<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 18, 1997)
PNC MORTGAGE
SECURITIES CORP.
DEPOSITOR AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-5
$288,274,518
(APPROXIMATE)
PRINCIPAL AND/OR INTEREST PAYABLE ON THE 25TH DAY OF EACH MONTH BEGINNING IN
OCTOBER 1997
THESE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN PNC MORTGAGE
SECURITIES CORP. OR ANY OF ITS AFFILIATES, INCLUDING PNC BANK CORP.
NEITHER THESE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE
GUARANTEED BY ANY AGENCY OR INSTRUMENTALITY OF THE
UNITED STATES.
The Mortgage Pass-Through Certificates, Series 1997-5 (the "CERTIFICATES"),
will consist of the following twenty-three classes: (i) Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class A-9,
Class A-10, Class A-11, Class A-12, Class A-13 and Class A-14 (the "CLASS A
CERTIFICATES"), (ii) Class X, (iii) Class B-1, Class B-2 and Class B-3 (the
"SENIOR SUBORDINATE CERTIFICATES"), (iv) Class B-4, Class B-5 and Class B-6 (the
"JUNIOR SUBORDINATE CERTIFICATES" and, together with the Senior Subordinate
Certificates, the "SUBORDINATE CERTIFICATES" or the "CLASS B CERTIFICATES") and
(v) Class R and Class R-1 (the "RESIDUAL CERTIFICATES" and, together with the
Class A and Class X Certificates, the "SENIOR CERTIFICATES"). The Class A-5,
Class A-6 and Class A-14 Certificates are sometimes referred to as the
"PREPAYMENT LOCKOUT CERTIFICATES". The Class A-9 and Class A-10 Certificates are
sometimes referred to as the "LIBOR CERTIFICATES". The Class A-9 Certificates
are sometimes referred to as the "FLOATER CERTIFICATES" and the Class A-10
Certificates are sometimes referred to as the "INVERSE FLOATER CERTIFICATES".
Only the Senior Certificates (other than the Class A-1 Certificates) and the
Senior Subordinate Certificates (collectively, the "OFFERED CERTIFICATES") are
offered hereby. The Class A-1 Certificates and the Junior Subordinate
Certificates are not offered hereby. It is a condition to the issuance of the
Offered Certificates that the Class A Certificates (other than the Class A-10
Certificates) and the Residual Certificates each be rated "AAA" by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and by Fitch
Investors Service, L.P. ("FITCH"), that the Class A-10 and Class X Certificates
each be rated "AAAr" by S&P and "AAA" by Fitch and that the Class B-1
Certificates be rated not less than "AA" by Fitch, the Class B-2 Certificates be
rated not less than "A" by Fitch and the Class B-3 Certificates be rated not
less than "BBB" by Fitch. See "Certificate Ratings" herein.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
APPROXIMATE APPROXIMATE
INITIAL CLASS INITIAL CLASS
PRINCIPAL REMITTANCE PRINCIPAL REMITTANCE
BALANCE RATE(1) BALANCE RATE(1)
- ---------------------------------------------------------------------------------------------------------------------------
Class A-2............ $ 18,990,025 6.750 % Class A-12........... $ 66,649,102 7.150 %
Class A-3............ 19,125,000 7.400 % Class A-13........... 18,772,000 7.150 %
Class A-4............ 5,200,000 7.400 (2) Class A-14........... 3,000,000 7.000 %
Class A-5............ 41,133,333 7.000 % Class X.............. -- 7.250 %(5)
Class A-6............ 22,066,667 7.750 % Class B-1............ 9,628,954 7.250 %
Class A-7............ 11,050,000 6.750 % Class B-2............ 2,626,078 7.250 %
Class A-8............ 14,917,610 6.750 % Class B-3............ 3,501,438 7.250 %
Class A-9............ 34,314,211 Variable(3) Class R.............. 50 7.250 %
Class A-10........... -- Variable(4) Class R-1............ 50 7.250 %
Class A-11........... 17,300,000 7.150 %
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Offered Certificates are being offered by Donaldson, Lufkin & Jenrette
Securities Corporation (the "UNDERWRITER") from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Sales may be made to investors at the same price or at different prices.
