounts representing scheduled interest due after the
month of the payments in the percentages and under the circumstances or for
the periods specified in the prospectus supplement. Any disproportionate
allocation of these principal prepayments to senior certificates will have the
effect of accelerating the amortization of the senior certificates while
increasing the interests evidenced by the subordinated certificates in the
trust fund. Increasing the interests of the subordinated certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinated certificates. See "Credit
Enhancement--Subordination" in the related prospectus supplement.
Unscheduled Distributions. If specified in the related prospectus
supplement, the certificates may receive distributions before the next
scheduled distribution date. If applicable, the trustee will be required to
make unscheduled distributions on the day and in the amount specified in the
related prospectus supplement if, due to substantial payments of principal,
including principal prepayments, on the mortgage assets, the trustee or the
master servicer determines that the funds available or anticipated to be
available from the certificate account and, if applicable, any reserve fund,
may be insufficient to make required distributions on the certificates on the
distribution date. Typically, the amount of any unscheduled distribution that
is allocable to principal will not exceed the amount that would otherwise have
been required to be distributed as principal on the certificates on the next
distribution date; however, if so specified in the related prospectus
supplement, it may. The unscheduled distributions may or may not include
interest at the applicable pass-through rate on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified
in the prospectus supplement.
Advances
To the extent provided in the related prospectus supplement, the
master servicer will be required to advance on or before each distribution
date an amount equal to the aggregate of payments of principal and interest,
net of the master servicing fee with respect to the related mortgage loans, on
the mortgage assets of the related series that were delinquent on the related
determination date. Advances by the master servicer will be made either from
its own funds, from funds advanced by sub-servicers or from funds held in the
certificate account for future distributions to certificateholders. The master
servicer will make advances only if the master servicer determines that the
advances will be recoverable out of late payments by obligors on the mortgage
assets, liquidation proceeds, insurance proceeds not used to restore the
property or otherwise. In the case of cooperative loans, the master servicer
also will be required to advance any unpaid maintenance fees and other charges
under the related proprietary leases as specified in the related prospectus
supplement.
In making advances, the master servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to
certificateholders, rather than to guarantee or insure against losses. Any
advances will be reimbursable to the master servicer or a sub-servicer either
out of funds held in the certificate account for future distribution to
certificateholders or out of recoveries on the specific mortgage assets with
respect to which the advances were made, e.g., late payments made by the
related obligors, any related insurance proceeds, liquidation proceeds or
proceeds of any mortgage loan repurchased by the depositor, a sub-servicer or
a seller pursuant to the related pooling and servicing agreement. In addition,
advances by the master servicer or sub-servicer also will be reimbursable to
the master servicer or a sub-servicer from cash otherwise distributable to
certificateholders to the extent that the master servicer determines that the
advances previously made are not ultimately recoverable from the mortgage
asset with respect to which the advances were made. If advances are made by,
or if reimbursements for prior advances are made to, the master servicer from
cash being held for future distribution to certificateholders, the master
servicer will replace the funds on or before any future distribution date to
the extent that funds in the applicable certificate account on the
distribution date would be less than the amount required to be available for
distributions to certificateholders on the distribution date. However, the
master servicer will not repay the related trust fund for any reimbursements
to it on account of advances that it has determined are not ultimately
recoverable from the mortgage assets with respect to which the advances were
made.
The master servicer also will be obligated to make advances, to the
extent recoverable out of insurance proceeds not used to restore the property,
liquidation proceeds or otherwise, in respect of taxes and insurance premiums
not paid by mortgagors on a timely basis. Funds so advanced are reimbursable
to the master servicer to the extent permitted by the pooling and servicing
agreement. If specified in the related prospectus supplement, the obligations
of the master servicer to make advances may be supported by a cash advance
reserve fund, a surety bond or other arrangement, in each case as described in
the prospectus supplement.
Reports to Certificateholders
Before or concurrently with each distribution on a distribution date,
the master servicer or the trustee will furnish to each certificateholder of
record of the related series a statement setting forth, to the extent
applicable to the series of certificates, among other things:
o the amount of the distribution allocable to principal,
separately identifying the aggregate amount of any principal
prepayments and, if so specified in the related prospectus
supplement, prepayment penalties;
o the amount of the distribution allocable to interest;
o the amount of any advance;
o the aggregate amount (a) otherwise allocable to the
subordinated certificateholders on the distribution date, and
(b) the aggregate amount withdrawn from the reserve fund, if
any, that is included in the amounts distributed to the
certificateholders;
o the class certificate balance or notional amount of each class
of the related series after giving effect to the distribution
of principal on the distribution date;
o the percentage of principal payments on the mortgage assets,
excluding prepayments, if any, which each class will be
entitled to receive on the following distribution date;
o the percentage of principal prepayments with respect to the
mortgage assets, if any, which each class will be entitled to
receive on the following distribution date;
o the related amount of the servicing compensation retained or
withdrawn from the certificate account by the master servicer,
and the amount of additional servicing compensation received by
the master servicer attributable to penalties, fees, excess
liquidation proceeds and other similar charges and items;
o the number and aggregate principal balances of mortgage loans
(a) delinquent, exclusive of mortgage loans in foreclosure, (i)
1 to 30 days, (ii) 31 to 60 days, (iii) 61 to 90 days and (iv)
91 or more days, and (b) in (iv) 91 or more days, as of the
close of business on the last day of the calendar month
preceding the distribution date;
o the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
o the pass-through rate, if adjusted from the date of the last
statement, of a class expected to be applicable to the next
distribution to the class;
o if applicable, the amount remaining in the reserve fund at the
close of business on the distribution date;
o the pass-through rate as of the day before the preceding
distribution date; and
o any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single certificate of the relevant class having the
percentage interest specified in the related prospectus supplement. The report
to certificateholders for any series of certificates may include additional or
other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail to each
certificateholder of record at any time during the calendar year a report (a)
as to the aggregate of amounts reported pursuant to the first two items above
for the calendar year or, if the person was a certificateholder of record
during a portion of the calendar year, for the applicable portion of the year
and (b) other customary information deemed appropriate for certificateholders
to prepare their tax returns.
Categories of Classes of Certificates
In general, classes of pass-through certificates fall into different
categories. The following chart identifies and generally describes the more
typical categories. The prospectus supplement for a series of certificates may
identify the classes which comprise the series by reference to the following
categories.
<TABLE>
<CAPTION>
<S> <C>
Categories of Classes
Principal Types
Accretion Directed............................... A class that receives principal payments from the accreted
interest from specified accrual classes. An accretion
directed class also may receive principal payments from
principal paid on the underlying mortgage assets or other
assets of the trust fund for the related series.
Component Certificates .......................... A class consisting of "components". The components of a
class of component certificates may have different principal
and interest payment characteristics but together constitute
a single class. Each component of a class of component
certificates may be identified as falling into one or more
of the categories in this chart.
Notional Amount Certificates..................... A class having no principal balance and bearing interest on
the related notional amount. The notional amount is used
for purposes of the determination of interest distributions.
Planned Principal Class or PACs.................. A class that is designed to receive principal payments using
a predetermined principal balance schedule derived by
assuming two constant prepayment rates for the underlying
mortgage assets. These two rates are the endpoints for the
"structuring range" for the planned principal class. The
planned principal classes in any series of certificates may
be subdivided into different categories e.g., primary
planned principal classes, secondary planned principal
classes and so forth having different effective structuring
ranges and different principal payment priorities. The
structuring range for the secondary planned principal class
of a series of certificates will be narrower than that for
the primary planned principal class of the series.
Scheduled Principal Class........................ A class that is designed to receive principal payments using
a predetermined principal balance schedule but is not
designated as a planned principal class or targeted
principal class. In many cases, the schedule is derived by
assuming two constant prepayment rates for the underlying
mortgage assets. These two rates are the endpoints for the
"structuring range" for the scheduled principal class.
Sequential Pay................................... Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal balance
schedules and that under all circumstances receive payments
of principal continuously from the first distribution date
on which they receive principal until they are retired. A
single class that receives principal payments before or
after all other classes in the same series of certificates
may be identified as a sequential pay class.
Strip............................................ A class that receives a constant proportion, or "strip", of
the principal payments on the underlying Mortgage Assets or
other assets of the trust fund.
Support Class
"companion classes".............................. A class that receives principal payments on any distribution
date only if scheduled payments have been made on specified
planned principal classes, targeted principal classes or
scheduled principal classes.
Targeted Principal Class or TACs................. A class that is designed to receive principal payments using
a predetermined principal balance schedule derived by
assuming a single constant prepayment rate for the
underlying mortgage assets.
Interest Types
Fixed Rate....................................... A class with an interest rate that is fixed throughout the
life of the class.
Floating Rate.................................... A class with an interest rate that resets periodically based
upon a designated index and that varies directly with
changes in the index.
Inverse Floating Rate............................ A class with an interest rate that resets periodically based
upon a designated index and that varies inversely with
changes in the index.
Variable Rate.................................... A class with an interest rate that resets periodically and
is calculated by reference to the rate or rates of interest
applicable to specified assets or instruments e.g., the
mortgage rates borne by the underlying mortgage loans.
Interest Only.................................... A class that receives some or all of the interest payments
made on the underlying mortgage assets or other assets of
the trust fund and little or no principal. Interest only
classes have either a nominal principal balance or a
notional amount. A nominal principal balance represents
actual principal that will be paid on the class. It is
referred to as nominal since it is extremely small compared
to other classes. A notional amount is the amount used as a
reference to calculate the amount of interest due on an
interest only class that is not entitled to any
distributions of principal.
Principal Only................................... A class that does not bear interest and is entitled to
receive only distributions of principal.
Partial Accrual.................................. A class that accretes a portion of the amount of accrued
interest on it. The accreted interest will not be
distributed but will instead be added to the principal
balance of the class on each applicable distribution date,
with the remainder of the accrued interest to be distributed
currently as interest on the class. This partial accrual
without distribution may continue until a specified event
has occurred or until the partial accrual class is retired.
Accrual.......................................... A class that accretes the full amount of accrued interest on
it. The accreted interest will not be distributed but will
instead be added as principal to the principal balance of
the class on each applicable distribution date. This
accrual without distribution may continue until some
specified event has occurred or until the accrual class is
retired.
</TABLE>
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
LIBOR
On the date set forth in the related prospectus supplement for each
class of certificates of a series for which the applicable interest rate is
determined by reference to an index denominated as LIBOR, the person
designated in the related pooling and servicing agreement as the calculation
agent will determine LIBOR in accordance with one of the two methods described
below. The related prospectus supplement will specify which method is used.
The related prospectus supplement may also specify additional or different
basis for determining LIBOR.
LIBO Method
If using this method to calculate LIBOR, the calculation agent will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page, offered by the principal London office of each of the
designated reference banks meeting the criteria set forth in this prospectus
for making one-month United States dollar deposits in leading banks in the
London Interbank market, as of 11:00 a.m., London time on the LIBOR
determination date. In lieu of relying on the quotations for those reference
banks that appear at the time on the Reuters Screen LIBO Page, the calculation
agent will request each of the reference banks to provide the offered
quotations at the time.
Under this method, LIBOR will be established by the calculation agent
on each LIBOR determination date as follows:
(a) If on any LIBOR determination date two or more reference banks
provide offered quotations, LIBOR for the next interest accrual period
shall be the arithmetic mean of the offered quotations, rounded upwards
if necessary to the nearest whole multiple of 1/32%.
(b) If on any LIBOR determination date only one or none of the
reference banks provides offered quotations, LIBOR for the next interest
accrual period shall be whichever is the higher of:
o LIBOR as determined on the previous LIBOR determination date,
or
o the reserve interest rate.
The reserve interest rate shall be the rate per annum which the
calculation agent determines to be either:
o the arithmetic mean, rounded upwards if necessary to the
nearest whole multiple of 1/32% of the one-month United States
dollar lending rates that New York City banks selected by the
calculation agent are quoting, on the relevant LIBOR
determination date, to the principal London offices of at least
two of the reference banks to which the quotations are, in the
opinion of the calculation agent being so made, or
o if the calculation agent cannot determine the arithmetic mean,
the lowest one-month United States dollar lending rate which
New York City banks selected by the calculation agent are
quoting on the LIBOR determination date to leading European
banks.
(c) If on any LIBOR determination date for a class specified in the
related prospectus supplement, the calculation agent is required but is
unable to determine the reserve interest rate in the manner provided in
paragraph (b) above, LIBOR for the next interest accrual period shall be
LIBOR as determined on the preceding LIBOR determination date, or, in the
case of the first LIBOR determination date, LIBOR shall be considered to
be the per annum rate specified as such in the related prospectus
supplement.
Each reference bank (1) shall be a leading bank engaged in
transactions in Eurodollar deposits in the international Eurocurrency market;
(2) shall not control, be controlled by, or be under common control with the
calculation agent; and (3) shall have an established place of business in
London. If a reference bank should be unwilling or unable to act as such or if
appointment of a reference bank is terminated, another leading bank meeting
the criteria specified above will be appointed.
BBA Method
If using this method of determining LIBOR, the calculation agent will
determine LIBOR on the basis of the British Bankers' Association "Interest
Settlement Rate" for one-month deposits in United States dollars as found on
Telerate page 3750 as of 11:00 a.m. London time on each LIBOR determination
date. Interest Settlement Rates currently are based on rates quoted by eight
British Bankers' Association designated banks as being, in the view of the
banks, the offered rate at which deposits are being quoted to prime banks in
the London interbank market. The Interest Settlement Rates are calculated by
eliminating the two highest rates and the two lowest rates, averaging the four
remaining rates, carrying the result, expressed as a percentage, out to six
decimal places, and rounding to five decimal places.
If on any LIBOR determination date, the calculation agent is unable
to calculate LIBOR in accordance with the method set forth above, LIBOR for
the next interest accrual period shall be calculated in accordance with the
LIBOR method described under "LIBO Method".
The establishment of LIBOR on each LIBOR determination date by the
calculation agent and its calculation of the rate of interest for the
applicable classes for the related interest accrual period shall, in the
absence of manifest error, be final and binding.
COFI
On the date specified in the related prospectus supplement for any
class of securities the interest rate of which is determined by reference to
an index designated as COFI, the calculation agent designated in the
prospectus supplement will ascertain the Eleventh District Cost of Funds Index
for the related interest accrual period. The Eleventh District Cost of Funds
Index is designed to represent the monthly weighted average cost of funds for
savings institutions in Arizona, California and Nevada that are member
institutions of the Eleventh Federal Home Loan Bank District. The Eleventh
District Cost of Funds Index for a particular month reflects the interest
costs paid on all types of funds held by Eleventh District member institutions
and is calculated by dividing the cost of funds by the average of the total
amount of those funds outstanding at the end of that month and of the prior
month and annualizing and adjusting the result to reflect the actual number of
days in the particular month. If necessary, before these calculations are
made, the component figures are adjusted by the Federal Home Loan Bank of San
Francisco, or FHLBSF, to neutralize the effect of events such as member
institutions leaving the Eleventh District or acquiring institutions outside
the Eleventh District. The Eleventh District Cost of Funds Index is weighted
to reflect the relative amount of each type of funds held at the end of the
relevant month. The major components of funds of Eleventh District member
institutions are:
(1) savings deposits,
(2) time deposits.
(3) FHLBSF advances,
(4) repurchase agreements, and
(5) all other borrowings.
Because the component funds represent a variety of maturities whose costs may
react in different ways to changing conditions, the Eleventh District Cost of
Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District
Cost of Funds Index, which may cause it to move in a manner different from
indices tied to specific interest rates, such as United States Treasury Bills
or LIBOR. Because the liabilities upon which the Eleventh District Cost of
Funds Index is based were issued at various times under various market
conditions and with various maturities, the Eleventh District Cost of Funds
Index may not necessarily reflect the prevailing market interest rates on new
liabilities of similar maturities. Moreover, as stated above, the Eleventh
District Cost of Funds Index is designed to represent the average cost of
funds for Eleventh District savings institutions for the month before the
month in which it is due to be published. Additionally, the Eleventh District
Cost of Funds Index may not necessarily move in the same direction as market
interest rates at all times, since as longer term deposits or borrowings
mature and are renewed at prevailing market interest rates, the Eleventh
District Cost of Funds Index is influenced by the differential between the
prior and the new rates on those deposits or borrowings. In addition,
movements of the Eleventh District Cost of Funds Index, as compared to other
indices tied to specific interest rates, may be affected by changes instituted
by the FHLBSF in the method used to calculate the Eleventh District Cost of
Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by
mail of Information Bulletins by writing the Federal Home Loan Bank of San
Francisco, P.O. Box 7948, 600 California Street, San Francisco, California
94120, or by calling (415) 616-1000. The Eleventh District Cost of Funds Index
may also be obtained by calling the FHLBSF at (415) 616-2600.
The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month "will be announced on or near the
last working day" of the following month and also has stated that it "cannot
guarantee the announcement" of the index on an exact date. On the tenth day,
or any other day of the month specified in the related prospectus supplement,
COFI for each class of COFI securities for the interest accrual period
commencing in that month shall be the most recently published Eleventh
District Cost of Funds Index, unless the most recently published index relates
to a month prior to the third preceding month. If the most recently published
Eleventh District Cost of Funds Index relates to a month prior to the third
preceding month, COFI for the current interest accrual period and for each
succeeding interest accrual period will, except as described in the next to
last sentence of this paragraph, be based on the National Cost of Funds Index
published by the OTS. Information on the National Cost of Funds Index may be
obtained by writing the OTS at 1700 G Street, N.W., Washington, D.C. 20552 or
calling (202) 906-6677, and the current National Cost of Funds Index may be
obtained by calling (202) 906-6988. If COFI is based on the National Cost of
Funds Index it will be based on the most recently published index, unless the
most recently published index, as of the tenth or other designated day of the
month in which an interest accrual period commences, relates to a month prior
to the fourth preceding month. In that case, the index applicable to each
class of COFI securities, for that interest accrual period and each succeeding
interest accrual period will be based on LIBOR, as determined by the
calculation agent in accordance with the agreement relating to the related
series of securities. A change of index from the Eleventh District Cost of
Funds Index to an alternative index will result in a change in the index
level, and, particularly if LIBOR is the alternative index, could increase its
volatility.
The establishment of COFI by the calculation agent and its
calculation of the rates of interest for the applicable classes for the
related interest accrual period shall, in the absence of manifest error, be
final and binding.
Treasury Index
On the date specified in the related prospectus supplement for any
class of securities the interest rate of which is determined by reference to
an index denominated as a Treasury Index, the calculation agent designated in
the prospectus supplement will ascertain the Treasury Index for Treasury
securities of the maturity and for the period, or, if applicable, date,
specified in the prospectus supplement. The related prospectus supplement may
specify additional or different basis for determining and defining Treasury
index. The Treasury index for any period means the average of the yield for
each business day during the specified period, and for any date means the
yield for the date, expressed as a per annum percentage rate, on (1) U.S.
Treasury securities adjusted to the "constant maturity" specified in the
prospectus supplement or (2) if no "constant maturity" is so specified, U.S.
Treasury securities trading on the secondary market having the maturity
specified in the prospectus supplement, in each case as published by the
Federal Reserve Board in its Statistical Release No. H.15 (519). Statistical
Release No. H.15 (519) is published on Monday or Tuesday of each week and may
be obtained by writing or calling the Publications Department at the Board of
Governors of the Federal Reserve System, 21st and C Streets, Washington, D.C.
20551 (202) 452-3244. If the calculation agent has not yet received
Statistical Release No. H.15 (519) for a week, then it will use the
Statistical Release from the preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived
from the U.S. Treasury's daily yield curve. This curve, which relates the
yield on a security to its time to maturity, is based on the closing market
bid yields on actively traded Treasury securities in the over-the-counter
market. These market yields are calculated from composites of quotations
reported by five leading U.S. Government securities dealers to the Federal
Reserve Bank of New York. This method provides a yield for a given maturity
even if no security with that exact maturity is outstanding. If the Treasury
index is no longer published, a new index based upon comparable data and
methodology will be designated in accordance with the pooling and servicing
agreement relating to the particular series of certificates. The calculation
agent's determination of the Treasury index, and its calculation of the rates
of interest for the applicable classes for the related interest accrual period
shall, in the absence of manifest error, be final and binding.
Prime Rate
On the date specified in the related prospectus supplement for each
class of certificates of a series for which the applicable interest rate is
determined by reference to an index denominated as the prime rate, the
calculation agent designated in the prospectus supplement will ascertain the
prime rate for the related interest accrual period. The related prospectus
supplement may specify additional or different basis for determining and
defining the prime rate. The prime rate for an interest accrual period will be
the "prime rate" as published in the "Money Rates" section of The Wall Street
Journal on the related prime rate determination date, or if not so published,
the "prime rate" as published in a newspaper of general circulation selected
by the calculation agent in its sole discretion. If a prime rate range is
given, then the average of the range will be used. If the prime rate is no
longer published, a new index based upon comparable data and methodology will
be designated in accordance with the pooling and servicing agreement relating
to the particular series of certificates. The calculation agent's
determination of the prime rate and its calculation of the rates of interest
for the related interest accrual period shall in the absence of manifest error
be final and binding.
Book-Entry Certificates
If so specified in the related prospectus supplement, one or more
classes of the certificates of any series will be initially issued through the
book-entry facilities of The Depository Trust Company in the United States, or
Clearstream or Euroclear in Europe if they are participants of either of those
systems, or indirectly through organizations that are participants in either
of those systems. Each class of book-entry certificates of a series will be
issued in one or more certificates which together equal the aggregate initial
class certificate balance of that class and which will be held by a nominee of
the depository. The applicable prospectus supplement may specify other
procedures for book-entry certificates. The following is a general description
of the procedures that will be applicable to any class of book-entry
certificates.
Beneficial interests in the book-entry certificates of a series will
be held indirectly by investors through the book-entry facilities of the
depository, as described in this prospectus. Accordingly, the depository or
its nominee is expected to be the holder of record of the book- entry
certificates. Except as described below, no person acquiring a beneficial
interest in a book-entry certificate will be entitled to receive a physical
certificate representing the certificate.
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary that maintains the beneficial owner's account for
that purpose. In turn, the financial intermediary's ownership of a book-entry
certificate will be recorded on the records of the depository or of a
participating firm that acts as agent for the financial intermediary, whose
interest will in true be recorded on the records of the depository, if the
beneficial owner's financial intermediary is not a depository participant.
Therefore, the beneficial owner must rely on the foregoing procedures to
evidence its beneficial ownership of a book-entry certificate. Beneficial
ownership of a book-entry certificate may only be transferred by compliance
with the procedures of the financial intermediaries and depository
participants.
In accordance with its normal procedures, the depository is expected
to record the positions held by each depository participant in the book-entry
certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of book-entry certificates will be
subject to the rules, regulations and procedures governing the depository and
depository participants as in effect from time to time.
Distributions on the book-entry certificates will be made on each
distribution date by the trustee to the depository. The depository will be
responsible for crediting the amount of the payments to the accounts of the
applicable depository participants in accordance with the depository's normal
procedures. Each depository participant will be responsible for disbursing the
payments to the beneficial owners of the book-entry certificates that it
represents and to each financial intermediary for which it acts as agent. Each
financial intermediary will be responsible for disbursing funds to the
beneficial owners of the book-entry certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry
certificates may experience some delay in their receipt of payments, since
payments will be forwarded by the trustee to the depository or its nominee, as
the case may be, as holder of record of the book-entry certificates. Because
the depository can act only on behalf of financial intermediaries, the ability
of a beneficial owner to pledge book-entry certificates to persons or entities
that do not participate in the depository system, or otherwise take actions in
respect of the book-entry certificates, may be limited due to the lack of
physical certificates for the book-entry certificates. In addition, issuance
of the book-entry certificates in book-entry form may reduce the liquidity of
the certificates in the secondary market since some potential investors may be
unwilling to purchase certificates for which they cannot obtain physical
certificates.
Until definitive certificates are issued, it is anticipated that the
only "certificateholder" of the book-entry certificates will be the depository
or its nominee. Beneficial owners of the book-entry certificates will not be
certificateholders, as that term will be used in the pooling and servicing
agreement relating to the series of certificates. Beneficial owners are only
permitted to exercise the rights of certificateholders indirectly through
financial intermediaries and the depository. Monthly and annual reports on the
related trust fund provided to the depository or its nominee, as the case may
be, as holder of record of the book-entry certificates, may be made available
to beneficial owners upon request, in accordance with the rules, regulations
and procedures creating and affecting the depository, and to the financial
intermediaries to whose depository accounts the book-entry certificates of the
beneficial owners are credited.
Until definitive certificates are issued, the depository will take
any action permitted to be taken by the holders of the book-entry certificates
of a particular series under the related pooling and servicing agreement only
at the direction of one or more financial intermediaries to whose depository
accounts the book-entry certificates are credited to the extent that the
actions are taken on behalf of financial intermediaries whose holdings include
the book-entry certificates.
The applicable prospectus supplement may specify when and for what
reasons definitive certificates may be issued Typically, definitive
certificates will be issued to beneficial owners of book-entry certificates,
or their nominees, rather than to the depository, only if (1) the depository
or the depositor advises the trustee in writing that the depository is no
longer willing, qualified or able to discharge properly its responsibilities
as nominee and depository with respect to the book-entry certificates and the
depositor or the trustee is unable to locate a qualified successor; (2) the
depositor, at its sole option, elects to terminate the book-entry system
through the depository; or (3) after the occurrence of an event of default,
beneficial owners of certificates representing not less than 51% of the
aggregate percentage interests evidenced by each class of certificates of the
related series issued as book-entry certificates advise the trustee and the
depository through the financial intermediaries in writing that the
continuation of a book-entry system through the depository, or a successor to
it, is no longer in the best interests of the beneficial owners.