See "Method of Distribution" herein. The aggregate proceeds to PNC Mortgage
Securities Corp. (the "COMPANY") from the sale of the Offered Certificates,
before deducting expenses estimated to be $435,000, will be 101.63098578% of the
initial aggregate Certificate Principal Balance of the Offered Certificates plus
accrued interest. The difference between the aggregate purchase price for the
Offered Certificates paid to the Company and the aggregate proceeds from the
sale of the Offered Certificates realized by the Underwriter will constitute
underwriting discounts and commissions. The Company has agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933. See "Method of Distribution" herein.
SEE "RISK FACTORS" IMMEDIATELY FOLLOWING "SUMMARY INFORMATION" HEREIN AND
IMMEDIATELY FOLLOWING "SUMMARY OF PROSPECTUS" IN THE PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE PURCHASING ANY OF THE
OFFERED CERTIFICATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Offered Certificates are offered by the Underwriter, as specified
herein, subject to receipt and acceptance by it, and subject to its right to
reject any order in whole or in part and to certain other conditions. It is
expected that delivery of the Offered Certificates (other than the Class A-10,
Class X, Senior Subordinate and Residual Certificates) will be made through the
facilities of The Depository Trust Company, and that delivery of the Class A-10,
Class X, Senior Subordinate and Residual Certificates (other than the portion of
the Residual Certificates retained by the Company) will be made at the offices
of the Underwriter, on or about September 30, 1997. (Additional cover page
information is contained on the following three pages.)
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
The date of this Prospectus Supplement is September 26, 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
(1) INTEREST DISTRIBUTED TO THE OFFERED CERTIFICATES ON EACH DISTRIBUTION DATE
WILL HAVE ACCRUED DURING THE PRECEDING CALENDAR MONTH AT THE APPLICABLE PER
ANNUM REMITTANCE RATE, EXCEPT FOR THE LIBOR CERTIFICATES WHICH WILL ACCRUE
INTEREST DURING THE PERIOD FROM THE 25TH OF THE MONTH PRIOR TO EACH
DISTRIBUTION DATE TO THE 24TH OF THE MONTH OF SUCH DISTRIBUTION DATE.
(2) ON EACH DISTRIBUTION DATE ON OR BEFORE THE CLASS A-4 ACCRETION TERMINATION
DATE (AS DEFINED HEREIN), AN AMOUNT EQUAL TO THE CLASS A-4 ACCRUAL AMOUNT
(AS DEFINED HEREIN) WILL BE ADDED TO THE CLASS A-4 PRINCIPAL BALANCE, AND
SUCH AMOUNT WILL BE DISTRIBUTED AS PRINCIPAL TO OTHER COMPONENTS (AS DEFINED
HEREIN) AND CLASSES OF CERTIFICATES AS DESCRIBED HEREIN AND WILL NOT BE
DISTRIBUTED AS INTEREST TO THE CLASS A-4 CERTIFICATES.
(3) THE CLASS A-9 CERTIFICATES ARE COMPRISED OF TWO COMPONENTS. THE INTEREST AND
PRINCIPAL DISTRIBUTABLE TO THE CLASS A-9 CERTIFICATES WILL BE BASED ON THE
INTEREST AND PRINCIPAL ALLOCABLE TO EACH COMPONENT THEREOF. THE INITIAL
REMITTANCE RATE FOR THE CLASS A-9 CERTIFICATES WILL BE 6.025% PER ANNUM.
THEREAFTER, THE CLASS A-9 CERTIFICATES WILL ACCRUE INTEREST AT A PER ANNUM
RATE EQUAL TO LIBOR (AS DEFINED HEREIN) PLUS 0.400%, SUBJECT TO A MINIMUM
AND MAXIMUM REMITTANCE RATE OF 0.400% AND 9.000% PER ANNUM, RESPECTIVELY.