Upon the occurrence of any of the events described in the preceding
paragraph, the trustee will be required to notify all beneficial owners of the
occurrence of the event and the availability of definitive certificates. Upon
surrender by the depository of the global certificate or certificates
representing the book-entry certificates and instructions for re-registration,
the trustee will issue the definitive certificates, and the trustee will then
recognize the holders of the definitive certificates as certificateholders
under the pooling and servicing agreement relating to the series of
certificates.
Credit Enhancement
General
Credit enhancement may be provided for one or more classes of a
series of certificates or with respect to the mortgage assets in the related
trust fund. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related prospectus
supplement, the subordination of one or more classes of the certificates of
the series, the establishment of one or more reserve funds, the use of a
cross-support feature, use of a mortgage pool insurance policy, bankruptcy
bond, special hazard insurance policy, surety bond, letter of credit,
guaranteed investment contract or other method of credit enhancement described
in the related prospectus supplement, or any combination of them. Credit
enhancement may not provide protection against all risks of loss or guarantee
repayment of the entire principal balance of the certificates and interest on
them. If losses occur which exceed the amount covered by credit enhancement or
which are not covered by the credit enhancement, certificateholders will bear
their allocable share of any deficiencies.
Subordination
If so specified in the related prospectus supplement, the rights of
holders of one or more classes of subordinated certificates will be
subordinate to the rights of holders of one or more other classes of senior
certificates of the series to distributions of scheduled principal, principal
prepayments, interest or any combination of them that otherwise would have
been payable to holders of subordinated certificates under the circumstances
and to the extent specified in the related prospectus supplement. If specified
in the related prospectus supplement, delays in receipt of scheduled payments
on the mortgage assets and losses with respect to the mortgage assets will be
borne first by the various classes of subordinated certificates and after that
by the various classes of senior certificates, in each case under the
circumstances and governed by the limitations specified in the related
prospectus supplement. The aggregate distributions of delinquent payments on
the mortgage assets over the lives of the certificates or at any time, the
aggregate losses on mortgage assets which must be borne by the subordinated
certificates by virtue of subordination and the amount of the distributions
otherwise distributable to the subordinated certificateholders that will be
distributable to senior certificateholders on any distribution date may be
limited as specified in the related prospectus supplement. If aggregate
distributions of delinquent payments on the mortgage assets or aggregate
losses on the mortgage assets were to exceed the amount specified in the
related prospectus supplement, senior certificateholders would experience
losses on the certificates.
If specified in the related prospectus supplement, various classes of
senior certificates and subordinated certificates may themselves be
subordinate in their right to receive specified distributions to other classes
of senior and subordinated certificates, respectively, through a cross support
mechanism or otherwise.
As between classes of senior certificates and as between classes of
subordinated certificates, distributions may be allocated among the classes:
(1) in the order of their scheduled final distribution dates,
(2) in accordance with a schedule or formula,
(3) in relation to the occurrence of events,
(4) or by another method as specified in the related prospectus
supplement.
As between classes of subordinated certificates, payments to senior
certificateholders on account of delinquencies or losses and payments to the
reserve fund will be allocated as specified in the related prospectus
supplement.
Mortgage Pool Insurance Policies
If specified in the related prospectus supplement relating to a
mortgage pool, a separate mortgage pool insurance policy will be obtained for
the mortgage pool and issued by the insurer named in the prospectus
supplement. Each mortgage pool insurance policy will provide limited coverage
of losses on mortgage loans in the mortgage pool. Coverage will be in an
amount equal to a percentage specified in the prospectus supplement of the
aggregate principal balance of the mortgage loans on the cut-off date that are
not covered as to their entire outstanding principal balances by primary
mortgage insurance policies. As more fully described below, the master
servicer will present claims under the insurance to the pool insurer on behalf
of itself, the trustee and the certificateholders. The mortgage pool insurance
policies, however, are not blanket policies against loss, since claims under
them may be made only for particular defaulted mortgage loans and only upon
satisfaction of conditions precedent in the policy. Typically, the mortgage
pool insurance policies will not cover losses due to a failure to pay or
denial of a claim under a primary mortgage insurance policy; however, if so
specified in the related prospectus supplement, the mortgage pool insurance
policies may cover those claims.
In general, each mortgage pool insurance policy will provide that no
claims may be validly presented unless:
o any required primary mortgage insurance policy is in effect for
the defaulted mortgage loan and a claim under it has been
submitted and settled;
o hazard insurance on the related mortgaged property has been
kept in force and real estate taxes and other protection and
preservation expenses have been paid;
o if there has been physical loss or damage to the mortgaged
property, it has been restored to its physical condition,
reasonable wear and tear excepted, at the time of issuance of
the policy; and
o the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens except particular
permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the option
either (a) to purchase the mortgaged property at a price equal to the
principal balance of the related mortgage loan plus accrued and unpaid
interest at the mortgage rate to the date of the purchase and a portion of
expenses incurred by the master servicer on behalf of the trustee and
certificateholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted mortgage loan plus accrued and unpaid interest at the
mortgage rate to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of the mortgaged
property, in either case net of specified amounts paid or assumed to have been
paid under the related primary mortgage insurance policy.
If any mortgaged property is damaged, and proceeds, if any, from the
related hazard insurance policy or a special hazard insurance policy or
policies maintained for a series are insufficient to restore the damaged
property to a condition sufficient to permit recovery under the mortgage pool
insurance policy, the master servicer will not be required to expend its own
funds to restore the damaged property unless it determines that (1) the
restoration will increase the proceeds to certificateholders on liquidation of
the mortgage loan after reimbursement of the master servicer for its expenses
and (2) the expenses will be recoverable by it through proceeds of the sale of
the mortgaged property or proceeds of the related mortgage pool insurance
policy or any related primary mortgage insurance policy.
The mortgage pool insurance policy generally will not insure, and
many primary mortgage insurance policies do not insure, against loss sustained
from a default arising from, among other things, (1) fraud or negligence in
the origination or servicing of a mortgage loan, including misrepresentation
by the mortgagor, the originator or persons involved in its origination, or
(2) failure to construct a mortgaged property in accordance with plans and
specifications. A failure of coverage for one of these reasons might result in
a breach of the related seller's representations and, in that case, might
result in an obligation on the part of the seller to repurchase the defaulted
mortgage loan if the breach cannot be cured by the seller. No mortgage pool
insurance policy will cover, and many primary mortgage insurance policies do
not cover, a claim with respect to a defaulted mortgage loan occurring when
the servicer of the mortgage loan was not approved by the applicable insurer.
The original amount of coverage under each mortgage pool insurance
policy will be maintained to the extent provided in the related prospectus
supplement and may be reduced over the life of the related certificates by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the pool insurer upon disposition of all foreclosed properties.
The applicable prospectus supplement may provide that the claims paid will be
net of master servicer expenses and accrued interest, but typically the amount
of claims paid will include some of the expenses incurred by the master
servicer as well as accrued interest on delinquent mortgage loans to the date
of payment of the claim. Accordingly, if aggregate net claims paid under any
mortgage pool insurance policy reach the original policy limit, coverage under
that mortgage pool insurance policy will be exhausted and any further losses
will be borne by the certificateholders.
Special Hazard Insurance Policies
If specified in the related prospectus supplement, a separate special
hazard insurance policy will be obtained for the mortgage pool and will be
issued by the insurer named in the prospectus supplement. Each special hazard
insurance policy will provide limited protection to holders of the related
certificates from loss caused by the application of the coinsurance clause
contained in hazard insurance policies and loss from damage to mortgaged
properties caused by any hazards not insured against under the standard form
of hazard insurance policy in the states where the mortgaged properties are
located or under a flood insurance policy if the mortgaged property is located
in a federally designated flood area. Some of the losses covered include
earthquakes and, to a limited extent, tidal waves and related water damage or
as otherwise specified in the related prospectus supplement. See "The Pooling
and Servicing Agreement--Hazard Insurance". No special hazard insurance policy
will cover losses from fraud or conversion by the trustee or master servicer,
war, insurrection, civil war, governmental action, errors in design, faulty
workmanship or materials, except under limited circumstances, nuclear or
chemical reaction, flood if the mortgaged property is located in a federally
designated flood area, nuclear or chemical contamination and other risks. The
amount of coverage under any special hazard insurance policy will be specified
in the related prospectus supplement. Each special hazard insurance policy
will provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the property securing the mortgage loan have been kept in force
and other protection and preservation expenses have been paid.
The applicable prospectus supplement may provide for details of
payment coverage of the special hazard insurance policies. Typically, each
special hazard insurance policy will provide that where there has been damage
to property securing a foreclosed mortgage loan, title to which has been
acquired by the insured, and to the extent the damage is not covered by the
hazard insurance policy or flood insurance policy, if any, maintained by the
mortgagor or the master servicer, the special hazard insurer will pay the
lesser of the cost of repair or replacement of the property or, upon transfer
of the property to the special hazard insurer, the unpaid principal balance of
the mortgage loan at the time of acquisition of the property by foreclosure or
deed in lieu of foreclosure, plus accrued interest to the date of claim
settlement and particular expenses incurred by the master servicer with
respect to the property. If the unpaid principal balance of a mortgage loan
plus accrued interest and particular expenses is paid by the special hazard
insurer, the amount of further coverage under the related special hazard
insurance policy will be reduced by that amount less any net proceeds from the
sale of the property. Any amount paid to repair the property will further
reduce coverage by that amount. So long as a mortgage pool insurance policy
remains in effect, the payment by the special hazard insurer of the cost of
repair or of the unpaid principal balance of the related mortgage loan plus
accrued interest and expenses will not affect the total insurance proceeds
paid to certificateholders, but will affect the relative amounts of coverage
remaining under the related special hazard insurance policy and mortgage pool
insurance policy.
To the extent specified in a prospectus supplement, the master
servicer may deposit cash, an irrevocable letter of credit, or any other
instrument acceptable to each nationally recognized rating agency rating the
certificates of the related series at the request of the depositor in a
special trust account to provide protection in lieu of or in addition to that
provided by a special hazard insurance policy. The amount of any special
hazard insurance policy or of the deposit to the special trust account
relating to the certificates may be reduced so long as the reduction will not
result in a downgrading of the rating of the certificates by a rating agency
rating certificates at the request of the depositor.
Bankruptcy Bonds
If specified in the related prospectus supplement, a bankruptcy bond
to cover losses resulting from proceedings under the federal bankruptcy code
with respect to a mortgage loan will be issued by an insurer named in the
prospectus supplement. Each bankruptcy bond will cover, to the extent
specified in the related prospectus supplement, specified losses resulting
from a reduction by a bankruptcy court of scheduled payments of principal and
interest on a mortgage loan or a reduction by the court of the principal
amount of a mortgage loan and will cover specified unpaid interest on the
amount of a principal reduction from the date of the filing of a bankruptcy
petition. The required amount of coverage under each bankruptcy bond will be
set forth in the related prospectus supplement. Coverage under a bankruptcy
bond may be cancelled or reduced by the master servicer if the cancellation or
reduction would not adversely affect the then current rating or ratings of the
related certificates. See "Material Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders".
To the extent specified in the prospectus supplement, the master
servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
certificates of the related series at the request of the depositor in a
special trust account to provide protection in lieu of or in addition to that
provided by a bankruptcy bond. The amount of any bankruptcy bond or of the
deposit to the special trust account relating to the certificates may be
reduced so long as the reduction will not result in a downgrading of the
rating of the certificates by a rating agency rating certificates at the
request of the depositor.
Reserve Fund
If so specified in the related prospectus supplement, credit support
with respect to a series of certificates may be provided by one or more
reserve funds held by the trustee, in trust, for the series of certificates.
The related prospectus supplement will specify whether or not a reserve fund
will be included in the trust fund for a series.
The reserve fund for a series will be funded:
(1) by a deposit of cash, U.S. Treasury securities or instruments
evidencing ownership of principal or interest payments on U.S.
Treasury securities, letters of credit, demand notes,
certificates of deposit, or a combination of them in an
aggregate amount specified in the related prospectus
supplement;
(2) by the deposit from time to time of amounts specified in the
related prospectus supplement to which the subordinated
certificateholders, if any, would otherwise be entitled;
(3) or in any other manner specified in the related prospectus
supplement.
Any amounts on deposit in the reserve fund and the proceeds of any
other instrument deposited in it upon maturity will be held in cash or will be
invested in permitted investments which may include:
(1) obligations of the United States and specified agencies of the
United States,
(2) certificates of deposit,
(3) specified commercial paper,
(4) time deposits and bankers acceptances sold by eligible
commercial banks, and
(5) specified repurchase agreements for United States government
securities with eligible commercial banks.
If a letter of credit is deposited with the trustee, the letter of
credit will be irrevocable. Generally, any deposited instrument will name the
trustee, in its capacity as trustee for the certificateholders, as beneficiary
and will be issued by an entity acceptable to each rating agency that rates
the certificates at the request of the depositor. Additional information about
the instruments deposited in the reserve funds will be set forth in the
related prospectus supplement.
Any amounts so deposited and payments on instruments so deposited
will be available for withdrawal from the reserve fund for distribution to the
certificateholders for the purposes, in the manner and at the times specified
in the related prospectus supplement.
Cross Support
If specified in the related prospectus supplement, the beneficial
ownership of separate groups of assets included in a trust fund may be
evidenced by separate classes of the related series of certificates. In that
case, credit support may be provided by a cross support feature that requires
that distributions be made on certificates evidencing a beneficial ownership
interest in other asset groups within the same trust fund. The related
prospectus supplement for a series that includes a cross support feature will
describe the manner and conditions for applying the cross support feature.
If specified in the related prospectus supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two
or more related trust funds. If applicable, the related prospectus supplement
will identify the trust funds to which the credit support relates and the
manner of determining the amount of the coverage provided by it and of the
application of the coverage to the identified trust funds.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of
certificates, deficiencies in amounts otherwise payable on the certificates or
on specified classes will be covered by insurance policies or surety bonds
provided by one or more insurance companies or sureties. These instruments may
cover timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or
determined in the manner specified in the related prospectus supplement. In
addition, if specified in the related prospectus supplement, a trust fund may
also include bankruptcy bonds, special hazard insurance policies, other
insurance or guaranties for the purpose of:
(1) maintaining timely payments or providing additional protection
against losses on the assets included in the trust fund,
(2) paying administrative expenses,
(3) or establishing a minimum reinvestment rate on the payments
made on the assets or principal payment rate on the assets.
These arrangements may include agreements under which
certificateholders are entitled to receive amounts deposited in various
accounts held by the trustee on the terms specified in the prospectus
supplement.
Over-Collateralization
If so provided in the prospectus supplement for a series of
certificates, a portion of the interest payment on each loan may be applied as
an additional distribution of principal to reduce the principal balance of a
particular class or classes of certificates and, thus, accelerate the rate of
payment of principal on the class or classes of certificates. Reducing the
principal balance of the certificates without a corresponding reduction in the
principal balance of the underlying mortgage assets will result in
over-collateralization.
Yield and Prepayment Considerations
The yields to maturity and weighted average lives of the certificates
will be affected primarily by the amount and timing of principal payments
received on or in respect of the mortgage assets included in the related trust
fund. The original terms to maturity of the underlying mortgage loans of the
mortgage assets in a given mortgage pool will vary depending upon the type of
loans included in that pool. Each prospectus supplement will contain
information with respect to the type and maturities of the loans in the
related pool. The related prospectus supplement will specify the
circumstances, if any, under which the related loans will have prepayment
penalties. The prepayment experience on the loans in a pool will affect the
weighted average life of the related series of certificates.
The rate of prepayment on the loans cannot be predicted. If specified
in the related prospectus supplement, conventional mortgage loans will contain
due-on-sale provisions permitting the mortgagee to accelerate the maturity of
the loan upon sale or specified transfers by the mortgagor of the underlying
mortgaged property. On the other hand, if specified in the related prospectus
supplement, conventional loans will not contain due-on-sale provisions.
Mortgage loans insured by the FHA and mortgage loans partially guaranteed by
the VA are assumable with the consent of the FHA and the VA, respectively.
Thus, the rate of prepayments on those mortgage loans may be lower than that
on conventional mortgage loans bearing comparable interest rates. The master
servicer generally will enforce any due-on-sale or due-on-encumbrance clause,
to the extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the mortgaged property
and reasonably believes that it is entitled to do so under applicable law.
However, the master servicer will not take any enforcement action that would
impair or threaten to impair any recovery under any related insurance policy.
See "The Pooling and Servicing Agreement--Collection Procedures" and "Material
Legal Aspects of the Mortgage Loans" for a description of some of the
provisions of each pooling and servicing agreement and legal developments that
may affect the prepayment experience on the mortgage loans.
The rate of prepayments of conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall
significantly below the mortgage rates borne by the mortgage loans, the
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above those mortgage rates. Conversely,
if prevailing interest rates rise appreciably above the mortgage rates borne
by the mortgage loans, the mortgage loans are likely to experience a lower
prepayment rate than if prevailing rates remain at or below those mortgage
rates. However, there can be no assurance that this will be the case.
Under specified circumstances, the master servicer or the holders of
the residual interests in a REMIC may have the option to purchase the assets
of a trust fund and thus effecting earlier retirement of the related series of
certificates. See "The Pooling and Servicing Agreement -- Termination;
Optional Termination".
Factors other than those identified in this prospectus and in the
related prospectus supplement could significantly affect principal prepayments
at any time and over the lives of the certificates. The relative contribution
of the various factors affecting prepayment may also vary from time to time.
There can be no assurance as to the rate of payment of principal of the
mortgage assets at any time or over the lives of the certificates.
The prospectus supplement relating to a series of certificates will
discuss in greater detail the effect of the rate and timing of principal
payments, including principal prepayments, delinquencies and losses on the
yield, weighted average lives and maturities of the certificates.
The Pooling and Servicing Agreement
The following is a summary of the material provisions of the pooling
and servicing agreement which are not described elsewhere in this prospectus.
Where particular provisions or terms used in the pooling and servicing
agreement are referred to, the provisions or terms are as specified in the
related pooling and servicing agreement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
certificates of a series, the depositor will cause the mortgage loans
comprising the related trust fund to be assigned to the trustee, together with
all principal and interest received by or on behalf of the depositor on or
with respect to the mortgage loans after the cut-off date, other than
principal and interest due on or before the cut-off date and other than any
retained interest specified in the related prospectus supplement. The trustee
will, concurrently with the assignment, deliver the certificates to the
depositor in exchange for the mortgage loans. Each mortgage loan will be
identified in a schedule appearing as an exhibit to the related pooling and
servicing agreement. The schedule will include information as to the
outstanding principal balance of each mortgage loan after application of
payments due on the cut-off date, as well as information regarding the
mortgage rate, the current scheduled monthly payment of principal and
interest, the maturity of the loan, the loan-to-value ratio at origination and
other specified information.
The depositor will deliver or cause to be delivered to the trustee,
or to the custodian, for each mortgage loan:
o the mortgage note endorsed without recourse in blank or to the
order of the trustee, except that the depositor may deliver or
cause to be delivered a lost note affidavit in lieu of any
original mortgage note that has been lost,
o the mortgage, deed of trust or similar instrument with evidence
of recording indicated on it, except for any mortgage not
returned from the public recording office, in which case the
depositor will deliver or cause to be delivered a copy of the
mortgage together with a certificate that the original of the
mortgage was delivered to the recording office or some other
arrangement will be provided for,
o an assignment of the mortgage to the trustee in recordable form,
and
o any other security documents as may be specified in the related
prospectus supplement or the related pooling and servicing
agreement.
Except as may be described in the applicable prospectus supplement, the
assignments of the related mortgages to the trustee will not be recorded in
connection with the issuance of the certificates.
In lieu of the delivery requirement set forth above, with respect to
any mortgage which has been recorded in the name of the MERS(R) System or its
designee, no mortgage assignment in favor of the trustee will be required to
be prepared or delivered. Instead, the master servicer will be required to
take all actions as are necessary to cause the applicable trust fund to be
shown as the owner of the related mortgage loan on the records of MERS for
purposes of the system of recording transfers of beneficial ownership of
mortgages maintained by MERS.
With respect to any mortgage loans that are cooperative loans, the
depositor will cause to be delivered to the trustee
o the related original cooperative note endorsed without recourse in
blank or to the order of the trustee or, to the extent the related
pooling and servicing agreement so provides, a lost note
affidavit,
o the original security agreement,
o the proprietary lease or occupancy agreement,
o the recognition agreement,
o an executed financing agreement, and
o the relevant stock certificate, related blank stock powers and any
other document specified in the related prospectus supplement.
The depositor will cause to be filed in the appropriate office an
assignment and a financing statement evidencing the trustee's security
interest in each cooperative loan.
The trustee or the custodian will review the mortgage loan documents
within the time period specified in the related prospectus supplement after
receipt of them, and the trustee will hold the documents in trust for the
benefit of the certificateholders. Generally, if the document is found to be
missing or defective in any material respect, the trustee or the custodian
will notify the master servicer and the depositor, and the master servicer
will notify the related seller. If the seller cannot cure the omission or
defect within the time period specified in the related prospectus supplement
after receipt of the notice, the seller will be obligated to either (1)
purchase the related mortgage loan from the trustee at the purchase price or
(2) if so specified in the related prospectus supplement, replace the mortgage
loan with another mortgage loan that meets specified requirements. There can
be no assurance that a seller will fulfill this purchase obligation. Although
the master servicer may be obligated to enforce the obligation to the extent
described under "Mortgage Loan Program--Representations by Sellers;
Repurchases", neither the master servicer nor the depositor will be obligated
to purchase the mortgage loan if the seller defaults on its purchase
obligation, unless the breach also constitutes a breach of the representations
or warranties of the master servicer or the depositor. This purchase
obligation generally constitutes the sole remedy available to the
certificateholders or the trustee for omission of, or a material defect in, a
constituent document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the mortgage loans as agent of the trustee.
Notwithstanding these provisions, no mortgage loan will be purchased
from a trust fund for which a REMIC election is to be made if the purchase
would result in a prohibited transaction tax under the tax code.
Assignment of Private Mortgage-Backed Securities. The depositor will
cause the private mortgage-backed securities to be registered in the name of
the trustee. The trustee or the custodian will have possession of any
certificated private mortgage-backed securities. Generally, the trustee will
not be in possession of or be assignee of record of any underlying assets for
a private mortgage-backed security. See "The Trust Fund--Private
Mortgage-Backed Securities". Each private mortgage-backed security will be
identified in a schedule appearing as an exhibit to the related pooling and
servicing agreement which will specify the original principal amount,
outstanding principal balance as of the cut-off date, annual pass-through rate
or interest rate and maturity date and other specified pertinent information
for each private mortgage-backed security conveyed to the trustee.
Payments on Mortgage Assets; Deposits to Certificate Account
The master servicer will establish and maintain or cause to be
established and maintained for the related trust fund a separate account or
accounts for the collection of payments on the related mortgage assets in the
trust fund which, unless otherwise specified in the related prospectus
supplement, must be either:
o maintained with a depository institution the short-term unsecured
debt obligations of which are rated in the highest short-term
rating category by the nationally recognized statistical rating
organizations that rated one or more classes of the related series
of certificates at the request of the depositor, or in the case of
a depository institution that is the principal subsidiary of a
holding company, the short-term debt obligations of the holding
company are so rated,
o an account or accounts the deposits in which are insured by the
FDIC or SAIF to the limits established by the FDIC or the SAIF,
and the uninsured deposits in which are otherwise secured such
that, as evidenced by an opinion of counsel, the
certificateholders have a claim with respect to the funds in the
certificate account or a perfected first priority security
interest against any collateral securing the funds that is
superior to the claims of any other depositors or general
creditors of the depository institution with which the certificate
account is maintained,
o a trust account or accounts maintained with the trust department
of a federal or a state chartered depository institution or trust
company, acting in a fiduciary capacity, or
o an account or accounts otherwise acceptable to each rating agency
that rated one or more classes of the related series of
certificates at the request of the depositor.
The collateral eligible to secure amounts in the certificate account
is limited to permitted investments. A certificate account may be maintained
as an interest-bearing account or the funds held in it may be invested pending
each succeeding distribution date in defined permitted investments. The
related prospectus supplement will specify whether the master servicer or its
designee will be entitled to receive the interest or other income earned on
funds in the certificate account as additional compensation and the entity
that will be obligated to deposit in the certificate account the amount of any
loss immediately as realized. The certificate account may be maintained with
the master servicer or with a depository institution that is an affiliate of
the master servicer, provided it meets the standards set forth above.
The master servicer will deposit or cause to be deposited in the
certificate account for each trust fund on a daily basis, to the extent
applicable and unless the related pooling and servicing agreement provides for
a different deposit arrangement, the following payments and collections
received or advances made by or on behalf of it after the cut-off date, other
than payments due on or before the cut-off date and exclusive of any amounts
representing any retained interest specified in the related prospectus
supplement:
o all payments on account of principal, including principal
prepayments and, if specified in the related prospectus
supplement, prepayment penalties, on the mortgage loans,
o all payments on account of interest on the mortgage loans, net of
applicable servicing compensation,
o all proceeds, net of unreimbursed payments of property taxes,
insurance premiums and similar items incurred, and unreimbursed
advances made, by the master servicer, of the hazard insurance
policies and any primary mortgage insurance policies, to the
extent the proceeds are not applied to the restoration of the
property or released to the mortgagor in accordance with the
master servicer's normal servicing procedures and all other cash
amounts, net of unreimbursed expenses incurred in connection with
liquidation or foreclosure and unreimbursed advances, if any,
received and retained in connection with the liquidation of
defaulted mortgage loans, by foreclosure or otherwise, together
with any net proceeds received on a monthly basis with respect to
any properties acquired on behalf of the certificateholders by
foreclosure or deed in lieu of foreclosure,
o all proceeds of any mortgage loan or property in respect of any
mortgage loan purchased by the master servicer, the depositor or
any seller as described under "Mortgage Loan Program--
Representations by Sellers; Repurchases" or "The Pooling
and Servicing Agreement--Assignment of Mortgage Assets" above and
all proceeds of any mortgage loan repurchased as described under
"The Pooling and Servicing Agreement--Termination; Optional
Termination",
o all payments required to be deposited in the certificate account
with respect to any deductible clause in any blanket insurance
policy described under "Hazard Insurance",
o any amount required to be deposited by the master servicer in
connection with losses realized on investments for the benefit of
the master servicer of funds held in the certificate account and,
to the extent specified in the related prospectus supplement, any
payments required to be made by the master servicer in connection
with prepayment interest shortfalls and
o all other amounts required to be deposited in the certificate
account pursuant to the pooling and servicing agreement.
The master servicer or the depositor, as applicable, may from time to
time direct the institution that maintains the certificate account to withdraw
funds from the certificate account for the following purposes:
o to pay to the master servicer the servicing fees described in the
related prospectus supplement and, as additional servicing
compensation, earnings on or investment income with respect to
funds credited to the certificate account,
o to reimburse the master servicer for advances, the right of
reimbursement with respect to any mortgage loan being limited to
amounts held in the certificate account for future distribution to
certificateholders and amounts received that represent late
recoveries of payments of principal and interest on the mortgage
loan, or insurance proceeds or liquidation proceeds from the
mortgage loan with respect to which the advance was made,
o to reimburse the master servicer for any advances previously made
that the master servicer has determined to be nonrecoverable,
o to reimburse the master servicer from insurance proceeds not used
to restore the property for expenses incurred by the master
servicer and covered by the related insurance policies,
o to reimburse the master servicer for unpaid master servicing fees
and unreimbursed out-of-pocket costs and expenses incurred by the
master servicer in the performance of its servicing obligations,
the right of reimbursement being limited to amounts received
representing late recoveries of the payments for which the
advances were made,
o to pay to the master servicer, with respect to each mortgage loan
or property that has been purchased by the master servicer
pursuant to the pooling and servicing agreement, all amounts
received on them and not taken into account in determining the
principal balance of the repurchased mortgage loan,
o to reimburse the master servicer or the depositor for expenses
incurred and reimbursable pursuant to the pooling and servicing
agreement,
o to withdraw any amount deposited in the certificate account that
was not required to be deposited in it, and
o to clear and terminate the certificate account upon termination of
the pooling and servicing agreement.
In addition, the pooling and servicing agreement will generally
provide that on or before the business day preceding each distribution date,
the master servicer shall withdraw from the certificate account the amount of
available funds, to the extent on deposit, for deposit in an account
maintained by the trustee for the related series of certificates.
Collection Procedures
The master servicer, directly or through one or more sub-servicers,
will make reasonable efforts to collect all payments called for under the
mortgage loans and will, consistent with each pooling and servicing agreement
and any mortgage pool insurance policy, primary mortgage insurance policy, FHA
insurance, VA guaranty and bankruptcy bond or alternative arrangements, follow
the collection procedures it customarily follows for mortgage loans that are
comparable to the mortgage loans. Consistent with the above, the master
servicer may, in its discretion, waive in connection any assumption fee, late
payment or other charge with a mortgage loan and arrange with a mortgagor a
schedule for the liquidation of delinquencies running for no more than 125
days after the applicable due date for each payment to the extent not
inconsistent with the coverage of the mortgage loan by a mortgage pool
insurance policy, primary mortgage insurance policy, FHA insurance, VA
guaranty or bankruptcy bond or alternative arrangements, if applicable. To the
extent the master servicer is obligated to make or to cause to be made
advances, the obligation will remain during any period of this arrangement.
Generally, where the property securing a conventional mortgage loan
has been, or is about to be, conveyed by the mortgagor or obligor, to the
extent it has knowledge of the conveyance or proposed conveyance, exercise or
cause to be exercised its rights to accelerate the maturity of the mortgage
loan under any due-on-sale clause applicable to it, but only if permitted by
applicable law and the exercise will not impair or threaten to impair any
recovery under any related primary mortgage insurance policy. If these
conditions are not met or if the master servicer reasonably believes it is
unable under applicable law to enforce the due-on-sale clause or if the
mortgage loan is insured by the FHA or partially guaranteed by the VA, the
master servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom the property has been or is
about to be conveyed, pursuant to which that person becomes liable for
repayment of the mortgage loan and, to the extent permitted by applicable law,
the mortgagor also remains liable on it. Any fee collected by or on behalf of
the master servicer for entering into an assumption agreement will be retained
by or on behalf of the master servicer as additional servicing compensation.
The applicable prospectus supplement may provide for other alternatives
regarding due-on-sale clauses. See "Material Legal Aspects of the Mortgage
Loans--Due-on-Sale Clauses". The terms of the related mortgage loan may not be
changed in connection with an assumption.
Any prospective purchaser of a cooperative apartment will generally
have to obtain the approval of the board of directors of the relevant
cooperative before purchasing the shares and acquiring rights under the
related proprietary lease or occupancy agreement. See "Material Legal Aspects
of the Mortgage Loans". This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring the approval could limit the number of potential purchasers for
those shares and otherwise limit the trust fund's ability to sell and realize
the value of shares securing a cooperative loan.
In general, a "tenant-stockholder", as defined in tax code Section
216(b)(2), of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of tax code Section 216(b)(1) is allowed a
deduction for amounts paid or accrued within his taxable year to the
corporation representing his proportionate share of specified interest
expenses and real estate taxes allowable as a deduction under tax code Section
216(a) to the corporation under tax code Sections 163 and 164. In order for a
corporation to qualify under tax code Section 216(b)(1) for its taxable year
in which the items are allowable as a deduction to the corporation, among
other things, at least 80% of the gross income of the corporation must be
derived from its tenant-stockholders. By virtue of this requirement, the
status of a corporation for purposes of tax code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance
that cooperatives relating to the cooperative loans will qualify under tax
code Section 216(b)(1) for any particular year. If a cooperative falls to
qualify for one or more years, the value of the collateral securing any
related cooperative loans could be significantly impaired because no deduction
would be allowable to tenant-stockholders under tax code Section 216(a) with
respect to those years. In view of the significance of the tax benefits
accorded tenant-stockholders of a corporation that qualifies under tax code
Section 216(b)(1), the likelihood that a failure to qualify would be permitted
to continue over a period of years appears remote.
Hazard Insurance
The master servicer will require the mortgagor or obligor on each
loan to maintain a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary for the type of mortgaged property in the state in which the
mortgaged property is located. The coverage will be in an amount that is at
least equal to the lesser of:
o the maximum insurable value of the improvements securing the
mortgage loan, or
o the greater of:
o the outstanding principal balance of the mortgage loan, and
o an amount so that the proceeds of the policy shall be
sufficient to prevent the mortgagor or the mortgagee from
becoming a co-insurer.
All amounts collected by the master servicer under any hazard policy, except
for amounts to be applied to the restoration or repair of the mortgaged
property or released to the mortgagor in accordance with the master servicer's
normal servicing procedures, will be deposited in the related certificate
account. If the master servicer maintains a blanket policy insuring against
hazard losses on all the mortgage loans comprising part of a trust fund, it
will have satisfied its obligation relating to the maintenance of hazard
insurance. The blanket policy may contain a deductible clause, in which case
the master servicer will be required to deposit from its own funds into the
related certificate account the amounts that would have been deposited in it
but for the clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a
mortgage loan by fire, lightning, explosion, smoke, windstorm and hail, riot,
strike and civil commotion, but this coverage is limited by the conditions and
exclusions particularized in each policy. Although the policies relating to
the mortgage loans may have been underwritten by different insurers under
different state laws in accordance with different applicable forms and
therefore may not contain identical terms, their basic terms are dictated by
the respective state laws, and most policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement, including
earthquakes, landslides and mud flows, nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in some cases,
vandalism. This list is merely indicative of some of the uninsured risks and
is not all inclusive. If the mortgaged property securing a mortgage loan is
located in a federally designated special flood area at the time of
origination, the master servicer will require the mortgagor to obtain and
maintain flood insurance.
The hazard insurance policies covering properties securing the
mortgage loans typically contain a clause that in effect requires the insured
at all times to carry insurance of a specified percentage, generally 80% to
90%, of the full replacement value of the insured property, in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, then the insurer's liability upon partial
loss will not exceed the larger of (1) the actual cash value, generally
defined as replacement cost at the time and place of loss, less physical
depreciation, of the improvements damaged or destroyed or (2) the proportion
of the loss that the amount of insurance carried bears to the specified
percentage of the full replacement cost of the improvements. Since the amount
of hazard insurance the master servicer may cause to be maintained on the
improvements securing the mortgage loans declines as the principal balances
owing on them decrease, and since improved real estate generally has
appreciated in value over time in the past, the effect of this requirement
upon partial loss may be that hazard insurance proceeds will be insufficient
to fully restore the damaged property. If specified in the related prospectus
supplement, a special hazard insurance policy will be obtained to insure
against some of the uninsured risks described above. See "Credit
Enhancement--Special Hazard Insurance Policies".
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's cooperative dwelling or the
cooperative's building could significantly reduce the value of the collateral
securing the cooperative loan.
Forced Placed Insurance
Mortgage loan documents require the borrower to maintain hazard
insurance on the property to protect the lender's or noteholder's security
interest in it. In the event the borrower does not maintain hazard insurance
on the property, or the insurance is cancelled, the mortgage documents give
the right to the lender to force place insurance coverage to protect the
collateral and to add the cost of the force placed coverage to the amount due
on the note. Typically, the cost of this coverage is significantly higher than
the coverage the borrower would be able to purchase from a property and
casualty insurer. Additionally, the force placed coverage may not cover the
borrower's interest in the property or personal property. To facilitate the
placement of force placed insurance coverage, the lender has entered into an
arrangement with a force placed insurance provider to place the coverage on
the property in the event the primary hazard insurance policy is cancelled or
not renewed by the borrower.
Realization Upon Defaulted Mortgage Loans
Primary Mortgage Insurance Policies. The master servicer will
maintain or cause to be maintained, as the case may be, in effect, to the
extent specified in the related prospectus supplement, a primary mortgage
insurance policy with regard to each mortgage loan for which coverage is
required. The master servicer will not cancel or refuse to renew any primary
mortgage insurance policy in effect at the time of the initial issuance of a
series of certificates that is required to be kept in force under the
applicable pooling and servicing agreement unless the replacement primary
mortgage insurance policy for the cancelled or nonrenewed policy is maintained
with an insurer whose claims-paying ability is sufficient to maintain the
current ratings of the classes of certificates of the series that have been
rated.
Although the terms of primary mortgage insurance vary, the amount of
a claim for benefits under a primary mortgage insurance policy covering a
mortgage loan will consist of the insured percentage of the unpaid principal
amount of the covered mortgage loan and accrued and unpaid interest on it and
reimbursement of specified expenses, less all rents or other payments
collected or received by the insured, other than the proceeds of hazard
insurance, that are derived from or in any way related to the mortgaged
property, hazard insurance proceeds in excess of the amount required to
restore the mortgaged property and which have not been applied to the payment
of the mortgage loan, amounts expended but not approved by the issuer of the
related primary mortgage insurance policy, claim payments previously made by
the primary insurer and unpaid premiums.
Primary mortgage insurance policies reimburse specified losses
sustained from defaults in payments by borrowers. Primary mortgage insurance
policies will not insure against, and exclude from coverage, a loss sustained
from a default arising from or involving specified matters, including (1)
fraud or negligence in origination or servicing of the mortgage loans,
including misrepresentation by the originator, mortgagor or other persons
involved in the origination of the mortgage loan; (2) failure to construct the
mortgaged property subject to the mortgage loan in accordance with specified
plans; (3) physical damage to the mortgaged property; and (4) the related
sub-servicer not being approved as a servicer by the primary insurer.
Recoveries Under A Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a primary mortgage
insurance policy covering a mortgage loan, the insured will be required to:
o advance or discharge:
o all hazard insurance policy premiums, and
o as necessary and approved in advance by the primary insurer,
real estate property taxes, all expenses required to maintain
the related mortgaged property in at least as good a condition
maintain the related mortgaged property in at least as good
a condition as existed at the effective date of the primary
mortgage insurance policy, ordinary wear and tear excepted,
mortgaged property sales expenses, any specified outstanding
liens on the mortgaged property and foreclosure costs,
including court costs and reasonable attorneys' fees,
o upon any physical loss or damage to the mortgaged property, have
the mortgaged property restored and repaired to at least as good
a condition as existed at the effective date of the primary
mortgage insurance policy, ordinary wear and tear excepted, and
o tender to the primary insurer good and merchantable title to and
possession of the mortgaged property.
The master servicer, on behalf of itself, the trustee and the
certificateholders, will present claims to the insurer under each primary
mortgage insurance policy, and will take any reasonable steps consistent with
its practices regarding comparable mortgage loans and necessary to receive
payment or to permit recovery under the policy with respect to defaulted
mortgage loans. As set forth above, all collections by or on behalf of the
master servicer under any primary mortgage insurance policy and, when the
mortgaged property has not been restored, the hazard insurance policy, are to
be deposited in the certificate account, which may be withdrawn as described
in this prospectus.
If the mortgaged property securing a defaulted mortgage loan is
damaged and proceeds, if any, from the related hazard insurance policy are
insufficient to restore the damaged mortgaged property to a condition
sufficient to permit recovery under the related primary mortgage insurance
policy, if any, the master servicer is not required to expend its own funds to
restore the damaged mortgaged property unless it determines that the
restoration will increase the proceeds to certificateholders on liquidation of
the mortgage loan after reimbursement of the master servicer for its expenses
and that the expenses will be recoverable by it from related insurance
proceeds or liquidation proceeds.
If recovery on a defaulted mortgage loan under any related primary
mortgage insurance policy is not available for the reasons set forth in the
preceding paragraph, or if the defaulted mortgage loan is not covered by a
primary mortgage insurance policy, the master servicer will be obligated to
follow or cause to be followed the normal practices and procedures that it
deems appropriate to realize upon the defaulted mortgage loan. If the proceeds
of any liquidation of the mortgaged property securing the defaulted mortgage
loan are less than the principal balance of the mortgage loan plus interest
accrued on it that is payable to certificateholders, the trust fund will
realize a loss in the amount of the difference plus the aggregate of expenses
incurred by the master servicer in connection with the proceedings that are
reimbursable under the pooling and servicing agreement. In the unlikely event
that the proceedings result in a total recovery which is, after reimbursement
to the master servicer of its expenses, in excess of the principal balance of
the mortgage loan plus interest accrued on it that is payable to
certificateholders, the master servicer will be entitled to withdraw or retain
from the certificate account amounts representing its normal servicing
compensation with respect to the mortgage loan and, unless otherwise specified
in the related prospectus supplement, amounts representing the balance of the
excess, exclusive of any amount required by law to be forwarded to the related
mortgagor, as additional servicing compensation.
If the master servicer or its designee recovers insurance proceeds
not used to restore the property which, when added to any related liquidation
proceeds and after deduction of specified expenses reimbursable to the master
servicer, exceed the principal balance of a mortgage loan plus interest
accrued thereon that is payable to certificateholders, the master servicer
will be entitled to withdraw or retain from the certificate account amounts
representing its normal servicing compensation with respect to the mortgage
loan. If the master servicer has expended its own funds to restore the damaged
mortgaged property and the funds have not been reimbursed under the related
hazard insurance policy, it will be entitled to withdraw from the certificate
account out of related liquidation proceeds or insurance proceeds an amount
equal to the expenses incurred by it, in which event the trust fund may
realize a loss up to the amount so charged. Since insurance proceeds cannot
exceed deficiency claims and specified expenses incurred by the master
servicer, no insurance payment or recovery will result in a recovery to the
trust fund that exceeds the principal balance of the defaulted mortgage loan
together with accrued interest on it. See "Credit Enhancement" in this
prospectus and in the related prospectus supplement.
Application of liquidations proceeds. Unless the related pooling and
servicing agreement provides for a different application of liquidation
proceeds, the proceeds from any liquidation of a mortgage loan will be applied
in the following order of priority:
o first, to reimburse the master servicer for any unreimbursed
expenses incurred by it to restore the related mortgaged property
and any unreimbursed servicing compensation payable to the master
servicer with respect to the mortgage loan,
o second, to reimburse the master servicer for any unreimbursed
advances with respect to the mortgage loan,
o third, to accrued and unpaid interest, to the extent no advance
has been made for the amount, on the mortgage loan, and
o fourth, as a recovery of principal of the mortgage loan.
FHA Insurance; VA Guaranties. Mortgage loans designated in the
related prospectus supplement as insured by the FHA will be insured by the FHA
as authorized under the United States National Housing Act of 1937, as
amended. Those mortgage loans will be insured under various FHA programs
including the standard FHA 203(b) program to finance the acquisition of one-to
four-family housing units and the FHA 245 graduated payment mortgage program.
These programs generally limit the principal amount and interest rates of the
mortgage loans insured. Mortgage loans insured by the FHA generally require a
minimum down payment of approximately 3% of the original principal amount of
the loan. No FHA-insured mortgage loans relating to a series may have an
interest rate or original principal amount exceeding the applicable FHA limits
at the time of origination of the loan.
The insurance premiums for mortgage loans insured by the FHA are
collected by lenders approved by the HUD or by the master servicer or any
sub-servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure, or other acquisition of possession, and
conveyance of the mortgaged premises to HUD or upon assignment of the
defaulted mortgage loan to HUD. With respect to a defaulted FHA-insured
mortgage loan, the master servicer or any sub-servicer is limited in its
ability to initiate foreclosure proceedings. When it is determined, either by
the master servicer or any sub-servicer or HUD, that default was caused by
circumstances beyond the mortgagor's control, the master servicer or any
sub-servicer is expected to make an effort to avoid foreclosure by entering,
if feasible, into one of a number of available forms of forbearance plans with
the mortgagor. These plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with the payments to be made up on
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or beyond the maturity date. In addition, when a
default caused by circumstances beyond the mortgagor's control is accompanied
by other criteria, HUD may provide relief by making payments to the master
servicer or any sub-servicer in partial or full satisfaction of amounts due
under the mortgage loan, which payments are to be repaid by the mortgagor to
HUD, or by accepting assignment of the loan from the master servicer or any
sub-servicer. With some exceptions, at least three full monthly installments
must be due and unpaid under the mortgage loan and HUD must have rejected any
request for relief from the mortgagor before the master servicer or any
sub-servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The master servicer of any sub-servicer of each
FHA-insured mortgage loan will be obligated to purchase the debenture issued
in satisfaction of the mortgage loan upon default for an amount equal to the
principal amount of the debenture.
The amount of insurance benefits generally paid by the FHA is equal
to the entire unpaid principal amount of the defaulted mortgage loan, as
adjusted to reimburse the master servicer or sub-servicer for specified costs
and expenses and to deduct specified amounts received or retained by the
master servicer or sub-servicer after default. When entitlement to insurance
benefits results from foreclosure, or other acquisition of possession, and
conveyance to HUD, the master servicer or sub-servicer is compensated for no
more than two-thirds of its foreclosure costs, and is compensated for accrued
and unpaid interest but in general only to the extent it was allowed pursuant
to a forbearance plan approved by HUD. When entitlement to insurance benefits
results from assignment of the mortgage loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself, upon foreclosure of an FHA-insured
mortgage loan, bears interest from a date 30 days after the mortgagor's first
uncorrected failure to perform any obligation to make any payment due under
the mortgage loan and, upon assignment, from the date of assignment to the
date of payment of the claim, in each case at the same interest rate as the
applicable HUD debenture interest rate as described above.
Mortgage loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's
Readjustment Act permits a veteran, or in some instances the spouse of a
veteran, to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires
no down payment from the purchaser and permits the guarantee of mortgage loans
of up to 30 years' duration. However, no mortgage loan guaranteed by the VA
will have an original principal amount greater than five times the partial VA
guaranty for the mortgage loan.
The maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States tax code Section
3703(a), as amended. As of February 1996, the maximum guaranty that may be
issued by the VA under a VA guaranteed mortgage loan of more than $144,000 is
the lesser of 25% of the original principal amount of the mortgage loan and
$50,750. The liability on the guaranty is reduced or increased pro rata with
any reduction or increase in the amount of indebtedness, but in no event will
the amount payable on the guaranty exceed the amount of the original guaranty.
The VA may, at its option and without regard to the guaranty, make full
payment to a mortgage holder of unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
With respect to a defaulted VA guaranteed mortgage loan, the master
servicer or sub-servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guaranty is submitted after
liquidation of the mortgaged property.
The amount payable under the guaranty will be the percentage of the
VA-insured mortgage loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that the amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty
may in no event exceed the amount of the original guaranty.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master
servicer in respect of its master servicing activities for each series of
certificates will be equal to the percentage per annum described in the
related prospectus supplement, which may vary, of the outstanding principal
balance of each mortgage loan, and the compensation will be retained by it
from collections of interest on the mortgage loan in the related trust fund.
As compensation for its servicing duties, a sub-servicer or, if there
is no sub-servicer, the master servicer will be entitled to a monthly
servicing fee as described in the related prospectus supplement. In addition,
generally the master servicer or a sub-servicer will retain all prepayment
charges, assumption fees and late payment charges, to the extent collected
from mortgagors, and any benefit that may accrue as a result of the investment
of funds in the applicable certificate account.
The master servicer will, to the extent provided in the related
pooling and servicing agreement, pay or cause to be paid specified ongoing
expenses associated with each trust fund and incurred by it in connection with
its responsibilities under the related pooling and servicing agreement,
including, without limitation, payment of the fees and disbursements of the
trustee, any custodian appointed by the trustee, the certificate registrar and
any paying agent, and payment of expenses incurred in enforcing the
obligations of sub-servicers and sellers. The master servicer will be entitled
to reimbursement of expenses incurred in enforcing the obligations of
sub-servicers and sellers under limited circumstances. In addition, as
indicated in the preceding section, the master servicer will be entitled to
reimbursement for specified expenses incurred by it in connection with any
defaulted mortgage loan as to which it has determined that all recoverable
liquidation proceeds and insurance proceeds have been received, and in
connection with the restoration of mortgaged properties, the right of
reimbursement being before the rights of certificateholders to receive any
related liquidation proceeds, including insurance proceeds.
Evidence as to Compliance
Each pooling and servicing agreement will provide that on or before a
specified date in each year, a firm of independent public accountants will
furnish a statement to the trustee to the effect that, on the basis of the
examination by the firm conducted substantially in compliance with the Uniform
Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac, the servicing by or on behalf of the
master servicer of mortgage loans or private mortgage-backed securities, under
pooling and servicing agreements substantially similar to each other,
including the related pooling and servicing agreement, was conducted in
compliance with those agreements except for any significant exceptions or
errors in records that, in the opinion of the firm, the Audit Program for
Mortgages serviced for Freddie Mac or the Uniform Single Attestation Program
for Mortgage Bankers requires it to report. In rendering its statement the
firm may rely, as to matters relating to the direct servicing of mortgage
loans or private mortgage-backed securities by sub-servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for Freddie Mac rendered within one year of the
statement of firms of independent public accountants with respect to the
related sub-servicer.
Each pooling and servicing agreement will also provide for delivery
to the trustee, on or before a specified date in each year, of an annual
statement signed by two officers of the master servicer to the effect that the
master servicer has fulfilled its obligations under the pooling and servicing
agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the master servicer may be obtained by certificateholders of the
related series without charge upon written request to the master servicer at
the address set forth in the related prospectus supplement.
List of Certificateholders
Each pooling and servicing agreement will provide that three or more
holders of certificates of any series may, by written request to the trustee,
obtain access to the list of all certificateholders maintained by the trustee
for the purpose of communicating with other certificateholders with respect to
their rights under the pooling and servicing agreement.
Matters Regarding the Master Servicer and the Depositor
The master servicer under each pooling and servicing agreement will
be named in the related prospectus supplement. The entity serving as master
servicer may be an affiliate of the depositor and may have other business
relationships with the depositor or its affiliates.
Each pooling and servicing agreement will provide that the master
servicer may not resign from its obligations and duties under the pooling and
servicing agreement except upon a determination that the performance by it of
its duties under the pooling and servicing agreement is no longer permissible
under applicable law. No resignation will become effective until the trustee
or a successor servicer has assumed the master servicer's obligations and
duties under the pooling and servicing agreement.