(4) THE INITIAL REMITTANCE RATE FOR THE CLASS A-10 CERTIFICATES WILL BE 2.975%
PER ANNUM. THEREAFTER, THE CLASS A-10 CERTIFICATES WILL ACCRUE INTEREST AT A
PER ANNUM RATE EQUAL TO 8.600% MINUS LIBOR, SUBJECT TO A MINIMUM AND MAXIMUM
REMITTANCE RATE OF 0.000% AND 8.600% PER ANNUM, RESPECTIVELY. THE CLASS A-10
CERTIFICATES WILL NOT BE ENTITLED TO RECEIVE DISTRIBUTIONS OF PRINCIPAL AND
WILL ACCRUE INTEREST ON THE CLASS A-10 NOTIONAL AMOUNT WHICH WILL EQUAL THE
CLASS A-9 PRINCIPAL BALANCE AT THE TIME OF DETERMINATION.
(5) THE REMITTANCE RATE ON THE CLASS X CERTIFICATES WILL BE 7.250% PER ANNUM.
THE CLASS X CERTIFICATES WILL ACCRUE INTEREST ON THE CLASS X NOTIONAL AMOUNT
(AS DEFINED IN "DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS OF
INTEREST" HEREIN). THE CLASS X NOTIONAL AMOUNT AS OF THE CUT-OFF DATE WILL
BE APPROXIMATELY $22,241,969. THE CLASS X CERTIFICATES WILL NOT BE ENTITLED
TO RECEIVE DISTRIBUTIONS OF PRINCIPAL.
The Certificates, other than the Class R-1 Certificates, will evidence all
the beneficial ownership interest in a trust (the "CERTIFICATE TRUST")
established by the Company, the assets of which, together with the Class R-1
Certificates described below, will evidence all the beneficial ownership
interest in another trust (the "MORTGAGE TRUST") also established by the
Company. The Mortgage Trust will consist of a pool of conventional fixed-rate
one- to four-family residential mortgage loans with original terms to maturity
of not more than 30 years (the "MORTGAGE LOANS") deposited and master serviced
by the Company, and certain other assets, as described herein.
The Company intends to cause elections to be made to treat the Mortgage
Trust and the Certificate Trust as "real estate mortgage investment conduits"
(each, a "REMIC") for federal income tax purposes. All of the certificates
issued by the Mortgage Trust and the Certificate Trust, other than the Class R-1
Certificates and the Class R Certificates, will represent ownership of REMIC
"regular interests". The Class R Certificates and the Class R-1 Certificates
will represent ownership of the REMIC "residual interest" in the Certificate
Trust and the Mortgage Trust, respectively. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
The Offered Certificates, other than the Class R-1 Certificates, evidence
interests only in the Certificate Trust and are payable solely from amounts
received with respect thereto. The Class R-1 Certificates evidence the residual
interests only in the Mortgage Trust.
The Company has the right to effect early retirement of the Certificates
under certain circumstances. See "Description of the Certificates -- Optional
Termination of the Mortgage Trust" herein.
S-2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The yield to maturity on the Class A-9 Certificates will be sensitive to
fluctuations in the level of LIBOR and to the rate of Principal Prepayments (as
defined herein), and the yield to maturity on the Class A-10 Certificates will
be extremely sensitive to fluctuations in the level of LIBOR and to the rate of
Principal Prepayments. Prospective investors should fully consider the risks
associated with an investment in the Class A-10 Certificates, including the
possibility that if the rate of Principal Prepayments is rapid or if the level
of LIBOR is high, such investors may not fully recoup their initial investments.
See "Yield and Prepayment Considerations" herein.