Each pooling and servicing agreement will further provide that
neither the master servicer, the depositor nor any director, officer,
employee, or agent of the master servicer or the depositor will be under any
liability to the related trust fund or certificateholders for any action taken
or for refraining from the taking of any action in good faith pursuant to the
pooling and servicing agreement, or for errors in judgment. However, neither
the master servicer, the depositor nor any director, officer, employee, or
agent of the master servicer or the depositor will be protected against any
liability that would otherwise be imposed for willful misfeasance, bad faith
or negligence in the performance of duties under the pooling and servicing
agreement or for reckless disregard of obligations and duties under the
pooling and servicing agreement. Each pooling and servicing agreement will
further provide that the master servicer, the depositor and any director,
officer, employee or agent of the master servicer or the depositor will be
entitled to indemnification by the related trust fund and will be held
harmless against any loss, liability or expense incurred in connection with
any legal action relating to the pooling and servicing agreement or the
certificates, other than any loss, liability or expense related to any
specific mortgage asset or mortgage assets, except any loss, liability or
expense otherwise reimbursable pursuant to the pooling and servicing
agreement, and any loss, liability or expense incurred for willful
misfeasance, bad faith or negligence in the performance of duties under the
pooling and servicing agreement or for reckless disregard of obligations and
duties under the pooling and servicing agreement. In addition, each pooling
and servicing agreement will provide that neither the master servicer nor the
depositor will be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its respective responsibilities under
the pooling and servicing agreement and that in its opinion may involve it in
any expense or liability. The master servicer or the depositor may, however,
in its discretion undertake any action that it deems appropriate with respect
to the pooling and servicing agreement and the rights and duties of the
parties to the pooling and servicing agreement and the interests of the
certificateholders under the pooling and servicing agreement. In that event,
the legal expenses and costs of the action and any liability resulting from it
will be expenses, costs and liabilities of the trust fund, and the master
servicer or the depositor, as the case may be, will be entitled to be
reimbursed for them out of funds otherwise distributable to
certificateholders.
Any person into which the master servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to
which the master servicer is a party, or any person succeeding to the business
of the master servicer, will be the successor of the master servicer under
each pooling and servicing agreement, provided that the person is qualified to
sell mortgage loans to, and service mortgage loans on behalf of, Fannie Mae or
Freddie Mac and further provided that the merger, consolidation or succession
does not adversely affect the then current rating or ratings of the class or
classes of certificates of any series that have been rated.
Events of Default
Events of default under each pooling and servicing agreement will
consist of:
o any failure by the master servicer to deposit in the certificate
account or remit to the trustee any payment which continues
unremedied for five days after the giving of written notice of the
failure to the master servicer by the trustee or the depositor, or
to the master servicer and the trustee by the holders of
certificates having not less than 25% of the voting rights
evidenced by the certificates,
o any failure by the master servicer to observe or perform in any
material respect any of its other covenants or agreements in the
pooling and servicing agreement which failure materially affects
the rights of certificateholders and continues unremedied for 60
days, or, in the case of a curable breach that the master servicer
is diligently attempting to cure, for 90 days after the giving of
written notice of the failure to the master servicer by the
trustee or the depositor, or to the master servicer and the
trustee by the holders of certificates of any class evidencing not
less than 25% of the voting rights evidenced by the certificate,
and
o particular events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceeding and particular
actions by or on behalf of the master servicer indicating its
insolvency, reorganization or inability to pay its obligations.
The applicable prospectus supplement may describe additional or
alternative events of default under the pooling and servicing agreement.
If specified in the related prospectus supplement, the pooling and
servicing agreement will permit the trustee to sell the mortgage assets and
the other assets of the trust fund if payments on them are insufficient to
make payments required in the pooling and servicing agreement. The assets of
the trust fund will be sold only under the circumstances and in the manner
specified in the related prospectus supplement.
Rights Upon Event of Default
So long as an event of default under a pooling and servicing
agreement remains unremedied, the depositor or the trustee may, and at the
direction of holders of certificates having not less than 66-2/3% of the
voting rights and under any other circumstances specified in the pooling and
servicing agreement, the trustee shall, terminate all of the rights and
obligations of the master servicer under the pooling and servicing agreement
relating to the trust fund and in the mortgage assets. Upon termination, the
trustee will succeed to all of the responsibilities, duties and liabilities of
the master servicer under the pooling and servicing agreement, including, if
specified in the related prospectus supplement, the obligation to make
advances, and will be entitled to similar compensation arrangements. If the
trustee is unwilling or unable so to act, it may appoint, or petition a court
of competent jurisdiction for the appointment of, a mortgage loan servicing
institution with a net worth of at least $10,000,000 to act as successor to
the master servicer under the pooling and servicing agreement. Pending
appointment, the trustee is obligated to act as master servicer. The trustee
and any successor may agree upon the servicing compensation to be paid to the
successor servicer, which may not be greater than the compensation payable to
the master servicer under the pooling and servicing agreement.
No certificateholder, solely by virtue of its status as a
certificateholder, will have any right under any pooling and servicing
agreement to institute any proceeding with respect to the pooling and
servicing agreement, unless the holder previously has given to the trustee
written notice of default and unless the holders of any class of certificates
of the series evidencing not less than 25% of the voting rights have requested
the trustee in writing to institute a proceeding in its own name as trustee
and have offered to the trustee reasonable indemnity, and the trustee for 60
days has neglected or refused to institute the proceeding.
Amendment
Except as otherwise specified in the related prospectus supplement,
each pooling and servicing agreement may be amended by the depositor, the
master servicer and the trustee, without the consent of any of the
certificateholders,
(a) to cure any ambiguity or mistake,
(b) to correct any defective provision, or to supplement any
provision, in the pooling and servicing agreement that may be
inconsistent with any other provision in it,
(c) to add to the duties of the depositor, the seller or the master
servicer,
(d) to add any other provisions with respect to matters or
questions arising under the pooling and servicing agreement, or
(e) to modify, alter, amend, add to or rescind any of the terms or
provisions contained in the pooling and servicing agreement.
However, no action pursuant to clauses (d) or (e) may, as evidenced
by an opinion of counsel, adversely affect in any material respect the
interests of any certificateholder. But no opinion of counsel will be required
if the person requesting the amendment obtains a letter from each rating
agency requested to rate the class or classes of certificates of the series
stating that the amendment will not result in the downgrading or withdrawal of
the respective ratings then assigned to the certificates.
In addition, to the extent provided in the related pooling and
servicing agreement, a pooling and servicing agreement may be amended without
the consent of any of the certificateholders to change the manner in which the
certificate account is maintained, if the change does not adversely affect the
then current rating of the class or classes of certificates of the series that
have been rated at the request of the depositor. Moreover, the related pooling
and servicing agreement may be amended to modify, eliminate or add to any of
its provisions to the extent necessary to maintain the qualification of the
related trust fund as a REMIC or to avoid or minimize the risk of imposition
of any tax on the REMIC, if a REMIC election is made with respect to the trust
fund, or to comply with any other requirements of the tax code, if the trustee
has received an opinion of counsel to the effect that the action is necessary
or helpful to maintain the qualification, avoid or minimize that risk or
comply with those requirements, as applicable.
Except as otherwise specified in the related prospectus supplement,
each pooling and servicing agreement may also be amended by the depositor, the
master servicer and the trustee with the consent of holders of certificates of
the series evidencing a majority in interest of each affected class for the
purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the pooling and servicing agreement or of modifying
in any manner the rights of the holders of the related certificates. However,
no amendment may:
(a) reduce in any manner the amount of, or delay the timing
of, payments received on mortgage assets that are required to be
distributed on any certificate without the consent of the holder of
the certificate,
(b) adversely affect in any material respect the interests
of the holders of any class of certificates in a manner other than as
described in (a), without the consent of the holders of certificates
of the class evidencing, as to the class, percentage interests
aggregating 66-2/3%, or (c) reduce the above percentage of
certificates of any class of holders that is required to consent to
the amendment without the consent of the holders of all certificates
of the class covered by the pooling and servicing agreement then
outstanding.
If a REMIC election is made with respect to a trust fund, the trustee
will not be entitled to consent to an amendment to the related pooling and
servicing agreement without having first received an opinion of counsel to the
effect that the amendment will not cause the trust fund to fall to qualify as
a REMIC.
Termination; Optional Termination
Generally, the obligations created by each pooling and servicing
agreement for each series of certificates will terminate upon the payment to
the related certificateholders of all amounts held in the certificate account
or by the master servicer and required to be paid to them pursuant to the
pooling and servicing agreement following the later of:
o the final payment or other liquidation of the last of the mortgage
assets subject to it or the disposition of all property acquired
upon foreclosure of the mortgage assets remaining in the trust
fund, and
o the purchase by the master servicer or, if REMIC treatment has
been elected and if specified in the related prospectus
supplement, by the holder of the residual interest in the REMIC,
from the related trust fund of all of the remaining mortgage
assets and all property acquired in respect of the mortgage
assets.
Any purchase of mortgage assets and property acquired in respect of
mortgage assets evidenced by a series of certificates will be made at the
option of the master servicer or the party specified in the related prospectus
supplement, including the holder of the REMIC residual party interest, at a
price, and in accordance with the procedures, specified in the related
prospectus supplement. The exercise of that right will effect early retirement
of the certificates of that series, but the master servicer or the other party
or, if applicable, the holder of the REMIC residual interest, will only have
this right if the principal balance of the related mortgage assets is less
than the percentage specified in the related prospectus supplement of the
aggregate principal balance of the mortgage assets at the cut-off date for the
series. However, if a REMIC election is made with respect to a trust fund, any
repurchase will be made only in connection with a "qualified liquidation" of
the REMIC within the meaning of Section 860F(a)(4) of the tax code.
The Trustee
The trustee under each pooling and servicing agreement will be named
in the applicable prospectus supplement. The commercial bank or trust company
serving as trustee may have normal banking relationships with the depositor,
the master servicer and any of their respective affiliates.
Material Legal Aspects of the Mortgage Loans
The following discussion contains summaries, which are general in
nature, of particular legal matters relating to the mortgage loans. Because
the legal aspects are governed primarily by applicable state law, which laws
may differ substantially, the summaries do not purport to be complete or to
reflect the laws of any particular state or to encompass the laws of all
states in which the security for the mortgage loans is situated.
General
The mortgage loans will be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A
mortgage creates a lien upon the real property encumbered by the mortgage,
which lien is generally not before the lien for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally
on the order of recording with a state or county office. There are two parties
to a mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally
has three parties, the borrower-property owner called the trustor, similar to
a mortgagor, a lender, similar to a mortgagee, called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. A
security deed and a deed to secure debt are special types of deeds which
indicate on their face that they are granted to secure an underlying debt. By
executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until the underlying debt is repaid. The trustee's authority under a
deed of trust, the mortgagee's authority under a mortgage and the grantee's
authority under a security deed or deed to secure debt are governed by law
and, with respect to some deeds of trust, the directions of the beneficiary.
Cooperatives. A portion of the mortgage loans may be cooperative
loans. The cooperative owns all the real property that comprises the project,
including the land, separate dwelling units and all common areas. The
cooperative is directly responsible for project management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If there is a
blanket mortgage on the cooperative or underlying land or both, as is
generally the case, the cooperative, as project mortgagor, is also responsible
for meeting these mortgage obligations. A blanket mortgage is ordinarily
incurred by the cooperative in connection with the construction or purchase of
the cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a
party are generally subordinate to the interest of the holder of the blanket
mortgage in that building. If the cooperative is unable to meet the payment
obligations arising under its blanket mortgage, the mortgagee holding the
blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative
to refinance this mortgage and its consequent inability to make the final
payment could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a trust fund including cooperative
loans, the collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through
ownership of stock, shares or membership certificates in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive
rights to occupy specific units. Generally, a tenant-stockholder of a
cooperative must make a monthly payment to the cooperative representing the
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
rights is financed through a cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement, and a financing statement covering the proprietary
lease or occupancy agreement and the cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Having regard to the limitations discussed below, upon default of
the tenant-stockholder, the lender may sue for judgment on the promissory
note, dispose of the collateral at a public or private sale or otherwise
proceed against the collateral or tenant-stockholder as an individual as
provided in the security agreement covering the assignment of the proprietary
lease or occupancy agreement and the pledge of cooperative shares.
Foreclosure and Repossession
Deed of Trust. Foreclosure of a deed of trust is generally
accomplished by a non-judicial sale under a specific provision in the deed of
trust which authorizes the trustee to sell the property at public auction upon
any default by the borrower under the terms of the note or deed of trust. In
some states, foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, such as
California, the trustee must record a notice of default and send a copy to the
borrower-trustor and to any person who has recorded a request for a copy of
any notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lien holders. If the deed of
trust is not reinstated within any applicable cure period, a notice of sale
must be posted in a public place and, in most states, including California,
published for a specified period of time in one or more newspapers. In
addition, these notice provisions require that a copy of the notice of sale be
posted on the property and sent to all parties having an interest of record in
the property. In California, the entire process from recording a notice of
default to a non-judicial sale usually takes four to five months.
In some states, including California, the borrower-trustor has the
right to reinstate the loan at any time following default until shortly before
the trustee's sale. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expenses incurred in enforcing the obligation. Generally, state laws control
the amount of foreclosure expenses and costs, including attorney's fees, which
may be recoverable by a lender.
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings
upon all parties having an interest in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the parties. When the mortgagee's right to foreclosure is contested,
the legal proceedings necessary to resolve the issue can be time consuming.
After the completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property. In general, the borrower, or any other
person having a junior encumbrance on the real estate, may, during a
statutorily prescribed reinstatement period, cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the deed of trust is not reinstated, a notice
of sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and
a requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
The lender will then assume the burden of ownership, including obtaining
hazard insurance and making repairs at its own expense necessary to render the
property suitable for sale. The lender will commonly obtain the services of a
real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of
the sale of the property may not equal the lender's investment in the
property.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the
borrower of the borrower's defaults under the loan documents. Some courts have
been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for fair notice require that
borrowers under deeds of trust receive notice longer than that prescribed by
statute. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that the sale by a trustee under a deed of
trust does not involve sufficient state action to afford constitutional
protection to the borrower.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer under the cooperative's certificate of
incorporation and bylaws, as well as the proprietary lease or occupancy
agreement, and may be cancelled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by the
tenant-stockholder, including mechanics' liens against the cooperative
apartment building incurred by the tenant-stockholder. The proprietary lease
or occupancy agreement generally permits the cooperative to terminate the
lease or agreement if an obligor fails to make payments or defaults in the
performance of covenants required under it. Typically, the lender and the
cooperative enter into a recognition agreement, which establishes the rights
and obligations of both parties upon a default by the tenant-stockholder on
its obligation under the proprietary lease or occupancy agreement. A default
by the tenant-stockholder under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest on
it.
Recognition agreements also provide that upon foreclosure of a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the
tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires
that a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders".
In the case of foreclosure on a building converted from a rental
building to a building owned by a cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws that apply to tenants who
elected to remain in the building but who did not purchase shares in the
cooperative when the building was so converted.
Rights of Redemption
In some states after a sale pursuant to a deed of trust or
foreclosure of a mortgage, the borrower and particular foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In some other states, including California, this right of
redemption applies only to sales following judicial foreclosure, and not to
sales pursuant to a non-judicial power of sale. In most states where the right
of redemption is available, statutory redemption may occur upon payment of the
foreclosure purchase price, accrued interest and taxes. In some states, the
right to redeem is an equitable right. The effect of a right of redemption is
to diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser at a
foreclosure sale, or of any purchaser from the lender after judicial
foreclosure or sale under a deed of trust. Consequently, the practical effect
of the redemption right is to force the lender to retain the property and pay
the expenses of ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders
Some states have imposed statutory restrictions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes limit the right of
the beneficiary or mortgagee to obtain a deficiency judgment against the
borrower following foreclosure or a sale under a deed of trust. A deficiency
judgment is a personal judgment against the borrower equal in most cases to
the difference between the amount due to the lender and the current fair
market value of the property at the time of the foreclosure sale. As a result
of these prohibitions, it is anticipated that in most instances the master
servicer will utilize the non-judicial foreclosure remedy and will not seek
deficiency judgments against defaulting mortgagors.
Some state statutes may require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action
against the borrower. In some other states, the lender has the option of
bringing a personal action against the borrower on the debt without first
exhausting that security. However, in some of these states, following judgment
on a personal action, the lender may be considered to have elected a remedy
and may be precluded from exercising other remedies with respect to the
security. Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower.
In some states, exceptions to the anti-deficiency statutes are
provided for in particular instances where the value of the lender's security
has been impaired by acts or omissions of the borrower, for example, upon
waste of the property.
In addition to anti-deficiency and related legislation, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize on its security. For example, in a
proceeding under the federal bankruptcy code, a lender may not foreclose on a
mortgaged property without the permission of the bankruptcy court. A
bankruptcy court may allow a borrower to reduce the monthly payments, change
the rate of interest, and alter the mortgage loan repayment schedule for under
collateralized mortgage loans. The effect of these types of proceedings can be
to cause delays in receiving payments on the loans underlying certificates and
even to reduce the aggregate amount of payments on the loans underlying
certificates.
The federal tax laws provide priority to particular tax liens over
the lien of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and enforcement of mortgage loans.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal and
state laws impose specific statutory liabilities on lenders who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans or contracts.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award
unless the creditor establishes that the sale of the collateral which, in the
case of a cooperative loan, would be the shares of the cooperative and the
related proprietary lease or occupancy agreement, was conducted in a
commercially reasonable manner.
Environmental Risks
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of some states, contamination
of a property may give rise to a lien on the property to assure the payment of
the costs of clean-up. In several states that lien has priority over the lien
of an existing mortgage on the property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
CERCLA, the EPA may impose a lien on property where the EPA has incurred
clean-up costs. However, a CERCLA lien is subordinate to pre-existing,
perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable
that a secured lender may be held liable as an "owner" or "operator" for the
costs of addressing releases or threatened releases of hazardous substances at
a mortgaged property, even though the environmental damage or threat was
caused by a prior or current owner or operator. CERCLA imposes liability for
the costs on any and all "responsible parties", including owners or operators.
However, CERCLA excludes from the definition of "owner or operator" a secured
creditor who holds indicia of ownership primarily to protect its security
interest but does not participate in the management" of the property. Thus, if
a lender's activities begin to encroach on the actual management of a
contaminated facility or property, the lender may incur liability as an "owner
or operator" under CERCLA. Similarly, if a lender forecloses and takes title
to a contaminated facility or property, the lender may incur CERCLA liability
in various circumstances, including when it holds the facility or property as
an investment, including leasing the facility or property to a third party, or
fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in
the management of a property causing the lender to lose the protection of the
secured creditor exclusion has been a matter of judicial interpretation of the
statutory language, and court decisions have historically been inconsistent.
In 1990, in United States v. Fleet Factors Corp., the United States Court of
Appeals for the Eleventh Circuit suggested that the mere capacity of the
lender to influence a borrower's decisions regarding disposal of hazardous
substances was sufficient participation in the management of the borrower's
business to deny the protection of the secured creditor exclusion to the
lender, regardless of whether the lender actually exercised influence. Other
judicial decisions did not interpret the secured creditor exclusion as
narrowly as did the Eleventh Circuit.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liability and Deposit Insurance Protection Act of
1996, or CERCLA, which took effect on September 30, 1996. It provides that to
be deemed to have participated in this management of a secured property, a
lender must actually participate in the operational affairs of the property or
of the borrower. The legislation also provides that participation in the
management of the property does not include "merely having the capacity to
influence, or unexercised right to control" operations. Rather, a lender will
lose the protection of the secured creditor exclusion only if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-today
management of all operational functions of the secured property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties", including a previous
owner or operator, who created the environmental hazard, but those persons or
entities may be bankrupt or otherwise judgment proof. The costs associated
with environmental cleanup may be substantial. It is conceivable that the
costs arising from the circumstances set forth above would result in a loss to
certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act, or RCRA, which regulates underground petroleum storage tanks,
except heating oil tanks. The EPA has adopted a lender liability rule for
underground storage tanks under this subtitle. Under that rule, a holder of a
security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. Moreover, under the Asset Conservation Act, the protections accorded
to lenders under CERCLA are also accorded to holders of security interests in
underground petroleum storage tanks. It should be noted, however, that
liability for cleanup of petroleum contamination may be governed by state law,
which may not provide for any specific protection for secured creditors.
Except as otherwise specified in the applicable prospectus
supplement, at the time the mortgage loans were originated, no environmental
assessment or a very limited environmental assessment of the Mortgage
Properties was conducted.
Due-on-Sale Clauses
Generally, each conventional mortgage loan will contain a due-on-sale
clause which will generally provide that if the mortgagor or obligor sells,
transfers or conveys the mortgaged property, the loan may be accelerated by
the mortgagee. In recent years, court decisions and legislative actions have
placed substantial restriction on the right of lenders to enforce these
clauses in many states. For instance, the California Supreme Court in August
1978 held that due-on-sale clauses were generally unenforceable. However, the
Garn-St Germain Depository Institutions Act of 1982, or the Garn-St Germain
Act, having regard to specified exceptions, preempts state constitutional,
statutory and case law prohibiting the enforcement of due-on-sale clauses. As
to loans secured by an owner-occupied residence, the Garn-St Germain Act sets
forth nine specific instances on which a mortgagee covered by the Garn-St
Germain Act may not exercise its rights under a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred.
The inability to enforce a due-on-sale clause may result in transfer of the
related mortgaged property to an uncreditworthy person, which could increase
the likelihood of default or may result in a mortgage bearing an interest rate
below the current market rate being assumed by a new home buyer, which may
affect the average life of the mortgage loans and the number of mortgage loans
which may extend to maturity.
Prepayment Charges
Under some state laws, prepayment charges may not be imposed after a
specified period of time following the origination of mortgage loans with
respect to prepayments on loans secured by liens encumbering owner-occupied
residential properties. Since many of the mortgaged properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
on many of the mortgage loans. The absence of this restraint on prepayment,
particularly with respect to fixed rate mortgage loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirement of
the loans or contracts.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended, or the Relief Act, a borrower who enters military
service after the origination of the borrower's mortgage loan including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the mortgage loan and is later called to active
duty, may not be charged interest above an annual rate of 6% during the period
of the borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that this interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of
the master servicer to collect full amounts of interest on some of the
mortgage loans. Any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
certificates. In addition, the Relief Act imposes limitations which would
impair the ability of the master servicer to foreclose on an affected mortgage
loan during the borrower's period of active duty status. Thus, if an affected
mortgage loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the mortgaged property in a timely fashion.
The Title I Program
General. Some of the loans contained in a trust fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934. Under the Title I
Program, the FHA is authorized and empowered to insure qualified lending
institutions against losses on eligible loans. The Title I Program operates as
a coinsurance program in which the FHA insures up to 90% of specified losses
incurred on an individual insured loan, including the unpaid principal balance
of the loan, but only to the extent of the insurance coverage available in the
lender's FHA insurance coverage reserve account. The owner of the loan bears
the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under
the Title I Program include property improvement loans. A property improvement
loan or Title I Loan means a loan made to finance actions or items that
substantially protect or improve the basic livability or utility of a property
and includes single family improvement loans.
There are two basic methods of lending or originating these loans,
which include a "direct loan" or a "dealer loan". With respect to a direct
loan, the borrower makes application directly to a lender without any
assistance from a dealer, which application may be filled out by the borrower
or by a person acting at the direction of the borrower who does not have a
financial interest in the loan transaction, and the lender may disburse the
loan proceeds solely to the borrower or jointly to the borrower and other
parties to the transaction. With respect to a dealer loan, the dealer, who has
a direct or indirect financial interest in the loan transaction, assists the
borrower in preparing the loan application or otherwise assists the borrower
in obtaining the loan from lender and the lender may distribute proceeds
solely to the dealer or the borrower or jointly to the borrower and the dealer
or other parties. With respect to a dealer Title I Loan, a dealer may include
a seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and, generally, provide for equal installment payments due
weekly, biweekly, semi-monthly or monthly, except that a loan may be payable
quarterly or semi-annually in order to correspond with the borrower's
irregular flow of income. The first or last payments or both may vary in
amount but may not exceed 150% of the regular installment payment, and the
first scheduled payment may be due no later than two months from the date of
the loan. The note must contain a provision permitting full or partial
prepayment of the loan. The interest rate may be established by the lender and
must be fixed for the term of the loan and recited in the note. Interest on an
insured loan must accrue from the date of the loan and be calculated on a
simple interest basis. The lender must assure that the note and all other
documents evidencing the loan are in compliance with applicable federal, state
and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence
and diligence to determine whether the borrower and any co-maker is solvent
and an acceptable credit risk, with a reasonable ability to make payments on
the loan obligation. The lender's credit application and review must determine
whether the borrower's income will be adequate to meet the periodic payments
required by the loan, as well as the borrower's other housing and recurring
expenses. This determination must be made in accordance with the
expense-to-income ratios published by the Secretary of HUD.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution, as is typically the case with
other federal loan programs. If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In that case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless the material misstatements of fact or misuse of loan proceeds
was caused by, or was knowingly sanctioned by, the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for
Title I Loans must not exceed the actual cost of the project plus any
applicable fees and charges allowed under the Title I Program; provided that
the maximum amount does not exceed $25,000, or the current applicable amount,
for a single family property improvement loan. Generally, the term of a Title
I Loan may not be less than six months nor greater than 20 years and 32 days.
A borrower may obtain multiple Title I Loans with respect to multiple
properties, and a borrower may obtain more than one Title I Loan with respect
to a single property, in each case as long as the total outstanding balance of
all Title I Loans in the same property does not exceed the maximum loan amount
for the type of Title I Loan thereon having the highest permissible loan
amount.