The Class A-4 Certificates will be especially sensitive to the rate of
prepayment on the Mortgage Loans because the Class A-4 Certificates will receive
distributions of principal on any Distribution Date only to the extent of the
portion of the Senior Principal Distribution Amount remaining, if any, after
distributions to the PACs (as defined herein), to the extent of their respective
planned principal balances for such Distribution Date as set forth in Appendix A
(each, a "PLANNED PRINCIPAL BALANCE"), and to the TACs (as defined herein), to
the extent of their respective targeted principal balances for such Distribution
Date as set forth in Appendix B (each, a "TARGETED PRINCIPAL BALANCE").
Furthermore, if the Senior Principal Distribution Amount on any Distribution
Date is not sufficient to reduce the Class or Component Principal Balances of
the PACs to their Planned Principal Balances and to reduce the Class or
Component Principal Balances of the TACs to their Targeted Principal Balances,
the Class A-4 Certificates will receive no principal distribution on such
Distribution Date.
The yield to maturity on the Class X Certificates will be extremely
sensitive to the rate of Principal Prepayments on the Mortgage Loans. The
interest payable to the Class X Certificates is based on the weighted average of
the Stripped Interest Rates (as defined herein) of the Mortgage Loans having
Pass-Through Rates in excess of 7.250% (the "PREMIUM RATE MORTGAGE LOANS") and
therefore the yield to maturity of such Certificates will generally decrease as
a result of faster than expected Principal Prepayments on the Premium Rate
Mortgage Loans. Prospective investors should fully consider the risks associated
with an investment in the Class X Certificates, including the possibility that
if the rate of Principal Prepayments on the Premium Rate Mortgage Loans is
rapid, such investors may not fully recoup their initial investments. See "Yield
and Prepayment Considerations" herein.
The rights of the holders of the Senior Subordinate Certificates to receive
distributions of interest and principal are subordinated to the rights of the
holders of the Senior Certificates to receive distributions of interest and
principal. In addition, the rights of the holders of the Class B-2 Certificates
to receive distributions of interest and principal are subordinated to the
rights of the holders of the Class B-1 Certificates to receive distributions of
interest and principal, and such rights of the holders of the Class B-3
Certificates are similarly subordinated to the rights of the holders of the
Class B-1 and Class B-2 Certificates. Furthermore, following the reduction of
the aggregate Class Principal Balance of the Junior Subordinate Certificates to
zero, the yield to maturity on each Class of the Senior Subordinate Certificates
will be extremely sensitive to certain realized losses on the Mortgage Loans
because a disproportionate amount of such losses (rather than a pro rata portion
thereof) generally will be allocable to such Certificates, in the order Class
B-3, Class B-2 and then Class B-1. Similarly, following the reduction of the
aggregate of the Class Principal Balances of the Class B Certificates to zero,
the yield to maturity on the Senior Certificates will be sensitive to all
realized losses on the Mortgage Loans. See "Description of the Certificates --
Subordination and Allocation of Losses" herein.
Although the Prepayment Lockout Certificates are Senior Certificates, the
Class A-5, Class A-6 and Class A-14 Certificates will generally not be entitled
to receive any distributions of Principal Prepayments until the Distribution
Date in October 2002. Therefore, the Class A-5, Class A-6 and Class A-14
Certificates will not be entitled to receive the disproportionate allocation of
Principal Prepayments that the other Senior Certificates are entitled to
receive. See "Description of the Certificates -- Distributions of Principal" and
"Yield and Prepayment Considerations" herein.
S-3
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Offered Certificates, other than the Class A-10, Class X and Residual
Certificates, are offered in minimum denominations equivalent to not less than
$25,000 initial Certificate Principal Balance each and multiples of $1 in excess
thereof. The Class A-10 and Class X Certificates are offered in minimum
denominations equivalent to not less than $100,000 initial Class Notional Amount
each and multiples of $1 in excess thereof, except that one Class X Certificate
may be issued in a different amount. The Residual Certificates, which will each
have an initial Class Principal Balance of $50, will each be offered in
registered, certificated form in a single denomination of a 99.99% Percentage
Interest. The remaining 0.01% Percentage Interest of the Class R and Class R-1
Certificates will be retained by the Company as set forth herein under "Certain
Federal Income Tax Consequences".
The Offered Certificates offered by this Supplement constitute a separate
Series of Certificates being offered by the Company from time to time pursuant
to the Prospectus dated September 18, 1997 of which this Supplement is a part
and which accompanies this Supplement. The Prospectus contains important
information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Supplement in
full.
UNTIL THE EXPIRATION OF 90 DAYS AFTER THE DATE OF THIS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A SUPPLEMENT AND
THE PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS SUPPLEMENT AND THE PROSPECTUS
TO WHICH IT RELATES, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON. THIS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE OFFERED
CERTIFICATES OFFERED HEREBY NOR AN OFFER OF THE OFFERED CERTIFICATES TO ANY
PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL.
THE DELIVERY OF THIS SUPPLEMENT AT ANY TIME DOES NOT IMPLY THAT INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY
MATERIAL CHANGE OCCURS WHILE THIS SUPPLEMENT IS REQUIRED BY LAW TO BE DELIVERED,
THIS SUPPLEMENT WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
S-4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SUMMARY INFORMATION........................................................................................ S-6
RISK FACTORS............................................................................................... S-22
Effect of Principal Prepayments.......................................................................... S-22
Book-Entry System........................................................................................ S-24
THE CERTIFICATE TRUST AND THE MORTGAGE TRUST............................................................... S-24
DESCRIPTION OF THE MORTGAGE POOL........................................................................... S-25
Additional Information................................................................................... S-26
DESCRIPTION OF THE CERTIFICATES............................................................................ S-27
General.................................................................................................. S-27
Book-Entry Registration.................................................................................. S-28
Definitive Certificates.................................................................................. S-30
Priority of Distributions................................................................................ S-30
Distributions of Interest................................................................................ S-33
LIBOR.................................................................................................... S-35
Distributions of Principal............................................................................... S-36
Subordination and Allocation of Losses................................................................... S-41
The Residual Certificates................................................................................ S-43
Advances................................................................................................. S-44
Available Distribution Amount............................................................................ S-44
Last Scheduled Distribution Date......................................................................... S-45
Optional Termination of the Mortgage Trust............................................................... S-45
Servicing Compensation and Payment of Expenses........................................................... S-45
Special Servicing Agreements............................................................................. S-46
YIELD AND PREPAYMENT CONSIDERATIONS........................................................................ S-46
General.................................................................................................. S-46
Principal Prepayments and Compensating Interest.......................................................... S-46
Prepayment Lockout Certificates.......................................................................... S-47
Rate of Payments......................................................................................... S-47
Special Sensitivities.................................................................................... S-47
Basic Prepayment Assumption.............................................................................. S-48
Yield Considerations with Respect to the Class A-10 and Class X Certificates............................. S-49
Yield Considerations with Respect to the Senior Subordinate Certificates................................. S-51
Additional Yield Considerations Applicable Solely to the Residual Certificates........................... S-54
Additional Information................................................................................... S-54
CREDIT ENHANCEMENTS........................................................................................ S-55
Subordination............................................................................................ S-55
Shifting of Interests.................................................................................... S-55
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................................... S-55
Special Tax Considerations Applicable to the Residual Certificates....................................... S-57
CERTAIN LEGAL INVESTMENT ASPECTS........................................................................... S-59
ERISA CONSIDERATIONS....................................................................................... S-59
Underwriter's PTE........................................................................................ S-60
Prohibited Transaction Class Exemptions.................................................................. S-61
Restrictions on the Class A-14, Senior Subordinate and Residual Certificates............................. S-61
METHOD OF DISTRIBUTION..................................................................................... S-62
LEGAL MATTERS.............................................................................................. S-62
CERTIFICATE RATINGS........................................................................................ S-62
Appendix A............................................................................................... S-63
Appendix B............................................................................................... S-65
Appendix C............................................................................................... S-69
</TABLE>
S-5
<PAGE>
SUMMARY INFORMATION
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE HEREIN AND IN THE PROSPECTUS.