Borrower eligibility for a Title I Loan requires that the borrower
have at least a one-half interest in either fee simple title to the real
property, a lease of that property for a term expiring at least six months
after the final maturity of the Title I Loan or a recorded land installment
contract for the purchase of the real property, and that the borrower have
equity in the property being improved at least equal to the amount of the
Title I Loan if the loan amount exceeds $15,000. Any Title I Loan in excess of
$7,500 must be secured by a recorded lien on the improved property which is
evidenced by a mortgage or deed of trust executed by the borrower and all
other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend the list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the borrower
is required to submit to the lender, promptly upon completion of the
improvements but not later than six months after disbursement of the loan
proceeds with one six month extension if necessary, a completion certificate,
signed by the borrower. The lender or its agent is required to conduct an
on-site inspection on any Title I Loan where the principal obligation is
$7,500 or more, and on any direct Title I Loan where the borrower fails to
submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account
is 10% of the amount disbursed, advanced or expended by the lender in
originating or purchasing eligible loans registered with FHA for Title I
insurance, with adjustments. The balance in the insurance coverage reserve
account is the maximum amount of insurance claims the FHA is required to pay.
Loans to be insured under the Title I Program will be registered for insurance
by the FHA and the insurance coverage attributable to those loans will be
included in the insurance coverage reserve account for the originating or
purchasing lender following the receipt and acknowledgment by the FHA of a
loan report on the prescribed form pursuant to the Title I regulations. The
FHA charges a fee of 0.50% per annum of the net proceeds - the original
balance - of any eligible loan so reported and acknowledged for insurance by
the originating lender. The FHA bills the lender for the insurance premium on
each insured loan annually, on approximately the anniversary date of the
loan's origination. If an insured loan is prepaid during the year, FHA will
not refund the insurance premium, but will abate any insurance charges falling
due after the prepayment.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to the insured loans
and (ii) the amount of insurance coverage attributable to insured loans sold
by the lender. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage in that reserve account may be earmarked with respect
to each or any eligible insured loans, if a determination is made by the
Secretary of HUD that it is in its interest to do so. Originations and
acquisitions of new eligible loans will continue to increase a lender's
insurance coverage reserve account balance by 10% of the amount disbursed,
advanced or expended in originating or acquiring the eligible loans registered
with the FHA for insurance under the Title I Program. The Secretary of HUD may
transfer insurance coverage between insurance coverage reserve accounts with
earmarking with respect to a particular insured loan or group of insured loans
when a determination is made that it is in the Secretary's interest to do so.
The lender may transfer, except as collateral in a bona fide loan
transaction, insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an
insured loan is transferred with recourse or with a guaranty or repurchase
agreement, the FHA, upon receipt of written notification of the transfer of
the loan in accordance with the Title I regulations, will transfer from the
transferor's insurance coverage reserve account to the transferee's insurance
coverage reserve account an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of the loan, whichever is
less. However, under the Title I Program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage reserve
account during any October 1 to September 30 period without the prior approval
of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender
may accelerate an insured loan following a default on the loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If
the lender chooses to proceed against the property under a security
instrument, or if it accepts a voluntary conveyance or surrender of the
property, the lender may file an insurance claim only with the prior approval
of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation
of the lender's efforts to obtain recourse against any dealer who has agreed
to provide recourse, certification of compliance with applicable state and
local laws in carrying out any foreclosure or repossession, and evidence that
the lender has properly filed proofs of claims, where the borrower is bankrupt
or deceased. Generally, a claim for reimbursement for loss on any Title I Loan
must be filed with the FHA no later than nine months after the date of default
of the loan. Concurrently with filing the insurance claim, the lender shall
assign to the United States of America the lender's entire interest in the
loan note, or a judgment in lieu of the note, in any security held and in any
claim filed in any legal proceedings. If, at the time the note is assigned to
the United States, the Secretary has reason to believe that the note is not
valid or enforceable against the borrower, the FHA may deny the claim and
reassign the note to the lender. If either the defect is discovered after the
FHA has paid a claim, the FHA may require the lender to repurchase the paid
claim and to accept a reassignment of the loan note. If the lender
subsequently obtains a valid and enforceable judgment against the borrower,
the lender may resubmit a new insurance claim with an assignment of the
judgment. The FHA may contest any insurance claim and make a demand for
repurchase of the loan at any time up to two years from the date the claim was
certified for payment and after these two years may do so in the event of
fraud or misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim
payment, when made, is equal to the claimable amount, up to the amount of
insurance coverage in the lender's insurance coverage reserve account. The
claimable amount means an amount equal to 90% of the sum of:
(1) the unpaid loan obligation, net unpaid principal and the
uncollected interest earned to the date of default, with
adjustments to the unpaid loan obligation if the lender has
proceeded against property securing the loan;
(2) the interest on the unpaid amount of the loan obligation from
the date of default to the date of the claim's initial
submission for payment plus 15 calendar days, but not to exceed
9 months from the date of default, calculated at the rate of 7%
per annum;
(3) the uncollected court costs;
(4) the attorney's fees not to exceed $500; and
(5) the expenses for recording the assignment of the security to the
United States.
Material Federal Income Tax Consequences
The following discussion is the opinion of Brown & Wood LLP, counsel
to the depositor, as to the material federal income tax consequences of the
purchase, ownership and disposition of certificates. The opinion of Brown &
Wood LLP is based on laws, regulations, administrative rulings, and judicial
decisions now in effect, all of which may be changed either prospectively or
retroactively. The following discussion does not describe aspects of federal
tax law that are unique to insurance companies, securities dealers and
investors who hold certificates as part of a straddle within the meaning of
Section 1092 of the Code. Prospective investors are encouraged to consult
their tax advisors regarding the federal, state, local, and any other tax
consequences to them of the purchase, ownership, and disposition of
certificates.
General
The federal income tax consequences to certificateholders will vary
depending on whether an election is made to treat the trust fund relating to a
particular series of certificates as a REMIC under the Code. The prospectus
supplement for each series of certificates will specify whether a REMIC
election will be made.
Non-REMIC Certificates
If a REMIC election is not made, the trust fund will not be
classified as an association taxable as a corporation and that each trust fund
will be classified as a grantor trust under subpart E, Part I of subchapter J
of chapter I of subtitle A of the Code. In this case, owners of certificates
will be treated for federal income tax purposes as owners of a portion of the
trust fund's assets as described below. Brown & Wood LLP will issue an opinion
confirming the above conclusions for each trust fund for which no REMIC
election is made.
a. Single Class of Certificates
Characterization. The trust fund may be created with one class of
certificates. In this case, each certificateholder will be treated as the
owner of a pro rata undivided interest in the interest and principal portions
of the trust fund represented by the certificates and will be considered the
equitable owner of a pro rata undivided interest in each of the mortgage loans
in the Pool. Any amounts received by a certificateholder in lieu of amounts
due with respect to any mortgage loans because of a default or delinquency in
payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
Each certificateholder will be required to report on its federal
income tax return in accordance with its method of accounting its pro rata
share of the entire income from the mortgage loans in the trust fund
represented by certificates, including interest, OID, if any, prepayment fees,
assumption fees, any gain recognized upon an assumption and late payment
charges received by the master servicer. Under Code Sections 162 or 212 each
certificateholder will be entitled to deduct its pro rata share of servicing
fees, prepayment fees, assumption fees, any loss recognized upon an assumption
and late payment charges retained by the master servicer, provided that the
amounts are reasonable compensation for services rendered to the trust fund.
Certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent expenses of the trust fund
plus their other miscellaneous itemized deductions, as defined in the Code,
exceed two percent of their adjusted gross income. A certificateholder using
the cash method of accounting must take into account its pro rata share of
income and deductions as and when collected by or paid to the master servicer.
A certificateholder using an accrual method of accounting must take into
account its pro rata share of income as it accrues, or when received if the
income is received before it accrues, and must take into account its pro rata
share of deductions as they accrue. If the servicing fees paid to the master
servicer are deemed to exceed reasonable servicing compensation, the amount of
any excess could be considered as an ownership interest retained by the master
servicer, or any person to whom the master servicer assigned for value all or
a portion of the servicing fees, in a portion of the interest payments on the
mortgage loans. The mortgage loans would then be subject to the "coupon
stripping" rules of the Code discussed below.
Generally, as to each series of certificates:
o a certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on mortgage loans will be
considered to represent "loans . . . secured by an interest in
real property which is "residential property" within the meaning
of Code Section 7701(a)(19)(C)(v), to the extent that the mortgage
loans represented by that certificate are of a type described in
that Code section,
o a certificate owned by a real estate investment trust representing
an interest in mortgage loans will be considered to represent
"real estate assets" within the meaning of Code Section
856(c)(4)(A), and interest income on the mortgage loans will be
considered interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), to the
extent that the mortgage loans represented by that certificate are
of a type described in that Code section, and
o a certificate owned by a REMIC will represent an "obligation . . .
which is principally secured, directly or indirectly, by an
interest in real property" within the meaning of Code Section
860G(a)(3).
Buydown Loans. Some trust funds may hold buydown loans. These loans
can be secured not only by a mortgage on real property but also by a pledged
account that is drawn upon to subsidize the mortgagor's monthly mortgage
payments for a limited period of time. So long as the loan value of the real
property at least equals the amount of the loan, then for purposes of the
above requirements, the mortgage loan will be treated as fully secured by real
property. If the loan value of the real property is less than the amount of
the loan, then, a certificateholder could be required to treat the loan as one
secured by an interest in real property only to the extent of the loan value
of the real property. The related prospectus supplement for any series of
certificates will specify whether apportionment would be required.
Premium. The price paid for a certificate by a holder will be
allocated to the holder's undivided interest in each mortgage loan based on
each mortgage loan's relative fair market value, so that the holder's
undivided interest in each mortgage loan will have its own tax basis. A
certificateholder that acquires an interest in mortgage loans at a premium may
elect, under Code Section 171, to amortize the premium under a constant
interest method, provided that the underlying mortgage loans with respect to
the mortgage loans were originated after September 27, 1985. Premium allocable
to mortgage loans originated on or before this date should be allocated among
the principal payments on the mortgage loans and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on the certificate. The basis for the
certificate will be reduced to the extent that amortizable premium is applied
to offset interest payments. It is not clear whether a reasonable prepayment
assumption should be used in computing amortization of premium allowable under
Code Section 171. However, recent changes to the Code require the use of a
prepayment assumption to accrue original issue discount on pools of
receivables the yield on which may be affected by prepayments for tax years
beginning after August 5, 1997 and prior legislative history indicated that if
a prepayment assumption applied to an instrument for purposes of the OID
rules, that prepayment assumption should be applied in amortizing bond
premium.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a certificate acquired at a premium
should recognize a loss if a mortgage loan, or an underlying mortgage loan,
prepays in full, equal to the difference between the portion of the prepaid
principal amount of the mortgage loan or underlying mortgage loan that is
allocable to the certificate and the portion of the adjusted basis of the
certificate that is allocable to the mortgage loan or underlying mortgage
loan. If a reasonable prepayment assumption is used to amortize premium, it
appears that any loss would be available, if at all, only if prepayments have
occurred at a rate faster than the reasonable assumed prepayment rate. It is
not clear whether any other adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments. In addition, under recent legislation, amounts received on the
redemption of an obligation issued by a natural person are considered received
in exchange for the obligation if the debt obligation is purchased or issued
after June 8, 1997 - i.e., treated the same as obligations issued by
corporations. This change could affect the character of any loss, e.g., cause
the loss to be treated as capital if the assets are held as capital assets by
the taxpayer.
On December 30, 1997, the IRS issued final regulations dealing with
amortizable bond premium. These regulations specifically do not apply to
prepayable debt instruments subject to Code Section 1272(a)(6). Absent further
guidance from the IRS, the trustee intends to account for amortizable bond
premium on the manner described above. Prospective purchasers of the
certificates are encouraged to consult their tax advisors regarding the
possible application of the Amortizable Bond Premium Regulations.
Original Issue Discount. The IRS has stated in published rulings
that, in circumstances similar to those described in this prospectus, the
special rules of the Code relating to "original issue discount", currently
Code Sections 1271 through 1273 and 1275, will be applicable to a
certificateholder's interest in those mortgage loans meeting the conditions
necessary for these sections to apply. OID generally must be reported as
ordinary gross income as it accrues under a constant interest method. See
"--Multiple Classes of Certificates--Certificates Representing Interests in
Loans Other Than ARM Loans".
Market Discount. A certificateholder that acquires an undivided
interest in mortgage loans may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a mortgage
loan is considered to have been purchased at a "market discount". The amount
of market discount is equal to the excess of the portion of the principal
amount of the mortgage loan allocable to the holder's undivided interest in
the mortgage loans over the holder's tax basis in the undivided interest.
Market discount with respect to a certificate will be considered to be zero if
the amount allocable to the certificate is less than 0.25% of the
certificate's stated redemption price at maturity multiplied by the weighted
average maturity remaining after the date of purchase. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors are advised to consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment, whether a scheduled
payment or a prepayment, or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of the payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Although the Treasury Department has not yet issued regulations, rules
described in the relevant legislative history describe how market discount
should be accrued on instruments bearing market discount. According to the
legislative history, the holder of a market discount bond may elect to accrue
market discount either on the basis of a constant interest rate or according
to one of the following methods:
o If a certificate is issued with OID, the amount of market discount
that accrues during any accrual period would be equal to the
product of the total remaining market discount and a fraction, the
numerator of which is the OID accruing during the period and the
denominator of which is the total remaining OID at the beginning
of the accrual period, or
o For certificates issued without OID, the amount of market discount
that accrues during a period is equal to the product of the total
remaining market discount and a fraction, the numerator of which
is the amount of stated interest paid during the accrual period
and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual
period.
For purposes of calculating market discount under any of these
methods in the case of instruments that provide for payments that may be
accelerated due to prepayments of other obligations securing the instruments,
the same prepayment assumption applicable to calculating the accrual of OID
will apply. Recent legislation expands the required use of a prepayment
assumption for purposes of calculating OID for tax years beginning after
August 5, 1997 to pools of receivables the yield on which may be affected due
to prepayments and previous legislative history states Congress intends that
if a prepayment assumption would be used to calculate OID it should also be
used to accrue marked discount. Because the regulations described above have
not been issued, it is impossible to predict what effect those regulations
might have on the tax treatment of a certificate purchased at a discount or
premium in the secondary market.
A holder who acquired a certificate at a market discount also may be
required to defer, until the maturity date of the certificate or its earlier
disposition in a taxable transaction, the deduction of a portion of the amount
of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the certificate in
excess of the aggregate amount of interest, including OID, includable in the
holder's gross income for the taxable year with respect to the certificate.
The amount of the net interest expense deferred in a taxable year may not
exceed the amount of market discount accrued on the certificate for the days
during the taxable year on which the holder held the certificate and, in
general, would be deductible when the market discount is includable in income.
The amount of any remaining deferred deduction is to be taken into account in
the taxable year in which the certificate matures or is disposed of in a
taxable transaction. In the case of a disposition in which gain or loss is not
recognized in whole or in part, any remaining deferred deduction will be
allowed to the extent of gain recognized on the disposition. This deferral
rule does not apply if the certificateholder elects to include the market
discount in income currently as it accrues on all market discount obligations
acquired by the certificateholder in or after that taxable year.
Election to Treat All Interest as OID. The OID regulations permit a
certificateholder to elect to accrue all interest, discount, including de
minimis market or original issue discount, and premium in income as interest,
based on a constant yield method for certificates acquired on or after April
4, 1994. If an election to treat all interest as OID were to be made with
respect to a certificate with market discount, the certificateholder would be
deemed to have made an election to include in income currently market discount
with respect to all other debt instruments having market discount that the
certificateholder acquires during or after the year of the election.
Similarly, a certificateholder that makes this election for a certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that the certificateholder owns or acquires. See "Single Class of
Certificates--Premium". The election to accrue interest, discount and premium
on a constant yield method with respect to a certificate cannot be revoked
without the consent of the IRS.
b. Multiple Classes of Certificates
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of Code
Sections 1271 through 1288, Code Section 1286 treats a stripped bond or a
stripped coupon as an obligation issued on the date that the stripped interest
is created. If a trust fund is created with two classes of certificates:
o one class of certificates may represent stripped bond
certificates, i.e., the right to principal and interest, or
principal only, on all or a portion of the mortgage loans, and
o the second class of certificates may represent stripped coupon
certificates, i.e., the right to some or all of the interest on
the same mortgage loans.
Servicing fees in excess of reasonable servicing fees will be treated
under the stripped bond rules. If the excess servicing fee is less than 100
basis points, i.e., 1% interest on the mortgage loan principal balance, or the
certificates are initially sold with a de minimis discount which amount may be
calculated without a prepayment assumption, any non-de minimis discount
arising from a subsequent transfer of the certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a mortgage loan by mortgage loan basis, which could result in
some mortgage loans being treated as having more than 100 basis points of
interest stripped off. See "--Non-REMIC Certificates" and "Multiple Classes of
Certificates--Stripped Bonds and Stripped Coupons".
Although current authority is not entirely clear, a stripped bond
certificate should be treated as an interest in mortgage loans issued on the
day the certificate is purchased for purposes of calculating any OID.
Generally, if the discount on a mortgage loan is larger than a de minimis
amount, as calculated for purposes of the OID rules a purchaser of the
certificate will be required to accrue the discount under the OID rules of the
Code. See "--Non-REMIC Certificates" and "--Single Class of
Certificates--Accrual of Original Issue Discount". However, a purchaser of a
stripped bond certificate will be required to account for any discount on the
mortgage loans as market discount rather than OID if either (1) the amount of
OID with respect to the mortgage loan is treated as zero under the OID de
minimis rule when the certificate was stripped or (2) no more than 100 basis
points, including any amount of servicing fees in excess of reasonable
servicing fees, is stripped off of the trust fund's mortgage loans.
The precise tax treatment of stripped coupon certificates is
substantially uncertain. The Code could be read literally to require that OID
computations be made for each payment from each mortgage loan. However, based
on the recent IRS guidance, it appears that all payments from a mortgage loan
underlying a stripped coupon certificate should be treated as a single
installment obligation subject to the OID rules of the Code, in which case,
all payments from the mortgage loan would be included in the mortgage loan's
stated redemption price at maturity for purposes of calculating income on the
stripped coupon certificate under the OID rules of the Code.
Based on current authority it is unclear under what circumstances, if
any, the prepayment of mortgage loans will give rise to a loss to the holder
of a stripped bond certificate purchased at a premium or a stripped coupon
certificate. If the certificate is treated as a single instrument, rather than
an interest in discrete mortgage loans and the effect of prepayments is taken
into account in computing yield with respect to the certificate, it appears
that no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate. However,
if a certificate is treated as an interest in discrete mortgage loans, or if
no prepayment assumption is used, then when a mortgage loan is prepaid, any
certificate so treated should be able to recognize a loss equal to the portion
of the unrecovered premium of the certificate that is allocable to the
mortgage loan. In addition, amounts received in redemption for debt
instruments issued by natural persons purchased or issued after June 8, 1997
are treated as received in exchange for them, i.e., treated the same as
obligations issued by corporations. This change could affect the character of
any loss.
Holders of stripped bond certificates and stripped coupon
certificates are encouraged to consult with their own tax advisors regarding
the proper treatment of these certificates for federal income tax purposes.
2. Certificates Representing Interests in Loans Other Than ARM Loans
The original issue discount rules of Code Sections 1271 through 1275
will be applicable to: (1) mortgages of corporations originated after May 27,
1969, (2) mortgages of noncorporate mortgagors, other than individuals,
originated after July 1, 1982, and (3) mortgages of individuals originated
after March 2, 1984. Under the OID regulations, original issue discount could
arise by the charging of points by the originator of the mortgage in an amount
greater than the statutory de minimis exception, including a payment of points
that is currently deductible by the borrower under applicable Code provisions
or by the presence of "teaser" rates, i.e., the initial rates on the mortgage
loans are lower than subsequent rates on the mortgage loans, on the mortgage
loans.
OID on each certificate must be included in the owner's ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant interest method that takes into account the compounding of interest,
in advance of receipt of the cash attributable to the income. The amount of
OID required to be included in an owner's income in any taxable year with
respect certificate representing an interest in ARM Loans likely will be
computed as described under "--Accrual of Original Issue Discount". The
following discussion is based in part on Treasury regulations issued on
January 27, 1994, and amended on June 11, 1996, under Code Sections 1271
through 1273 and 1275 and in part on the provisions of the Tax Reform Act of
1986. These regulations generally are effective for debt instruments issued on
or after April 4, 1994, but may be relied upon as authority with respect to
debt instruments issued after December 21, 1992. Alternatively, proposed
Treasury regulations issued December 21, 1992 may be treated as authority for
debt instruments issued after December 21, 1992 and before April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issued date of the mortgage loans should be used, or, in the case
of stripped bond certificates or stripped coupon certificates, the date the
certificates are acquired. The holder of a certificate should be aware,
however, that neither the proposed regulations nor the existing regulations
adequately address the issues relevant to prepayable securities.
Under the Code, the mortgage loans underlying the certificates will
be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of the mortgage loan's stated redemption
price at maturity over its issue price. The issue price of a mortgage loan is
generally the amount lent to the mortgagee, which may be adjusted to take into
account of some loan origination fees. The stated redemption price at maturity
of a mortgage loan is the sum of all payments to be made on the mortgage loan
other than payments that are treated as qualified stated interest payments.
The accrual of this OID, as described under "--Accrual of Original Issue
Discount", will, unless otherwise specified in the related prospectus
supplement, utilize the original yield to maturity of the certificates
calculated based on the Prepayment Assumption, and will take into account
events that occur during the calculation period. The Prepayment Assumption
will be determined in the manner prescribed by regulations that have not yet
been issued. The legislative history of the 1986 Act provides, however, that
the regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of the certificate.
No representation is made that any certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the
Code literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in debt instruments, and, in tax years beginning after August 5,
1997, to pools of receivables the yield on which may be affected by
prepayments of receivables like those the certificates represent. However, no
other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to prepayment, and, until further
guidance is issued, the master servicer intends to calculate and report OID
under the method described in "--Accrual of Original Issue Discount".
Accrual of Original Issue Discount. Generally, the owner of a
certificate must include in gross income the sum of the daily portions of the
OID on any certificate for each day on which it owns the certificate,
including the date of purchase but excluding the date of disposition. In the
case of an original owner, the daily portions of OID with respect to each
component generally will be determined as set forth under the OID regulations.
A calculation will be made by the master servicer or other entity specified in
the related prospectus supplement of the portion of OID that accrues during
each successive monthly accrual period, or shorter period from the date of
original issue, that ends on the day in the calendar year corresponding to
each of the distribution dates on the certificates, or the day before each
date. This will be done, in the case of each full month accrual period, by
adding the present value at the end of the accrual period, determined by using
as a discount factor the original yield to maturity of the respective
component under the Prepayment Assumption, of all remaining payments to be
received under the Prepayment Assumption on the respective component and any
payments received during the same accrual period, and subtracting from that
total the adjusted issue price of the respective component at the beginning of
the same accrual period. The adjusted issue price of a certificate at the
beginning of the first accrual period is its issue price; the adjusted issue
price of a certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period reduced by the
amount of any payment made at the end of or during that accrual period. The
OID accruing during the accrual period will then be divided by the number of
days in the period to determine the daily portion of OID for each day in the
period. With respect to an initial accrual period shorter than a full monthly
accrual period, the daily portions of OID must be determined according to an
appropriate allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest as it accrues rather than when received. However,
the amount of original issue discount includable in the income of a holder of
an obligation is reduced when the obligation is acquired after its initial
issuance at a price greater than the sum of the original issue price and the
previously accrued original issue discount, less prior payments of principal.
Accordingly, if mortgage loans acquired by a certificateholder are purchased
at a price equal to the then unpaid principal amount of those mortgage loans,
no original issue discount attributable to the difference between the issue
price and the original principal amount of those mortgage loans, e.g., due to
points, will be includable by the holder. Other original issue discount on the
mortgage loans, e.g., that arising from a "teaser" rate, would still need to
be accrued.
3. Certificates Representing Interests in ARM Loans
The OID regulations do not address the treatment of instruments, such
as the certificates, which represent interests in ARM Loans. Additionally, the
IRS has not issued guidance under the Code's coupon stripping rules with
respect to instruments that represent interests in ARM Loans. In the absence
of any authority, the master servicer will report OID on certificates
attributable to Stripped ARM Obligations to holders in a manner it believes is
consistent with the rules described under the heading "--Certificates
Representing Interests in Loans Other than ARM Loans" and with the OID
regulations. As such, for purposes of projecting the remaining payments and
the projected yield, the assumed rate payable on the ARM Loans will be the
fixed rate equivalent on the issue date. Application of these rules may
require inclusion of income on a Stripped ARM Obligation in advance of the
receipt of cash attributable to the income. Further, the addition of interest
deferred due to negative amortization to the principal balance of an ARM Loan
may require the inclusion of the interest deferred due to negative
amortization in the income of the certificateholder when it accrues.
Furthermore, the addition of the deferred interest to the certificate's
principal balance will result in additional income, including possibly OID
income, to the certificateholder over the remaining life of the certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are encouraged to consult their tax advisors regarding how income
will be includable with respect to the certificates.
c. Sale or Exchange of a Certificate
Sale or exchange of a certificate before its maturity will result in
gain or loss equal to the difference, if any, between the amount received and
the owner's adjusted basis in the certificate. The adjusted basis of a
certificate generally will equal the seller's purchase price for the
certificate, increased by the OID included in the seller's gross income with
respect to the certificate, and reduced by principal payments on the
certificate previously received by the seller. The gain or loss will be
capital gain or loss to an owner for which a certificate is a "capital asset"
within the meaning of Code Section 1221, and will be long-term or short-term
depending on whether the certificate has been owned for the long-term capital
gain holding period--currently more than one year.
The certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a certificate by a bank or a thrift institution to which that section
applies will be ordinary income or loss.
d. Non-U.S. Persons
Generally, to the extent that a certificate evidences ownership in
underlying mortgage loans that were issued on or before July 18, 1984,
interest or OID paid by the person required to withhold tax under Code Section
1441 or 1442 to an owner that is not a U.S. Person or a certificateholder
holding on behalf of an owner that is not a U.S. Person will be subject to
federal income tax, collected by withholding, at a rate of 30% or any lower
rate provided for interest by an applicable tax treaty. Accrued OID recognized
by the owner on the sale or exchange of a certificate also will be subject to
federal income tax at the same rate. Generally, accrued OID payments would not
be subject to withholding to the extent that a certificate evidences ownership
in mortgage loans issued after July 18, 1984, by natural persons if the
certificateholder complies with specified identification requirements,
including delivery of a statement, signed by the certificateholder under
penalties of perjury, certifying that the certificateholder is not a U.S.
Person and providing the name and address of the certificateholder. Additional
restrictions apply to mortgage loans where the mortgagor is not a natural
person in order to qualify for the exemption from withholding. Any foreclosure
property owned by the trust could be treated as a U.S. real property interest
owned by certificateholders.
As used in this prospectus, the term U.S. Person means
o a citizen or resident of the United States,
o a corporation or a partnership, including an entity treated as a
corporation or partnership for U.S. federal income tax purposes,
organized in or created under the laws of the United States or any
state or the District of Columbia, unless in the case of a
partnership Treasury regulations provide otherwise,
o an estate, the income of which from sources outside the United
States is includable in gross income for federal income tax
purposes regardless of its connection with the conduct of a trade
or business within the United States, or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have authority to control all
substantial decisions of the trust.
In addition, U.S. Persons would include some trusts that can elect to be
treated as U.S. Persons.
Interest paid or accrued on the mortgage loans to a certificateholder
who is a non-U.S. Person will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax; provided, that the interest is not effectively connected with
the conduct of a trade or business within the United States by the non-U.S.
Person, and the non-U.S. Person provides the trust or other person who is
otherwise required to withhold U.S. tax with respect to the mortgage loans
with an appropriate statement, on Form W-8 or other similar form, signed under
penalty of perjury, certifying that the beneficial owner of the mortgage loan
is a foreign person and providing that non-U.S. person's name and address. If
an interest in a mortgage loan is held through a securities clearing
organization or some other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding
agent. In that case, however, the signed statement must be accompanied by a
Form W-8 or substitute form provided by the non-U.S. Person that owns that
interest in the mortgage loan. If interest does not constitute portfolio
interest, then it will be subject to U.S. federal income and withholding tax
at a rate of 30%, unless reduced or eliminated pursuant to an applicable tax
treaty and the non-U.S. Person provides the trust, or an organization or
financial institution described above, with an appropriate statement, e.g., a
Form 1001, signed under penalties of perjury, to that effect.
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters were published
in the Federal Register on October 14, 1997. In general, the new withholding
regulations significantly alter the substantive withholding and information
reporting requirements, but do unify current certification procedures and
forms and clarify reliance standards. The new withholding regulations
generally will be effective for payments made after December 31, 1999, subject
to a number of transition rules. The discussion set forth above does not take
the new withholding regulations into account. Prospective non-U.S. Persons who
own interests in mortgage loans are strongly urged to consult their own tax
advisors with respect to the new withholding regulations.
e. Information Reporting and Backup Withholding
The master servicer will furnish or make available, within a
reasonable time after the end of each calendar year, to each person who was a
certificateholder at any time during the year, the information deemed
appropriate to assist certificateholders in preparing their federal income tax
returns, or to enable holders to make any information available to beneficial
owners or financial intermediaries that hold certificates as nominees on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that the person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against a recipient's federal income tax liability.
REMIC Certificates
The trust fund relating to a series of certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance with
a number of conditions. Although a REMIC is not generally subject to federal
income tax, see, however "--Residual Certificates" and "--Prohibited
Transactions and Other Taxes", if a trust fund with respect to which a REMIC
election is made fails to comply with one or more of the ongoing requirements
of the Code for REMIC status during any taxable year, including the
implementation of restrictions on the purchase and transfer of the residual
interests in a REMIC as described under "--Residual Certificates", the Code
provides that a trust fund will not be treated as a REMIC for that year and
future years. In that event, the entity may be taxable as a separate
corporation, and the related REMIC certificates may not be accorded the status
or given the tax treatment described below. While the Code authorizes the
Treasury Department to issue regulations providing relief upon an inadvertent
termination of the status of a trust fund as a REMIC, no regulations have been
issued. Any relief, moreover, may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC's income for
the period in which the requirements for REMIC status are not satisfied.
Assuming compliance with all provisions of the related pooling and servicing
agreement, each trust fund that elects REMIC status will qualify as a REMIC,
and the related certificates will be considered to be (1) Regular Certificates
or (2) Residual Certificates. The related prospectus supplement for each
series of certificates will indicate whether the trust fund will make a REMIC
election and whether a class of certificates will be treated as a regular or
residual interest in the REMIC. With respect to each trust fund for which a
REMIC election is to be made, Brown & Wood LLP will issue an opinion
confirming the conclusions expressed above concerning the status of the trust
fund as a REMIC and the status of the certificates as representing regular or
residual interests in a REMIC.
In general, with respect to each series of certificates for which a
REMIC election is made, certificates held by a thrift institution taxed as a
"domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code Section
856(c)(4)(A); and interest on certificates held by a real estate investment
trust will be considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B). If less than 95% of
the REMIC's assets are assets qualifying under any of these Code sections, the
certificates will be qualifying assets only to the extent that the REMIC's
assets are qualifying assets. In addition, payments on mortgage loans held
pending distribution on the REMIC certificates will be considered to be real
estate assets for purposes of Code Section 856(c).
In some instances the mortgage loans may not be treated entirely as
assets described in the foregoing sections. See, in this regard, the
discussion of buydown loans contained in "--Non-REMIC Certificates--Single
Class of Certificates". REMIC certificates held by a real estate investment
trust will not constitute "Government Securities" within the meaning of Code
Section 856(c)(4)(A), and REMIC certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of Code
Section 851(b)(4)(A)(ii). REMIC certificates held by some financial
institutions will constitute "evidences of indebtedness" within the meaning of
Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation,
including certificates of participation in an obligation, that is principally
secured by an interest in real property and that is transferred to the REMIC
within a prescribed time period in exchange for regular or residual interests
in the REMIC. The REMIC regulations provide that manufactured housing or
mobile homes, not including recreational vehicles, campers or similar
vehicles, that are "single family residences" under Code Section 25(e)(10)
will qualify as real property without regard to state law classifications.
Under Code Section 25(e)(10), a single family residence includes any
manufactured home that has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches and that is of a kind customarily used
at a fixed location.
Tiered REMIC Structures. For some series of certificates, two or more
separate elections may be made to treat designated portions of the related
trust fund as REMICs for federal income tax purposes. Upon the issuance of
these series of certificates, assuming compliance with all provisions of the
related pooling and servicing agreement, the master REMIC as well as each
subsidiary REMIC will each qualify as a REMIC, and the REMIC certificates
issued by the master REMIC and each subsidiary REMIC, respectively, will be
considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC provisions.
With respect to each trust fund for which more than one REMIC election is to
be made, Brown & Wood LLP will issue an opinion confirming the conclusions
expressed above concerning the status of the master REMIC and each subsidiary
REMIC as a REMIC and the status of the certificates as regular or residual
interests in a REMIC.
Only REMIC certificates, other than the residual interest in any
subsidiary REMIC, issued by the master REMIC will be offered under this
prospectus. All subsidiary REMICs and the master REMIC will be treated as one
REMIC solely for purposes of determining whether the REMIC certificates will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code; "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code; and whether the income on the certificates is
interest described in Section 856(c)(3)(B) of the Code.
a. Regular Certificates
General. Except as otherwise stated in this discussion, Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, holders of Regular Certificates that otherwise report
income under a cash method of accounting will be required to report income
with respect to Regular Certificates under an accrual method.
Original Issue Discount and Premium. The Regular Certificates may be
issued with OID. Generally, OID, if any, will equal the difference between the
"stated redemption price at maturity" of a Regular Certificate and its "issue
price". Holders of any class of certificates issued with OID will be required
to include OID in gross income for federal income tax purposes as it accrues,
in accordance with a constant interest method based on the compounding of
interest as it accrues rather than in accordance with receipt of the interest
payments. The following discussion is based in part on the OID regulations and
in part on the provisions of the 1986 Act. The OID regulations generally are
effective for debt instruments issued on or after April 4, 1994. Regular
Certificateholders should be aware, however, that the OID regulations do not
adequately address some of the issues relevant to prepayable securities, such
as the Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273
and 1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the Regular Certificates and prescribe a method for
adjusting the amount and rate of accrual of the discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The legislative
history of the 1986 Act discussed above provides, however, that Congress
intended the regulations to require that the Prepayment Assumption be the
prepayment assumption that is used in determining the initial offering price
of the Regular Certificates. The prospectus supplement for each series of
Regular Certificates will specify the Prepayment Assumption to be used for the
purpose of determining the amount and rate of accrual of OID. No
representation is made that the Regular Certificates will prepay at the
Prepayment Assumption or at any other rate.
The IRS issued final regulations in June 1996 governing the
calculation of OID on instruments having contingent interest payments. These
regulations specifically do not apply for purposes of calculating OID on debt
instruments subject to Code Section 1272(a)(6), such as the Regular
Certificates. Additionally, the OID regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6). The trustee intends to base
its computations on Code Section 1272(a)(6) and the OID regulations as
described in this prospectus. However, because no regulatory guidance
currently exists under Code Section 1272(a)(6), there can be no assurance that
this methodology represents the correct manner of calculating OID.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its issue price. The issue price of
a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public, excluding
bond houses, brokers, underwriters or wholesalers. The issue price of a
Regular Certificate also includes the amount paid by an initial
certificateholder for accrued interest that relates to a period before the
issue date of the Regular Certificate. The stated redemption price at maturity
of a Regular Certificate includes the original principal amount of the Regular
Certificate, but generally will not include distributions of interest that
constitute "qualified stated interest". Qualified stated interest generally
means interest unconditionally payable at intervals of one year or less at a
single fixed rate or qualified variable rate, as described below, during the
entire term of the Regular Certificate. Interest is payable at a single fixed
rate only if the rate appropriately takes into account the length of the
interval between payments. Distributions of interest on Regular Certificates
with respect to which deferred interest will accrue will not constitute
qualified stated interest payments, and the stated redemption price at
maturity of the Regular Certificates includes all distributions of interest as
well as principal thereon.
Where the interval between the issue date and the first distribution
date on a Regular Certificate is longer than the interval between subsequent
distribution dates, the greater of any original issue discount disregarding
the rate in the first period and any interest foregone during the first period
is treated as the amount by which the stated redemption price of the
certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID regulations suggest that all or a portion of the
interest on a long first period Regular Certificate that is issued with non-de
minimis OID will be treated as OID. Where the interval between the issue date
and the first distribution date on a Regular Certificate is shorter than the
interval between subsequent distribution dates, interest due on the first
distribution date in excess of the amount that accrued during the first period
would be added to the certificates stated redemption price at maturity.
Regular Certificateholders should consult their own tax advisors to determine
the issue price and stated redemption price at maturity of a Regular
Certificate. Additionally, it is possible that the IRS could assert that the
stated pass-through rate of interest on the Regular Certificates is not
unconditionally payable because late payments or nonpayments on the mortgage
loans are not penalized nor are there reasonable remedies in place to compel
payment on the mortgage loans. That position, if successful, would require all
holders of Regular Certificates to accrue income on the certificates under the
OID regulations.
Under the de minimis rule, OID on a Regular Certificate will be
considered to be zero if it is less than 0.25% of the stated redemption price
at maturity of the Regular Certificate multiplied by the weighted average
maturity of the Regular Certificate. For this purpose, the weighted average
maturity of the Regular Certificate is computed as the sum of the amounts
determined by multiplying the number of full years, i.e., rounding down
partial years, from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Certificate and the denominator of
which is the stated redemption price at maturity of the Regular Certificate.
Although currently unclear, it appears that the schedule of these
distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a series of Regular
Certificates will be set forth in the related prospectus supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and income will be capital gain if the Regular Certificate is held
as a capital asset. However, accrual method holders may elect to accrue all de
minimis OID as well as market discount under a constant interest method.
The prospectus supplement with respect to a trust fund may provide
for Regular Certificates to be issued at prices significantly exceeding their
principal amounts or based on notional principal balances. The income tax
treatment of these super-premium certificates is not entirely certain. For
information reporting purposes, the trust fund intends to take the position
that the stated redemption price at maturity of super-premium certificates is
the sum of all payments to be made on these Regular Certificates determined
under the Prepayment Assumption, with the result that these Regular
Certificates would be issued with OID. The calculation of income in this
manner could result in negative original issue discount, which delays future
accruals of OID rather than being immediately deductible, when prepayments on
the mortgage loans exceed those estimated under the Prepayment Assumption. As
discussed above, the contingent regulations mentioned above specifically do
not apply to prepayable debt instruments subject to Code Section 1272(a)(6),
such as the Regular Certificates. However, if the super-premium certificates
were treated as contingent payment obligations, it is unclear how holders of
those certificates would report income or recover their basis. In the
alternative, the IRS could assert that the stated redemption price at maturity
of super-premium certificates should be limited to their principal amount,
subject to the discussion under "--Accrued Interest Certificates", so that
the Regular Certificates would be considered for federal income tax purposes
to be issued at a premium. If this position were to prevail, the rules
described under "--Regular Certificates--Premium" would apply. It is
unclear when a loss may be claimed for any unrecovered basis for a
super-premium certificate. It is possible that a holder of a super-premium
certificate may only claim a loss when its remaining basis exceeds the maximum
amount of future payments, assuming no further prepayments or when the final
payment is received with respect to the super-premium certificate. Absent
further guidance, the trustee intends to treat the super-premium certificates
as described in this prospectus.
Under the REMIC regulations, if the issue price of a Regular
Certificate, other than those based on a notional amount, does not exceed 125%
of its actual principal amount, the interest rate is not considered
disproportionately high. Accordingly, the Regular Certificate generally should
not be treated as a super-premium certificate and the rules described under
"--Regular Certificates--Premium" should apply. However, it is
possible that certificates issued at a premium, even if the premium is less
than 25% of the certificate's actual principal balance, will be required to
amortize the premium under an original issue discount method or contingent
interest method even though no election under Code section 171 is made to
amortize the premium.
Generally, a Regular Certificateholder must include in gross income
the "daily portions", as determined below, of the OID that accrues on a
Regular Certificate for each day a certificateholder holds the Regular
Certificate, including the purchase date but excluding the disposition date.
The daily portions of OID are determined by allocating to each day in an
accrual period the ratable portion of OID allocable to the accrual period.
Accrual periods may be of any length and may vary in length over the term of
the Regular Certificates, provided that each accrual period is not longer than
one year, begins or ends on a distribution date, except for the first accrual
period which begins on the issue date, and begins on the day after the
preceding accrual period ends. This will be done, in the case of each full
accrual period, by:
o adding:
o the present value at the end of the accrual period, determined by
using as a discount factor the original yield to maturity of the
Regular Certificates as calculated under the Prepayment
Assumption, of all remaining payments to be received on the
Regular Certificates under the Prepayment Assumption, and
o any payments included in the stated redemption price at maturity
received during the same accrual period, and
o subtracting from that total the adjusted issue price of the
Regular Certificates at the beginning of the same accrual period.
The adjusted issue price of a Regular Certificate at the beginning of
the first accrual period is its issue price. The adjusted issue price of a
Regular Certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period and reduced by
the amount of any payment other than a payment of qualified stated interest
made at the end of or during that accrual period. The OID accrued during an
accrual period will then be divided by the number of days in the period to
determine the daily portion of OID for each day in the accrual period. The
calculation of OID under the method described above will cause the accrual of
OID to either increase or decrease, but never below zero, in a given accrual
period to reflect the fact that prepayments are occurring faster or slower
than under the Prepayment Assumption. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of OID may be
determined according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a Regular Certificate issued with OID who
purchases the Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that Regular Certificate. In computing
the daily portions of OID for a subsequent purchaser of a Regular Certificate,
as well as an initial purchaser that purchases at a price higher than the
adjusted issue price but less than the stated redemption price at maturity,
however, the daily portion is reduced by the amount that would be the daily
portion for the day, computed in accordance with the rules set forth above,
multiplied by a fraction, the numerator of which is the amount, if any, by
which the price paid by the holder for that Regular Certificate exceeds the
following amount:
o the sum of the issue price plus the aggregate amount of OID that
would have been includable in the gross income of an original
Regular Certificateholder who purchased the Regular Certificate at
its issue price, less
o any prior payments included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily
portions for that Regular Certificate for all days beginning on
the date after the purchase date and ending on the maturity date
computed under the Prepayment Assumption.
A holder who pays an acquisition premium instead may elect to accrue OID by
treating the purchase as a purchase at original issue.
Variable Rate Regular Certificates. Regular Certificates may provide
for interest based on a variable rate. Interest is treated as payable at a
variable rate and not as contingent interest if, generally, the issue price
does not exceed the original principal balance by more than a specified amount
and the interest compounds or is payable at least annually at current values
of particular objective rates matured by or based on lending rates for newly
borrowed funds. For a debt instrument issued after August 13, 1996, an
objective rate is a rate, other than a qualified floating rate, that is
determined using a single fixed formula and that is based on objective
financial or economic information. The variable interest generally will be
qualified stated interest to the extent it is unconditionally payable at least
annually and, to the extent successive variable rates are used, interest is
not significantly accelerated or deferred.
The amount of OID with respect to a Regular Certificate bearing a
variable rate of interest will accrue in the manner described under
"--Original Issue Discount and Premium" by assuming generally that the
index used for the variable rate will remain fixed throughout the term of the
certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on mortgage loans as variable rate certificates. In this case,
the weighted average rate used to compute the initial pass-through rate on the
Regular Certificates will be deemed to be the index in effect through the life
of the Regular Certificates. It is possible, however, that the IRS may treat
some or all of the interest on Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for
contingent payments. This treatment may effect the timing of income accruals
on the Regular Certificates. Additionally, if some or all of the mortgage
loans are subject to "teaser rates", i.e., the initial rates on the mortgage
loans are less than subsequent rates on the mortgage loans, the interest paid
on some or all of the Regular Certificates may be subject to accrual using a
constant yield method notwithstanding the fact that these certificates may not
have been issued with "true" non-de minimis original issue discount.
Election to Treat All Interest as OID. The OID regulations permit a
certificateholder to elect to accrue all interest, discount, including de
minimis market or original issue discount, and premium in income as interest,
based on a constant yield method for certificates acquired on or after April
4, 1994. If this election were to be made with respect to a Regular
Certificate with market discount, a certificateholder would be deemed to have
made an election to include in income currently market discount with respect
to all other debt instruments having market discount that the
certificateholder acquires during the year of the election or future years.
Similarly, a certificateholder that makes this election for a certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that the certificateholder owns or acquires. See "--Regular
Certificates--Premium". The election to accrue interest, discount and
premium on a constant yield method with respect to a certificate cannot be
revoked without the consent of the IRS.
Market Discount. A purchaser of a Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID regulations, "market discount" equals the
excess, if any, of a Regular Certificate's stated principal amount or, in the
case of a Regular Certificate with OID, the adjusted issue price, determined
for this purpose as if the purchaser had purchased the Regular Certificate
from an original holder, over the price for the Regular Certificate paid by
the purchaser. A certificateholder that purchases a Regular Certificate at a
market discount will recognize income upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code a holder generally will be required to allocate each principal
distribution first to accrued market discount not previously included in
income, and to recognize ordinary income to that extent. A certificateholder
may elect to include market discount in income currently as it accrues rather
than including it on a deferred basis in accordance with the foregoing. If
made, the election will apply to all market discount bonds acquired by the
electing certificateholder on or after the first day of the first taxable year
to which the election applies.
Market discount with respect to a Regular Certificate will be
considered to be zero if the amount allocable to the Regular Certificate is
less than 0.25% of the Regular Certificate's stated redemption price at
maturity multiplied by the Regular Certificate's weighted average maturity
remaining after the date of purchase. If market discount on a Regular
Certificate is considered to be zero under this rule, the actual amount of
market discount must be allocated to the remaining principal payments on the
Regular Certificate, and gain equal to the allocated amount will be recognized
when the corresponding principal payment is made. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors should consult their own tax advisors regarding the application of
these rules and the advisability of making any of the elections allowed under
Code Sections 1276 through 1278.
The Code provides that any principal payment, whether a scheduled
payment or a prepayment, or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of the payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until regulations are issued by the Treasury, rules described in the
legislative history of the 1986 Act discussed above will apply. Under those
rules, the holder of a market discount bond may elect to accrue market
discount either on the basis of a constant interest rate or according to one
of the following methods. For Regular Certificates issued with OID, the amount
of market discount that accrues during a period is equal to the product of the
total remaining market discount and a fraction, the numerator of which is the
OID accruing during the period and the denominator of which is the total
remaining OID at the beginning of the period. For Regular Certificates issued
without OID, the amount of market discount that accrues during a period is
equal to the product of the total remaining market discount and a fraction,
the numerator of which is the amount of stated interest paid during the
accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the period. For purposes of
calculating market discount under any of the above methods in the case of
instruments, such as the Regular Certificates, that provide for payments that
may be accelerated due to prepayments of other obligations securing the
instruments, the same Prepayment Assumption applicable to calculating the
accrual of OID will apply.
A holder of a Regular Certificate that acquires the Regular
Certificate at a market discount also may be required to defer, until the
maturity date of the Regular Certificate or its earlier disposition in a
taxable transaction, the deduction of a portion of the amount of interest that
the holder paid or accrued during the taxable year on indebtedness incurred or
maintained to purchase or carry the Regular Certificate in excess of the
aggregate amount of interest, including OID, includable in the holder's gross
income for the taxable year with respect to the Regular Certificate. The
amount of the net interest expense deferred in a taxable year may not exceed
the amount of market discount accrued on the Regular Certificate for the days
during the taxable year on which the holder held the Regular Certificate and,
in general, would be deductible when the market discount is includable in
income. The amount of any remaining deferred deduction is to be taken into
account in the taxable year in which the Regular Certificate matures or is
disposed of in a taxable transaction. In the case of a disposition in which
gain or loss is not recognized in whole or in part, any remaining deferred
deduction will be allowed to the extent of gain recognized on the disposition.
This deferral rule does not apply if the Regular Certificateholder elects to
include the market discount in income currently as it accrues on all market
discount obligations acquired by the Regular Certificateholder in that taxable
year or future years.
Premium. A purchaser of a Regular Certificate that purchases the
Regular Certificate at a cost, not including accrued qualified stated
interest, greater than its remaining stated redemption price at maturity will
be considered to have purchased the Regular Certificate at a premium and may
elect to amortize the premium under a constant yield method. It is not clear
whether the Prepayment Assumption would be taken into account in determining
the life of the Regular Certificate for this purpose. The Amortizable Bond
Premium Regulations described above specifically do not apply to prepayable
debt instruments subject to Code Section 1272(a)(6) such as the Regular
Certificates. Absent further guidance from the IRS, the trustee intends to
account for amortizable bond premium in the manner described in this
prospectus. However, the legislative history of the 1986 Act discussed above
states that the same rules that apply to accrual of market discount, which
rules require use of a Prepayment Assumption in accruing market discount with
respect to Regular Certificates without regard to whether the certificates
have OID, will also apply in amortizing bond premium under Code Section 171.
The Code provides that amortizable bond premium will be allocated among the
interest payments on the Regular Certificates and will be applied as an offset
against the interest payment. Prospective purchasers of the Regular
Certificates should consult their tax advisors regarding the possible
application of the Amortizable Bond Premium Regulations.
On December 30, 1997, the IRS issued final Amortizable Bond Premium
Regulations. These regulations specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6). Absent further guidance from
the IRS, the trustee intends to account for amortizable bond premium in the
manner described above. Prospective purchasers of the certificates should
consult their tax advisors regarding the possible application of the
Amortizable Bond Premium Regulations.
Deferred Interest. Some of Regular Certificates will provide for the
accrual of deferred interest with respect to one or more ARM Loans. Any
deferred interest that accrues with respect to a class of Regular Certificates
will constitute income to the holders of the certificates before the time
distributions of cash with respect to the deferred interest are made. It is
unclear, under the OID regulations, whether any of the interest on the
certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on the certificates must be included in the
stated redemption price at maturity of the certificates and accounted for as
OID, which could accelerate the inclusion. Interest on Regular Certificates
must in any event be accounted for under an accrual method by the holders of
the certificates and, therefore, applying the latter analysis may result only
in a slight difference in the timing of the inclusion in income of interest on
the Regular Certificates.