CAPITALIZED TERMS USED HEREIN AND NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS
ASSIGNED IN THE PROSPECTUS.
<TABLE>
<S> <C>
Title of Securities.......... Mortgage Pass-Through Certificates, Series 1997-5 (the
"Certificates")
Depositor and Master
Servicer.................... PNC Mortgage Securities Corp.
Trustee...................... U.S. Bank National Association
Cut-Off Date................. September 1, 1997
Closing Date................. On or about September 30, 1997
Certificates................. The Offered Certificates will be issued pursuant to a
Pooling and Servicing Agreement, dated as of the Cut-Off
Date, between the Depositor and Master Servicer and the
Trustee. The approximate initial Class Principal Balances,
Remittance Rates, and types of the Offered Certificates will
be as follows:
</TABLE>
<TABLE>
<CAPTION>
APPROXIMATE
INITIAL
CLASS PRINCIPAL REMITTANCE
CLASS BALANCE RATE TYPE
- ---------- ------------------ ----------- ------------------
<S> <C> <C> <C>
Class A-2 $ 18,990,025 6.750% Senior/PAC
Class A-3 19,125,000 7.400% Senior/TAC
Class A-4 5,200,000 7.400% Senior/Accrual
Class A-5 41,133,333 7.000% Senior/Lockout
Class A-6 22,066,667 7.750% Senior/Lockout
Class A-7 11,050,000 6.750% Senior/PAC
Class A-8 14,917,610 6.750% Senior/PAC
Class A-9 34,314,211 Variable Senior/Component
Senior/Interest
Class A-10 -- Variable Only
Class A-11 17,300,000 7.150% Senior/TAC
Class A-12 66,649,102 7.150% Senior/TAC
Class A-13 18,772,000 7.150% Senior/PAC
Class A-14 3,000,000 7.000% Senior/Lockout
Senior/Interest
Class X -- 7.250% Only
Class B-1 9,628,954 7.250% Senior Subordinate
Class B-2 2,626,078 7.250% Senior Subordinate
Class B-3 3,501,438 7.250% Senior Subordinate
Class R 50 7.250% Senior/Residual
Class R-1 50 7.250% Senior/Residual
</TABLE>
<TABLE>
<S> <C>
COMPONENTS. Certain Classes of Certificates will be
comprised of multiple components (each, a "COMPONENT"), each
of which will have a specified principal balance (a
"COMPONENT PRINCIPAL BALANCE") or notional amount (a
"COMPONENT NOTIONAL AMOUNT") which functions in a manner
comparable to that of a Class Principal Balance or Class
Notional Amount, respectively, on which interest will accrue
at a designated Remittance Rate (other than Component A-1-3
and Component A-1-4 which are not entitled to distributions
of interest). Holders of a Class of Certificates comprised
of Components will be entitled to receive distributions on
any Distribution Date to the extent of the amount
distributed with respect to the related Components on such
Distribution Date. Holders of a Class of Certificates
comprised of Components may not transfer such Components
separately.
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
For purposes of calculating principal distributions, the
Class A-9 Certificates will be comprised of two Components
having the designations, initial Component Principal
Balances and types of Components set forth below:
</TABLE>
APPROXIMATE INITIAL
COMPONENT PRINCIPAL
DESIGNATION BALANCE TYPE
- -------------------- -------------------- -----
Component A-9-1..... $ 18,264,039 PAC
Component A-9-2..... 16,050,172 TAC
For purposes of calculating distributions, the
Class A-1 Certificates, which are not offered
hereby, will be comprised of five Components
having the designations, initial Component
Principal Balances and Remittance Rates set forth
below:
APPROXIMATE INITIAL
COMPONENT PRINCIPAL
DESIGNATION BALANCE REMITTANCE RATE
- -------------------- -------------------- ---------------
Component A-1-1..... $ 898,297 7.400 %
Component A-1-2..... 52,000,000 7.400 %(1)
Component A-1-3..... 5,363,095 (2)
Component A-1-4..... 106,458 (3)
Component A-1-5..... -- 7.250 %(4)
(1) On each Distribution Date on or before the Component
A-1-2 Accretion Termination Date (as defined herein), an
amount equal to the Component A-1-2 Accrual Amount (as
defined herein) will be added to the Component A-1-2
Principal Balance, and such amount will be distributed as
principal to other Components and Classes of Certificates
as described herein and will not be distributed as interest
to Component A-1-2.