Effects of Defaults and Delinquencies. Some series of certificates
may contain one or more classes of subordinated certificates, and in the event
there are defaults or delinquencies on the mortgage loans, amounts that would
otherwise be distributed on the subordinated certificates may instead be
distributed on the certificates. Subordinated certificateholders nevertheless
will be required to report income with respect to their certificates under an
accrual method without giving effect to delays and reductions in distributions
on the subordinated certificates attributable to defaults and delinquencies on
the mortgage loans, except to the extent that it can be established that the
amounts are uncollectible. As a result, the amount of income reported by a
subordinated certificateholder in any period could significantly exceed the
amount of cash distributed to the holder in that period. The holder will
eventually be allowed a loss, or will be allowed to report a lesser amount of
income, to the extent that the aggregate amount of distributions on the
subordinated certificate is reduced as a result of defaults and delinquencies
on the mortgage loans. However, the timing and characterization of any losses
or reductions in income are uncertain, and, accordingly, subordinated
certificateholders are urged to consult their own tax advisors on this point.
Sale, Exchange or Redemption. If a Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale, exchange,
redemption, or retirement and the seller's adjusted basis in the Regular
Certificate. The adjusted basis generally will equal the cost of the Regular
Certificate to the seller, increased by any OID and market discount included
in the seller's gross income with respect to the Regular Certificate, and
reduced, but not below zero, by payments included in the stated redemption
price at maturity previously received by the seller and by any amortized
premium. Similarly, a holder who receives a payment that is part of the stated
redemption price at maturity of a Regular Certificate will recognize gain
equal to the excess, if any, of the amount of the payment over the holder's
adjusted basis in the Regular Certificate. A Regular Certificateholder who
receives a final payment that is less than the holder's adjusted basis in the
Regular Certificate will generally recognize a loss. Except as provided in the
following paragraph and as provided under "Market Discount", any gain or loss
will be capital gain or loss, provided that the Regular Certificate is held as
a "capital asset", generally, property held for investment, within the meaning
of Code Section 1221.
Gain from the sale or other disposition of a Regular Certificate that
might otherwise be capital gain will be treated as ordinary income to the
extent that the gain does not exceed the excess, if any, of the amount that
would have been includable in the holder's income with respect to the Regular
Certificate had income accrued on it at a rate equal to 110% of the AFR as
defined in Code Section 1274(d) determined as of the date of purchase of the
Regular Certificate, over the amount actually includable in the holder's
income.
The Regular Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from
the sale of a Regular Certificate by a bank or a thrift institution to which
this section applies will be ordinary income or loss.
The Regular Certificate information reports will include a statement
of the adjusted issue price of the Regular Certificate at the beginning of
each accrual period. In addition, the reports will include information
necessary to compute the accrual of any market discount that may arise upon
secondary trading of Regular Certificates. Because exact computation of the
accrual of market discount on a constant yield method would require
information relating to the holder's purchase price which the REMIC may not
have, it appears that the information reports will only require information
pertaining to the appropriate proportionate method of accruing market
discount.
Accrued Interest Certificates. Some of the Regular Certificates may
provide for payments of interest based on a period that corresponds to the
interval between distribution dates but that ends before each distribution
date. The period between the closing date for these payment lag certificates
and their first distribution date may or may not exceed that interval.
Purchasers of payment lag certificates for which the period between the
closing date and the first distribution date does not exceed that interval
could pay upon purchase of the Regular Certificates accrued interest in excess
of the accrued interest that would be paid if the interest paid on the
distribution date were interest accrued from distribution date to distribution
date. If a portion of the initial purchase price of a Regular Certificate is
allocable to interest that has accrued before the issue date and the Regular
Certificate provides for a payment of stated interest on the first payment
date, and the first payment date is within one year of the issue date, that
equals or exceeds the amount of the pre-issuance accrued interest, then the
Regular Certificates issue price may be computed by subtracting from the issue
price the amount of pre-issuance accrued interest, rather than as an amount
payable on the Regular Certificate. However, it is unclear under this method
how the OID regulations treat interest on payment lag certificates. Therefore,
in the case of a payment lag certificate, the trust fund intends to include
accrued interest in the issue price and report interest payments made on the
first distribution date as interest to the extent the payments represent
interest for the number of days that the certificateholder has held the
payment lag certificate during the first accrual period.
Investors are encouraged to consult their own tax advisors concerning
the treatment for federal income tax purposes of payment lag certificates.
Non-Interest Expenses of the REMIC. Under the temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC", a
portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to those Regular
Certificateholders that are "pass-through interest holders".
Certificateholders that are pass-through interest holders should consult their
own tax advisors about the impact of these rules on an investment in the
Regular Certificates. See "Pass-Through of Non-Interest Expenses of the REMIC
under Residual Certificates".
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of Regular Certificates that are corporations should in general
be allowed to deduct as an ordinary loss any loss sustained during the taxable
year on account of the certificates becoming wholly or partially worthless,
and that, in general, holders of certificates that are not corporations should
be allowed to deduct as a short-term capital loss any loss sustained during
the taxable year on account of the certificates becoming wholly worthless.
Although the matter is unclear, non-corporate holders of certificates may be
allowed a bad debt deduction at the time that the principal balance of a
certificate is reduced to reflect realized losses resulting from any
liquidated mortgage loans. The Internal Revenue Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction
to reflect realized losses only after all mortgage loans remaining in the
related trust fund have been liquidated or the certificates of the related
series have been otherwise retired. Potential investors and certificateholders
are urged to consult their own tax advisors regarding the appropriate timing,
amount and character of any loss sustained with respect to their certificates,
including any loss resulting from the failure to recover previously accrued
interest or discount income.
Non-U.S. Persons. Generally, payments of interest, including any
payment with respect to accrued OID, on the Regular Certificates to a Regular
Certificateholder who is not a U.S. Person and is not engaged in a trade or
business within the United States will not be subject to federal withholding
tax if the Regular Certificateholder complies with particular identification
requirements, including delivery of a statement, signed by the Regular
Certificateholder under penalties of certifying that the Regular
Certificateholder is a foreign person and providing the name and address of
the Regular Certificateholder. If a Regular Certificateholder is not exempt
from withholding, distributions of interest, including distributions in
respect of accrued OID, the holder may be subject to a 30% withholding tax
which may be reduced under any applicable tax treaty.
Further, it appears that a Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals are encouraged to consult their tax advisors concerning this
question.
It is recommended that Regular Certificateholders who are not U.S.
Persons and persons related to them not acquire any Residual Certificates, and
Residual Certificateholders and persons related to Residual Certificateholders
not acquire any Regular Certificates without consulting their tax advisors as
to the possible adverse tax consequences of doing so.
As previously mentioned, the new withholding regulations were
published in the Federal Register on October 14, 1997 and generally will be
effective for payments made after December 31, 1999, subject to a number of
transition rules. The discussion set forth above does not take the new
withholding regulations into account. Prospective non-U.S. Persons who own
Regular Certificates are urged to consult their own tax advisor with respect
to the new withholding regulations.
Information Reporting and Backup Withholding. The master servicer
will furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a Regular Certificateholder at any time
during the year, any information deemed appropriate to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make the information available to beneficial owners or financial
intermediaries that hold the Regular Certificates on behalf of beneficial
owners. If a holder, beneficial owner, financial intermediary or other
recipient of a payment on behalf of a beneficial owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that the person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and
withheld from a distribution to a recipient would be allowed as a credit
against a recipient's federal income tax liability. In addition, prospective
investors are encouraged to consult their tax advisors with respect to the new
withholding regulations.
b. Residual Certificates
Allocation of the Income of the REMIC to the Residual Certificates.
The REMIC will not be subject to federal income tax except with respect to
income from prohibited transactions and some other transactions. See
"--Prohibited Transactions and Other Taxes". Instead, each original holder
of a Residual Certificate will report on its federal income tax return, as
ordinary income, its share of the taxable income of the REMIC for each day
during the taxable year on which it owns any Residual Certificates. The
taxable income of the REMIC for each day will be determined by allocating the
taxable income of the REMIC for each calendar quarter ratably to each day in
the quarter. An original holder's share of the taxable income of the REMIC for
each day will be based on the portion of the outstanding Residual Certificates
that the holder owns on that day. The taxable income of the REMIC will be
determined under an accrual method and will be taxable to the holders of
Residual Certificates without regard to the timing or amounts of cash
distributions by the REMIC. Ordinary income derived from Residual Certificates
will be "portfolio income" for purposes of the taxation of taxpayers subject
to the limitations on the deductibility of "passive losses". As residual
interests, the Residual Certificates will be subject to tax rules, described
below, that differ from those that would apply if the Residual Certificates
were treated for federal income tax purposes as direct ownership interests in
the certificates or as debt instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable
income from the Residual Certificate in excess of the cash distributed. For
example, a structure where principal distributions are made serially on
regular interests, that is, a fast-pay, slow-pay structure, may generate that
sort of mismatching of income and cash distributions, that is, "phantom
income". This mismatching may be caused by the use of required tax accounting
methods by the REMIC, variations in the prepayment rate of the underlying
mortgage loans and other factors. Depending upon the structure of a particular
transaction, these factors may significantly reduce the after-tax yield of a
Residual Certificate to a Residual Certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a
Residual Certificate and the impact of the tax treatment on the after-tax
yield of a Residual Certificate.
A subsequent Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that the Residual Certificateholder owns the
Residual Certificate. Those daily amounts generally would equal the amounts
that would have been reported for the same days by an original Residual
Certificateholder, as described above. The legislative history of the 1986 Act
discussed above indicates that some of the adjustments may be appropriate to
reduce, or increase, the income of a subsequent holder of a Residual
Certificate that purchased the Residual Certificate at a price greater than or
less than the adjusted basis the Residual Certificate would have in the hands
of an original Residual Certificateholder. See "--Sale or Exchange of
Residual Certificates". It is not clear, however, whether these adjustments
will in fact be permitted or required and, if so, how they would be made. The
REMIC regulations do not provide for these adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of the income from the
mortgage loans and the REMIC's other assets and the deductions allowed to the
REMIC for interest and OID on the Regular Certificates and, except as
described under "--Regular Certificates--Non-Interest Expenses of the
REMIC", other expenses. REMIC taxable income is generally determined in the
same manner as the taxable income of an individual using the accrual method of
accounting, except that the limitations on deductibility of investment
interest expense and expenses for the production of income do not apply, all
bad loans will be deductible as business bad debts, and the limitation on the
deductibility of interest and expenses related to tax-exempt income is more
restrictive than with respect to individual. The REMIC's gross income includes
interest, original issue discount income, and market discount income, if any,
on the mortgage loans, as well as, income earned from temporary investments on
reverse assets, reduced by the amortization of any premium on the mortgage
loans. In addition, a Residual Certificateholder will recognize additional
income due to the allocation of realized losses to the Regular Certificates
due to defaults, delinquencies and realized losses on the mortgage loans. The
timing of the inclusion of the income by Residual Certificateholders may
differ from the time the actual loss is allocated to the Regular Certificates.
The REMIC's deductions include interest and original issue discount expense on
the Regular Certificates, servicing fees on the mortgage loans, other
administrative expenses of the REMIC and realized losses on the mortgage
loans. The requirement that Residual Certificateholders report their pro rata
share of taxable income or net loss of the REMIC will continue until there are
no certificates of any class of the related series outstanding.
For purposes of determining its taxable income, the REMIC will have
an initial aggregate tax basis in its assets equal to the sum of the issue
prices of the Regular Certificates and the Residual certificates or, if a
class of certificates is not sold initially, its fair market value. The
aggregate basis will be allocated among the mortgage loans and other assets of
the REMIC in proportion to their respective fair market value. A mortgage loan
will be deemed to have been acquired with discount or premium to the extent
that the REMIC's basis in it is less than or greater than its principal
balance, respectively. Any discount, whether market discount or OID, will be
includable in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to this income, under a method similar to the method
described above for accruing OID on the Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the
mortgage loans. Premium on any mortgage loan to which the election applies
would be amortized under a constant yield method. It is not clear whether the
yield of a mortgage loan would be calculated for this purpose based on
scheduled payments or taking account of the Prepayment Assumption.
Additionally, the election would not apply to the yield with respect to any
underlying mortgage loan originated on or before September 27, 1985. Instead,
premium with respect to that mortgage loan would be allocated among the
principal payments on it and would be deductible by the REMIC as those
payments become due.
The REMIC will be allowed a deduction for interest and OID on the
Regular Certificates. The amount and method of accrual of OID will be
calculated for this purpose in the same manner as described above with respect
to Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described there will not apply.
A Residual Certificateholder will not be permitted to amortize the
cost of the Residual Certificate as an offset to its share of the REMIC's
taxable income. However, that taxable income will not include cash received by
the REMIC that represents a recovery of the REMIC's basis in its assets, and,
as described above, the issue price of the Residual Certificates will be added
to the issue price of the Regular Certificates in determining the REMIC's
initial basis in its assets. See "--Sale or Exchange of Residual
Certificates". For a discussion of possible adjustments to income of a
subsequent holder of a Residual Certificate to reflect any difference between
the actual cost of the Residual Certificate to the holder and the adjusted
basis the Residual Certificate would have in the hands of an original Residual
Certificateholder, see "--Allocation of the Income of the REMIC to the
Residual Certificates".
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. The net loss
would be allocated among the Residual Certificateholders in the same manner as
the REMIC's taxable income. The net loss allocable to any Residual Certificate
will not be deductible by the holder to the extent that the net loss exceeds
the holder's adjusted basis in the Residual Certificate. Any net loss that is
not currently deductible due to this limitation may only be used by the
Residual Certificateholder to offset its share of the REMIC's taxable income
in future periods, but not otherwise. The ability of Residual
Certificateholders that are individuals or closely held corporations to deduct
net losses may be subject to additional limitations under the Code.
Mark to Market Rules. A Residual Certificate acquired after January
3, 1995 cannot be marked-to-market.
Pass-Through of Non-Interest Expenses of the REMIC. As a general
rule, all of the fees and expenses of a REMIC will be taken into account by
holders of the Residual Certificates. In the case of a single class REMIC,
however, the expenses and a matching amount of additional income will be
allocated, under temporary Treasury regulations, among the Regular
Certificateholders and the Residual Certificateholders on a daily basis in
proportion to the relative amounts of income accruing to each
certificateholder on that day. In general terms, a single class REMIC is one
that either would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC, treating all interests as ownership interests,
even if they would be classified as debt for federal income tax purposes, or
is similar to a grantor trust and is structured with the principal purpose of
avoiding the single class REMIC rules. The applicable prospectus supplement
may apportion expenses to the Regular Certificates but generally the expenses
of the REMIC will be allocated to holders of the related Residual Certificates
in their entirety and not to holders of the related Regular Certificates.
In the case of individuals, or trusts, estates or other persons that
compute their income in the same manner as individuals, who own an interest in
a Regular Certificate or a Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries, e.g., a partnership, an S
corporation or a grantor trust, the trust expenses will be deductible under
Code Section 67 only to the extent that those expenses, plus other
"miscellaneous itemized deductions" of the individual, exceed 2% of the
individual's adjusted gross income. In addition, Code Section 68 provides that
the amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds an applicable amount will be reduced by the
lesser of 3% of the excess of the individual's adjusted gross income over the
applicable amount or 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by Residual Certificateholders who are subject to the limitations
of either Code Section 67 or Code Section 68 may be substantial. Further,
holders, other than corporations, subject to the alternative minimum tax may
not deduct miscellaneous itemized deductions in determining their alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS the holder's allocable share, if any, of the
REMIC's non-interest expenses. The term "pass-through interest holder"
generally refers to individuals, entities taxed as individuals and some
pass-through entities, but does not include real estate investment trusts.
Residual Certificateholders that are pass-through interest holders are
encouraged to consult their own tax advisors about the impact of these rules
on an investment in the Residual Certificates.
Excess Inclusions. A portion of the income on a Residual Certificate,
referred to in the Code as an "excess inclusion", for any calendar quarter
generally will be subject to federal income tax in all events. Thus, for
example, an excess inclusion may not be offset by any unrelated losses,
deductions or loss carryovers of a Residual Certificateholder; will be treated
as "unrelated business taxable income" within the meaning of Code Section 512
if the Residual Certificateholder is a pension fund or any other organization
that is subject to tax only on its unrelated business taxable income, see
"--Tax-Exempt Investors"; and is not eligible for any reduction in the
rate of withholding tax in the case of a Residual Certificateholder that is a
foreign investor. See "--Non-U.S. Persons". An exception to the excess
inclusion rules that applied to thrifts holding particular residuals was
repealed by the Small Business Tax Act of 1996.
Except as discussed in the following paragraph, with respect to any
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of the income of the Residual Certificateholder for that
calendar quarter from its Residual Certificate over the sum of the "daily
accruals" for all days during the calendar quarter on which the Residual
Certificateholder holds the Residual Certificate. For this purpose, the daily
accruals with respect to a Residual Certificate are determined by allocating
to each day in the calendar quarter its ratable portion of the product of the
"adjusted issue price" of the Residual Certificate at the beginning of the
calendar quarter and 120 percent of the "Federal long-term rate" in effect at
the time the Residual Certificate is issued. For this purpose, the "adjusted
issue price" of a Residual Certificate at the beginning of any calendar
quarter equals the issue price of the Residual Certificate, increased by the
amount of daily accruals for all prior quarters, and decreased, but not below
zero, by the aggregate amount of payments made on the Residual Certificate
before the beginning of the same quarter. The "federal long-term rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
In the case of any Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to the Residual
Certificates, reduced, but not below zero, by the real estate investment trust
taxable income within the meaning of Code Section 857(b)(2), excluding any net
capital gain, will be allocated among the shareholders of the trust in
proportion to the dividends received by the shareholders from the trust, and
any amount so allocated will be treated as an excess inclusion with respect to
a Residual Certificate as if held directly by the shareholder. Regulated
investment companies, common trust funds and some cooperatives are subject to
similar rules.
Payments. Any distribution made on a Residual Certificate to a
Residual Certificateholder will be treated as a non-taxable return of capital
to the extent it does not exceed the Residual Certificateholder's adjusted
basis in the Residual Certificate. To the extent a distribution exceeds the
adjusted basis, it will be treated as gain from the sale of the Residual
Certificate.
Sale or Exchange of Residual Certificates. If a Residual Certificate
is sold or exchanged, the seller will generally recognize gain or loss equal
to the difference between the amount realized on the sale or exchange and its
adjusted basis in the Residual Certificate, except that the recognition of
loss may be limited under the "wash sale" rules. A holder's adjusted basis in
a Residual Certificate generally equals the cost of the Residual Certificate
to the Residual Certificateholder, increased by the taxable income of the
REMIC that was included in the income of the Residual Certificateholder with
respect to the Residual Certificate, and decreased, but not below zero, by the
net losses that have been allowed as deductions to the Residual
Certificateholder with respect to the Residual Certificate and by the
distributions received on it by the Residual Certificateholder. In general,
the gain or loss will be capital gain or loss provided the Residual
Certificate is held as a capital asset. However, Residual Certificates will be
"evidences of indebtedness" within the meaning of Code Section 582(c)(1), so
that gain or loss recognized from sale of a Residual Certificate by a bank or
thrift institution to which that section applies would be ordinary income or
loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a Residual Certificate reacquires the Residual Certificate, or
acquires any other Residual Certificate, any residual interest in another
REMIC or similar interest in a "taxable mortgage pool" as defined in Code
Section 7701(i) during the period beginning six months before, and ending six
months after, the date of the sale, the sale will be subject to the "wash
sale" rules of Code Section 1091. In that event, any loss realized by the
Residual Certificateholder on the sale will not be deductible, but, instead,
will increase the Residual Certificateholder's adjusted basis in the newly
acquired asset.
Prohibited Transactions and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" and prohibits deducting any loss with
respect to prohibited transactions. In general, subject to specified
exceptions, a prohibited transaction means the disposition of a mortgage loan,
the receipt of income from a source other than a mortgage loan or other
permitted investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the mortgage loans
for temporary investment pending distribution on the certificates. It is not
anticipated that the trust fund for any series of certificates will engage in
any prohibited transactions in which it would recognize a material amount of
net income.
In addition, some of the contributions to a trust fund as to which an
election has been made to treat the trust fund as a REMIC made after the day
on which the trust fund issues all of its interest could result in the
imposition of a tax on the trust fund equal to 100% of the value of the
contributed property. No trust fund for any series of certificates will accept
contributions that would subject it to this contributions tax.
In addition, a trust fund as to which an election has been made to
treat the trust fund as a REMIC may also be subject to federal income tax at
the highest corporate rate on "net income from foreclosure property",
determined by reference to the rules applicable to real estate investment
trusts. "Net income from foreclosure property" generally means income from
foreclosure property other than qualifying income for a real estate investment
trust.
Where any prohibited transactions tax, contributions tax, tax on net
income from foreclosure property or state or local income or franchise tax
that may be imposed on a REMIC relating to any series of certificates results
from:
o a breach of the related master servicer's, trustee's or seller's
obligations under the related pooling and servicing agreement for
the series, the tax will be borne by the master servicer, trustee
or seller, as the case may be, out of its own funds, or
o the seller's obligation to repurchase a mortgage loan, the tax
will be borne by the seller.
If the master servicer, trustee or seller, as the case may be, fails to pay or
is not required to pay the tax as provided above, the tax will be payable out
of the trust fund for the series and will result in a reduction in amounts
available to be distributed to the certificateholders of the series.
Liquidation and Termination
If the REMIC adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC's final tax return a date on which the adoption is
deemed to occur, and sells all of its assets, other than cash, within a 90-day
period beginning on that date, the REMIC will not be subject to any prohibited
transactions tax, provided that the REMIC credits or distributes in
liquidation all of the sale proceeds plus its cash, other than the amounts
retained to meet claims, to holders of Regular and Residual Certificates
within the 90-day period.
The REMIC will terminate shortly following the retirement of the
Regular Certificates. If a Residual Certificateholder's adjusted basis in the
Residual Certificate exceeds the amount of cash distributed to the Residual
Certificateholder in final liquidation of its interest, then it would appear
that the Residual Certificateholder would be entitled to a loss equal to the
amount of the excess. It is unclear whether the loss, if allowed, will be a
capital loss or an ordinary loss.
Administrative Matters
Solely for the purpose of the administrative provisions of the Code,
the REMIC generally will be treated as a partnership and the Residual
Certificateholders will be treated as the partners if there is more than one
holder of the Residual Certificate. Information will be furnished quarterly to
each Residual Certificateholder who held a Residual Certificate on any day in
the previous calendar quarter.
Each Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting
an administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a Residual Certificate
as a nominee for another person may be required to furnish the REMIC, in a
manner to be provided in Treasury regulations, with the name and address of
the person and other information.
Tax-Exempt Investors
Any Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of Code Section 512 will be subject to the
tax on that portion of the distributions received on a Residual Certificate
that is considered an excess inclusion. See "--Residual Certificates--
Excess Inclusions".
Non-U.S. Persons
Amounts paid to Residual Certificateholders who are not U.S. persons
--see "--Regular Certificates--Non-U.S. Persons" are treated as
interest for purposes of the 30%, or lower treaty rate, United States
withholding tax. Amounts distributed to holders of Residual Certificates
should qualify as "portfolio interest", subject to the conditions described in
"--Regular Certificates", but only to the extent that the underlying
mortgage loans were originated after July 18, 1984. Furthermore, the rate of
withholding on any income on a Residual Certificate that is excess inclusion
income will not be subject to reduction under any applicable tax treaties. See
"--Residual Certificates--Excess Inclusions". If the portfolio
interest exemption is unavailable, the amount will be subject to United States
withholding tax when paid or otherwise distributed, or when the Residual
Certificate is disposed of, under rules similar to those for withholding upon
disposition of debt instruments that have OID. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those
amounts be taken into account earlier than otherwise provided where necessary
to prevent avoidance of tax for example, where the Residual Certificates do
not have significant value. See "--Residual Certificates--Excess
Inclusions". If the amounts paid to Residual Certificateholders that are not
U.S. persons are effectively connected with their conduct of a trade or
business within the United States, the 30% or lower treaty rate withholding
will not apply. Instead, the amounts paid to the non-U.S. Person will be
subject to U.S. federal income taxation at regular graduated rates. For
special restrictions on the transfer of Residual Certificates, see
"--Tax-Related Restrictions on Transfers of Residual Certificates".
Tax-Related Restrictions on Transfers of Residual Certificates
Disqualified Organizations. An entity may not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that residual
interests in the entity are not held by "disqualified organizations". Further,
a tax is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization". The amount of the tax equals the product of an
amount as determined under the REMIC regulations equal to the present value of
the total anticipated "excess inclusions" with respect to the interest for
periods after the transfer and the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent, including a broker or other middleman, for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to it an affidavit that the transferee is not a
disqualified organization and, at the time of the transfer, the person does
not have actual knowledge that the affidavit is false. A "disqualified
organization" means the United States, any State, possession or political
subdivision of the United States, any foreign government, any international
organization or any agency or instrumentality of any of the foregoing
entities, provided that the term does not include an instrumentality if all
its activities are subject to tax and, except for Freddie Mac, a majority of
its board of directors is not selected by a governmental agency, any
organization, other than some farmers cooperatives, generally exempt from
federal income taxes unless the organization is subject to the tax on
"unrelated business taxable income" and a rural electric or telephone
cooperative.
A tax is imposed on a "pass-through entity" holding a residual
interest in a REMIC if at any time during the taxable year of the pass-through
entity a disqualified organization is the record holder of an interest in the
entity. The amount of the tax is equal to the product of the amount of excess
inclusions for the taxable year allocable to the interest held by the
disqualified organization and the highest marginal federal income tax rate
applicable to corporations. The pass-through entity otherwise liable for the
tax, for any period during which the disqualified organization is the record
holder of an interest in the entity, will be relieved of liability for the tax
if the record holder furnishes to the entity an affidavit that the record
holder is not a disqualified organization and, for the applicable period, the
pass-through entity does not have actual knowledge that the affidavit is
false. For this purpose, a "pass-through entity" means a regulated investment
company, real estate investment trust, or common trust fund; a partnership,
trust, or estate; and some cooperatives. Except as may be provided in Treasury
regulations not yet issued, any person holding an interest in a pass-through
entity as a nominee for another will, with respect to the interest, be treated
as a pass-through entity. The tax on pass-through entities is generally
effective for periods after March 31, 1988, except that in the case of
regulated investment companies, real estate investment trusts, common trust
funds and publicly-traded partnerships the tax shall apply only to taxable
years of the entities beginning after December 31, 1988. Under the Taxpayer
Relief Act of 1997, large partnerships, generally with 250 or more partners,
will be taxable on excess inclusion income as if all partners were
disqualified organizations.
To comply with these rules, the pooling and servicing agreement will
provide that no record or beneficial ownership interest in a Residual
Certificate may be purchased, transferred or sold, directly or indirectly,
without the express written consent of the master servicer. The master
servicer will grant consent to a proposed transfer only if it receives an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the Residual Certificate as a
nominee or agent for a disqualified organization and a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the Residual
Certificate.
Noneconomic Residual Certificates. The REMIC regulations disregard,
for federal income tax purposes, any transfer of a Noneconomic Residual
Certificate to a U.S. Person as defined in the following section of this
discussion, unless no significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. In general, the
definition of a U.S. Person is the same as provided under "Material Federal
Income Tax Consequences--Non-REMIC Certificates--Non-U.S. Persons",
except that entities or individuals that would otherwise be treated as
non-U.S. Persons, may be considered U.S. Persons for this purpose if their
income from the residual is subject to tax under Code Section 871(b) or Code
Section 882, income effectively connected with a U.S. trade or business. A
Noneconomic Residual Certificate is any Residual Certificate, including a
Residual Certificate with a positive value at issuance, unless, at the time of
transfer, taking into account the Prepayment Assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents, the present value of the expected future
distributions on the Residual Certificate at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs and the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. A
significant purpose to impede the assessment or collection of tax exists if
the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A transferor is presumed not to have that
knowledge if the transferor conducted a reasonable investigation of the
transferee and the transferee acknowledges to the transferor that the residual
interest may generate tax liabilities in excess of the cash flow and the
transferee represents that it intends to pay the taxes associated with the
residual interest as they become due. If a transfer of a Noneconomic Residual
Certificate is disregarded, the transferor would continue to be treated as the
owner of the Residual Certificate and would continue to be subject to tax on
its allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC regulations provide that the transfer of
a Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless the transferee's
income in respect of the Residual Certificate is effectively connected with
the conduct of a United States trade or business. A Residual Certificate is
deemed to have a tax avoidance potential unless, at the time of transfer, the
transferor reasonably expects that the REMIC will distribute to the transferee
amounts that will equal at least 30 percent of each excess inclusion, and that
the amounts will be distributed at or after the time the excess inclusion
accrues and not later than the end of the calendar year following the year of
accrual. If the non-U.S. Person transfers the Residual Certificate to a U.S.
Person, the transfer will be disregarded, and the foreign transferor will
continue to be treated as the owner, if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions. The
provisions in the REMIC regulations regarding transfers of Residual
Certificates that have tax avoidance potential to foreign persons are
effective for all transfers after June 30, 1992. The pooling and servicing
agreement will provide that no record or beneficial ownership interest in a
Residual Certificate may be transferred, directly or indirectly, to a non-U.S.
Person unless the person provides the trustee with a duly completed I.R.S.
Form 4224 and the trustee consents to the transfer in writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in Residual Certificates are encouraged to
consult their own tax advisors with respect to transfers of the Residual
Certificates and pass-through entities are encouraged to consult their own tax
advisors with respect to any tax which may be imposed on a pass-through
entity.
State Tax Considerations
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences", potential investors are encouraged
to consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the certificates. State and local income tax law
may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors are encouraged to
consult their own tax advisors with respect to the various tax consequences of
investments in the certificates.
ERISA Considerations
The following describes a number of considerations under ERISA and
the tax code, which apply only to certificates of a series that are not
divided into subclasses. If certificates are divided into subclasses, the
related prospectus supplement will contain information concerning
considerations relating to ERISA and the tax code that are applicable to them.
ERISA imposes requirements on employee benefit plans subject to ERISA
and the tax code imposes requirements on some other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which the
plans, accounts or arrangements are invested and on persons who bear specified
relationships to Plans or are fiduciaries with respect to Plans. Generally,
ERISA applies to investments made by Plans. Among other things, ERISA requires
that the assets of Plans be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority and discretion to manage and
control the assets of the Plans. ERISA also imposes duties on persons who are
fiduciaries of Plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of the Plan, subject to exceptions not here
relevant. Some employee benefit plans, such as governmental plans as defined
in ERISA Section 3(32) and, if no election has been made under Section 410(d)
of the tax code, church plans as defined in ERISA Section 3(33), are not
subject to ERISA requirements. Accordingly, assets of those plans may be
invested in certificates without regard to the described ERISA considerations,
subject to the provisions of applicable state law. However, any of those plans
that are qualified and exempt from taxation under tax code Sections 401(a) and
501(a) are subject to the prohibited transaction rules set forth in tax code
Section 503.
On November 13, 1986, the United States Department of Labor issued
final regulations concerning the definition of what constitutes the assets of
a Plan--Labor Reg. Section 2510.3-101. Under this regulation, the underlying
assets and properties of corporations, partnerships and some other entities in
which a Plan makes an "equity" investment could be deemed for purposes of
ERISA to be assets of the investing Plan in particular circumstances.
However, the regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of the Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered
security, as defined in Labor Reg. Section 2510.3-101, is a security that is
widely held, freely transferable and registered under the Securities Exchange
Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and the tax code prohibit a
broad range of transactions involving Plan assets of a Plan and Parties in
Interest with respect to the Plan and impose additional prohibitions where
Parties in Interest are fiduciaries with respect to the Plan. Because the
mortgage loans may be deemed Plan assets of each Plan that purchases
certificates, an investment in the certificates by a Plan might be a
prohibited transaction under ERISA Sections 406 and 407 and subject to an
excise tax under tax code Section 4975 unless a statutory, regulatory or
administrative exemption applies.
In Prohibited Transaction Exemption 83-1, the DOL exempted from
ERISA's prohibited transaction rules and from the excise tax imposed under tax
code Section 4975 specified transactions relating to the operation of
residential mortgage pool investment trusts and the purchase, sale and holding
of "mortgage pool pass-through certificates" in the initial issuance of the
certificates. PTE 83-1 permits, subject to particular conditions, transactions
that might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on single-family residential property, and the
acquisition and holding of mortgage pool pass-through certificates
representing an interest in those mortgage pools by Plans. If the general
conditions of PTE 83-1 are satisfied, investments by a Plan in Single Family
Certificates will be exempt from the prohibitions of ERISA Sections 406(a) and
407, relating generally to transactions with Parties in Interest who are not
fiduciaries, if the Plan purchases the Single Family Certificates at no more
than fair market value and will be exempt from the prohibitions of ERISA
Sections 406(b)(1) and (2), relating generally to transactions with
fiduciaries, if, in addition, the purchase is approved by an independent
fiduciary, no sales commission is paid to the pool sponsor, the Plan does not
purchase more than 25% of all Single Family Certificates and at least 50% of
all Single Family Certificates are purchased by persons independent of the
pool sponsor or pool trustee. PTE 83-1 does not provide an exemption for
transactions involving subordinated certificates. Accordingly, no transfer of
a subordinated certificate generally may be made to a Plan.
The discussion in this and the next paragraph applies only to Single
Family Certificates. The depositor believes that, for purposes of PTE 83-1,
the term "mortgage pass-through certificate" would include: (1) certificates
issued in a series consisting of only a single class of certificates and (2)
senior certificates issued in a series in which there is only one class of
senior certificates; provided, that the certificates in the case of clause
(1), or the senior certificates in the case of clause (2), evidence the
beneficial ownership of both a specified percentage of future interest
payments, greater than zero percent, and a specified percentage, greater than
zero percent, of future principal payments on the mortgage loans. It is not
clear whether a class of certificates that evidences the beneficial ownership
in a trust fund divided into mortgage loan groups, beneficial ownership of a
specified percentage of interest payments only or principal payments only, or
a notional amount of either principal or interest payments, or a class of
certificates entitled to receive payments of interest and principal on the
mortgage loans only after payments to other classes or after the occurrence of
specified events would be a "mortgage pass-through certificate" for purposes
of PTE 83-1.
PTE 83-1 sets forth three general conditions that must be satisfied
for any transaction to be eligible for exemption:
o the maintenance of a system of insurance or other protection for
the pooled mortgage loans and property securing the loans and for
indemnifying certificateholders against reductions in pass-through
payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the
principal balance of the largest covered pooled mortgage loan,
o the existence of a pool trustee who is not an affiliate of the
pool sponsor, and
o a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to not
more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool
sponsor to the mortgage pool.
The depositor believes that the first general condition referred to
above will be satisfied with respect to the certificates in a series issued
without a subordination feature, or the senior certificates only in a series
issued with a subordination feature, provided that the subordination and
reserve fund, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described in this prospectus --that
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above-- with respect to a
series of certificates is maintained in an amount not less than the greater of
one percent of the aggregate principal balance of the mortgage loans or the
principal balance of the largest mortgage loan. See "Description of the
Certificates". In the absence of a ruling that the system of insurance or
other protection with respect to a series of certificates satisfies the first
general condition referred to above, there can be no assurance that these
features will be so viewed by the DOL. The trustee will not be affiliated with
the depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Certificates must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the
availability of any other prohibited transaction exemptions. Each Plan
fiduciary should also determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the certificates
is appropriate for the Plan, taking into account the overall investment policy
of the Plan and the composition of the Plan's investment portfolio.
The DOL has granted to a number of underwriters Underwriter
Exemptions. While each Underwriter Exemption is an individual exemption
separately granted to a specific underwriter, the terms and conditions which
generally apply to the Underwriter Exemptions are substantially the following:
o 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,
o the rights and interest evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust fund,
o the certificates acquired by the Plan have received a rating at
the time of acquisition that is one of the three highest generic
rating categories from S&P, Moody's, Duff & Phelps or Fitch,
o the trustee is not an affiliate of any other member of the
Restricted Group,
o the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents
not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
seller pursuant to the assignment of the loans to the trust fund
represents not more than the fair market value of the loans; the
sum of all payments made to and retained by the master servicer
and any other servicer represents not more than reasonable
compensation for its services under the agreement pursuant to
which the loans are pooled and reimbursements of its reasonable
expenses in connection with providing those services, and
o the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the SEC under the
Securities Act of 1933, as amended.
The trust fund must also meet the following requirements:
o the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools,
o certificates in other investment pools must have been rated in one
of the three highest rating categories of S&P, Moody's, Fitch or
Duff & Phelps for at least one year before the Plan's acquisition
of certificates, and
o certificates evidencing interests in the other investment pools
must have been purchased by investors other than Plans for at
least one year before any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from
some self-dealing and conflict of interest prohibited transactions that may
occur when the Plan fiduciary causes a Plan to acquire certificates in a trust
holding receivables as to which the fiduciary or its affiliate is an obligor
provided that, among other requirements:
o 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,
o the fiduciary or its affiliate is an obligor with respect to 5% or
less of the fair market value of the obligations contained in the
trust,
o 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
o immediately after the acquisition, no more than 25% of the assets
of any Plan with respect to which the person is a fiduciary is
invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity.
The Underwriter Exemptions do not apply to Plans sponsored by any
member of the Restricted Group with respect to the related series.
On July 21, 1997, DOL published in the Federal Register an amendment
to the Underwriter Exemption, which extends exemptive relief to specified
mortgage-backed and asset-backed securities transactions using prefunded
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables supporting payments to
certificateholders, and having a value equal to no more than 25% of the total
principal amount of the certificates being offered by the trust, to be
transferred to the trust within a 90-day or three-month period following the
closing date, instead of requiring that all obligations be either identified
or transferred on or before the closing date. The relief is available when the
specified conditions are met.
The prospectus supplement for each series of certificates will
indicate the classes of certificates, if any, offered as to which it is
expected that an Underwriter Exemption will apply.
Any Plan fiduciary that proposes to cause a Plan to purchase
certificates is encouraged to consult with its counsel concerning the impact
of ERISA and the tax code, the applicability of PTE 83-1, the availability and
applicability of any Underwriter Exemption or any other exemptions from the
prohibited transaction provisions of ERISA and the tax code and the potential
consequences in their specific circumstances, before making the investment.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification an investment
in the certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Legal Investment
The prospectus supplement for each series of certificates will
specify which, if any, of the classes of certificates offered by it will
constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984. Classes of certificates that qualify
as "mortgage related securities" will be legal investments for those investors
whose authorized investments are subject to state regulation, to the same
extent as, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States constitute legal investments for
them. Those investors are persons, trusts, corporations, partnerships,
associations, business trusts and business entities, including depository
institutions, life insurance companies and pension funds, created pursuant to
or existing under the laws of the United States or of any state, including the
District of Columbia and Puerto Rico. Under SMMEA, if a state enacts
legislation before October 4, 1991 specifically limiting the legal investment
authority of those entities with respect to "mortgage related securities", the
certificates will constitute legal investments for entities subject to the
legislation only to the extent provided in it. Approximately twenty-one states
adopted limiting legislation before the October 4, 1991 deadline.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or otherwise
deal in certificates without limitations as to the percentage of their assets
represented by them, federal credit unions may invest in mortgage related
securities, and national banks may purchase certificates for their own account
without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to
regulations that the applicable federal authority may prescribe. In this
connection, federal credit unions should review the National Credit Union
Administration Letter to Credit Unions No. 96, as modified by Letter to Credit
Unions No. 108, which includes guidelines to assist federal credit unions in
making investment decisions for mortgage related securities, and its
regulation "Investment and Deposit Activities" (12 C.F.R. Part 703), whether
or not the class of certificates under consideration for purchase constitutes
a "mortgage related security".
All depository institutions considering an investment in the
certificates, whether or not the class of certificates under consideration for
purchase constitutes a "mortgage related security", should review the Federal
Financial Institutions Examination Council's Supervisory Policy Statement on
Securities Activities to the extent adopted by their respective regulators,
setting forth, in relevant part, some securities trading and sales practices
deemed unsuitable for an institution's investment portfolio, and guidelines
for, and restrictions on, investing in mortgage derivative products, including
"mortgage related securities" that are "high-risk mortgage securities" as
defined in the policy statement. According to the policy statement, "high-risk
mortgage securities" include securities such as certificates not entitled to
distributions allocated to principal or interest, or subordinated
certificates. Under the policy statement, each depository institution must
determine, before purchase, and at stated intervals after purchase, whether a
particular mortgage derivative product is a "high-risk mortgage security", and
whether the purchase, or retention, of this product would be consistent with
the policy statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including "prudent
investor" provisions, percentage-of-assets limits and provisions that may
restrict or prohibit investment in securities that are not "interest bearing"
or "income paying".
There may be other restrictions on the ability of some investors,
including depository institutions, either to purchase certificates or to
purchase certificates representing more than a specified percentage of the
investor's assets. Investors are encouraged to consult their own legal
advisors in determining whether and to what extent the certificates constitute
legal investments for them.
Method of Distribution
Certificates are being offered by this prospectus and by the related
prospectus supplement in series from time to time, each series evidencing a
separate trust fund, through any of the following methods:
o by negotiated firm commitment underwriting and public reoffering
by underwriters,
o by agency placements through one or more placement agents
primarily with institutional investors and dealers, and
o by placement directly by the depositor with institutional
investors.
A prospectus supplement will be prepared for each series which will
describe the method of offering being used for that series and will set forth
the identity of any of its underwriters and either the price at which the
series is being offered, the nature and amount of any underwriting discounts
or additional compensation to the underwriters and the proceeds of the
offering to the depositor, or the method by which the price at which the
underwriters will sell the certificates will be determined. Each prospectus
supplement for an underwritten offering will also contain information
regarding the nature of the underwriters' obligations, any material
relationship between the depositor and any underwriter and, where appropriate,
information regarding any discounts or concessions to be allowed or reallowed
to dealers or others and any arrangements to stabilize the market for the
certificates so offered. In firm commitment underwritten offerings, the
underwriters will be obligated to purchase all of the certificates of the
series if any certificates are purchased. Certificates may be acquired by the
underwriters for their own accounts and may be resold from time to time in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale.
Underwriters and agents may be entitled under agreements entered into
with the depositor to indemnification by the depositor against particular
civil liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribution with respect to payments which the underwriters or
agents may be required to make in respect of those liabilities.
If a series is offered other than through underwriters, the
prospectus supplement relating to it will contain information regarding the
nature of the offering and any agreements to be entered into between the
depositor and purchasers of certificates of the series.
Legal Matters
The validity of the certificates, including federal income tax
consequences with respect to the certificates, will be passed upon for the
depositor by Brown & Wood LLP, San Francisco, California, and if specified in
the prospectus supplement, Randal D. Shields, Secretary of Fleet Mortgage
Securities Corp.
Financial Information
A new trust fund will be formed for each series of certificates and
no trust fund will engage in any business activities or have any assets or
obligations before the issuance of the related series of certificates.
Accordingly, no financial statements for any trust fund will be included in
this prospectus or in the related prospectus supplement.
Rating
It is a condition to the issuance of the certificates of each series
offered by this prospectus and by the prospectus supplement that they shall
have been rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies specified in the related
prospectus supplement.
Ratings on mortgage pass-through certificates address the likelihood
of receipt by certificateholders of all distributions on the underlying
mortgage loans. These ratings address the structural, legal and issuer-related
aspects associated with the certificates, the nature of the underlying
mortgage loans and the credit quality of the credit enhancer or guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by mortgagors or of the
degree by which the prepayments might differ from those originally
anticipated. As a result, certificateholders might suffer a lower than
anticipated yield, and, in addition, holders of stripped pass-through
certificates in extreme cases might fail to recoup their underlying
investments.
A 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.
Where You Can Find More Information
The depositor has filed with the SEC a Registration Statement under
the Securities Act of 1933, as amended, covering the certificates. This
prospectus, which forms a part of the Registration Statement, and the
prospectus supplement relating to each series of certificates, contain
summaries of the material terms of the documents referred to in this
prospectus and in the prospectus supplement, but do not contain all of the
information in the Registration Statement pursuant to the rules and
regulations of the SEC. For further information, reference is made to the
Registration Statement and its exhibits. You may inspect and obtain copies of,
at prescribed rates, the Registration Statement and exhibits at the public
reference facilities maintained by the SEC at its Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices
located as follows: Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661; and New York Regional Office, Seven World Trade Center, New
York, New York 10048. You may obtain information on the operation of the
Public Reference Room by calling the SEC a 1-800-SEC-0330. The SEC maintains
an Internet Web site that contains reports, information statements and other
information regarding the registrants that file electronically with the SEC,
including the depositor. The address of that Internet Web site is
http://www.sec.gov.
Incorporation of Certain Documents by Reference
The SEC allows information filed with it regarding the depositor or
each trust fund to be incorporated by reference into this prospectus. This
means that the depositor and each trust fund can disclose important
information to you by referring to those reports. Information filed with the
SEC that is incorporated by reference into this prospectus is considered part
of this prospectus and automatically updates and supersedes the information in
this prospectus and the related prospectus supplement. All documents filed
with the SEC by or on behalf of each trust fund before the termination of the
offering of certificates issued by that trust will be incorporated by
reference into this prospectus.
The trustee on behalf of any trust fund will provide without charge
to each person to whom this prospectus is delivered, on the person's written
or oral request, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this prospectus. However, the
trustee will not provide exhibits to the information that is incorporated by
reference unless the exhibits are specifically incorporated by reference into
the information that this prospectus incorporates. Requests should be directed
to the corporate trust office of the trustee specified in the accompanying
prospectus supplement. All reports filed with the SEC for each trust fund may
be obtained from the SEC's public reference facilities or through its web
site. See "Where You Can Find More Information" for information on where you
can obtain these reports.
<PAGE>
Glossary
"1986 Act" means the Tax Reform Act of 1986.
"ARM Loans" means mortgage loans other than mortgage loans with
interest to a certificate that adjust periodically.
"Code" means the Internal Revenue Code of 1986, as amended.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"MERS" means Merscorp, Inc. and/or Mortgage Electronic Registration
Systems, Inc..
"OID" means with respect to any certificate, "original issue
discount" under the Code with respect to the issuance of that security.
"Parties in Interest" means persons who bear specified relationships
to Plans.
"Plan" means employee benefit plans and other retirement plans and
arrangements, including, but not limited to, individual retirement accounts
and annuities, Keogh plans and collective investment funds and separate
accounts in which the plans, accounts or arrangements are invested, which have
requirements imposed upon them under ERISA and the Code.
"Prepayment Assumption" means, for federal income tax purposes and
any certificate, the rate of prepayment assumed in pricing the certificate.
"Regular Certificate" means certificates that are designated as
"regular interests" in a REMIC in accordance with the Code.
"Regular Certificateholder" means a holder of one or more Regular
Certificates.
"REMIC" means a "real estate mortgage investment conduit" under the
Code.
"Residual Certificate" means certificates that are designated as
"residual interests" in a REMIC in accordance with the Code.
"Residual Certificateholder" means a holder of one or more Residual
Certificates.
"Restricted Group" means the seller, the underwriter, the trustee,
the master servicer, any servicer, any insurer with respect to the mortgage
loans, any obligor with respect to mortgage loans included in the trust fund
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the trust fund, or any affiliate of those parties.
"Single Family Certificates" means certificates that represent
interests in a mortgage pool consisting of mortgage loans representing loans
for single family homes.
"Stripped ARM Obligations" means the certificates attributable to ARM
Loans.
"Underwriter Exemption" means individual administrative exemption
granted by the DOL to an underwriter from some of the prohibited transaction
rules of ERISA and the related excise tax provisions of Section 4975 of the
Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of
receivables, loans and other obligations that meet the conditions and
requirements of the exemption.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.*
The following table sets forth the estimated expenses to be incurred
in connection with the offering of the Securities, other than underwriting
discounts and commissions:
SEC Registration Fee.................................. $ **
Trustee's Fees and Expenses........................... **
Printing and Engraving................................ **
Legal Fees and Expenses............................... **
Blue Sky Fees......................................... **
Accounting Fees and Expenses.......................... **
Rating Agency Fees.................................... **
Miscellaneous......................................... **
Total................................................. $ **
==========
---------------
* All amounts, except the SEC Registration Fee, are estimates of aggregate
expenses incurred or to be incurred in connection with the issuance and
distribution of Securities in an aggregate principal amount assumed for these
purposes to be equal to $_____ of Securities registered hereby.
** To be filed by amendment.
Item 15. Indemnification of Directors and Officers.
Under the proposed form of Underwriting Agreement, the Underwriters
are obligated under certain circumstances to indemnify certain controlling
persons of the Registrant against certain liabilities, including liabilities
under the Securities Act of 1933, as amended.
The Registrant's Certificate of Incorporation provides for
indemnification of directors and officers of the Registrant to the full extent
permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses
incurred in any such action, suit or proceeding. The Delaware General
Corporation Law also provides that the Registrant may purchase insurance on
behalf of any such director, officer, employee or agent.
Item 16. Exhibits.
(a) Financial Statements:
None.
(b) Exhibits:
1.1 Form of Underwriting Agreement.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Forms of Pooling and Servicing Agreement.*
4.2 Form of Trust Agreement.*
4.3 Form of Indenture.*
5.1 Opinion of Brown & Wood LLP as to legality of the Securities.*
8.1 Opinion of Brown & Wood LLP as to certain tax matters.*
10.1 Form of Mortgage Loan Purchase Agreement.*
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1
hereto).*
24.1 Powers of Attorney (included on Page II-4).
--------------------
* To be filed by amendment.
Item 17. Undertakings.
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, as amended;
(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 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 end 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 aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, 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 that remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (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, as amended), that is
incorporated by reference in the registration statement shall be deemed 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.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, 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 Securities Act of 1933, as amended, 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 Securities Act of 1933, as
amended, and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Columbia, South Carolina, on the
17th day of August, 2000.
FLEET MORTGAGE SECURITIES CORP.
By: /s/ A. William Schenck
--------------------------------
Name: A. William Schenck
Title: Chairman of Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Patricia Evans, E. Patrick Cutler, William B.
Naryka, Jack D. Myers, or any of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and
his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ A. William Schenck Director and Chairman of Board (Principal August 17, 2000
-------------------------- Executive Officer)
A. William Schenck
/s/ Michael J. Torke Director and President August 17, 2000
--------------------------
Michael J. Torke
/s/ E. Patrick Cutler Director and Executive Vice President August 17, 2000
--------------------------
E. Patrick Cutler
/s/ William B. Naryka Director, Chief Financial and Accounting Officer August 17, 2000
--------------------------- and Treasurer
William B. Naryka
</TABLE>