(2) Component A-1-3 will not be entitled to distributions
of interest.
(3) Component A-1-4 will not be entitled to distributions
of interest and will receive principal only in respect of
those Mortgage Loans with Pass-Through Rates that are less
than 7.250%. For a description of the principal
distributions to Component A-1-4, see "Description of the
Certificates -- Distributions of Principal -- PO PRINCIPAL
DISTRIBUTION AMOUNT" herein.
(4) The Remittance Rate on Component A-1-5 will be 7.250%
per annum. Component A-1-5 will accrue interest on the
Component A-1-5 Notional Amount (as defined in "Description
of the Certificates -- Distributions of Interest" herein).
The Component A-1-5 Notional Amount as of the Cut-Off Date
will be approximately $10,180,726. Component A-1-5 will not
be entitled to receive distributions of principal.
<TABLE>
<S> <C>
The Certificates, other than the Class R-1 Certificates,
will evidence all the beneficial ownership interest in a
trust (the "CERTIFICATE TRUST") established by the Company,
the assets of which, together with the Class R-1
Certificates described below, will evidence all the
beneficial ownership interest in another trust (the
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
"MORTGAGE TRUST"), also established by the Company, into
which the mortgage loans (the "MORTGAGE LOANS") will be
deposited. The Company will cause elections to be made to
treat the Mortgage Trust and the Certificate Trust as real
estate mortgage investment conduits (each, a "REMIC"). See
"Description of the Certificates" herein.
The Mortgage Pool............ The Mortgage Pool consists of approximately 1,392 Mortgage
Loans with an aggregate principal balance as of the Cut-Off
Date of approximately $350,143,810. The principal balance at
origination of the Mortgage Loans ranged from a minimum of
approximately $12,000 to a maximum of approximately
$1,000,000, with an average principal balance at origination
of approximately $251,974. The Mortgage Loans have terms to
maturity from the date of origination of not more than 30
years, with a weighted average remaining term to maturity
(adjusted for Curtailments) of approximately 357.3 months as
of the Cut-Off Date.
For a further description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.
Initial Aggregate Certificate
Principal Balance of the
Certificates................ $350,143,810 (approximate, subject to an upward or downward
variance of no more than 5%). The Senior Certificates will
comprise approximately 94.50%, the Senior Subordinate
Certificates will comprise approximately 4.50%, and the
Junior Subordinate Certificates will comprise approximately
1.00% of the initial aggregate Certificate Principal Balance
of the Certificates.
Initial Weighted Average
Mortgage Interest Rate...... 8.208% (approximate).
The Certificate Trust and the
Mortgage Trust.............. The assets of the Certificate Trust will consist of the
certificates (other than the Class R-1 Certificates) issued
by the Mortgage Trust. The assets of the Mortgage Trust will
consist of a pool (the "MORTGAGE POOL") of Mortgage Loans
with original terms to maturity of not more than 30 years,
with an aggregate principal balance as of the Cut-Off Date
of approximately $350,143,810. The Mortgage Trust will also
contain (i) certain insurance policies related to the
Mortgage Loans, (ii) any property which secured a Mortgage
Loan and which is acquired by foreclosure or by deed in lieu
of foreclosure after the Cut-Off Date, (iii) amounts held in
the Certificate Account, and (iv) certain other assets. See
"The Certificate Trust and Mortgage Trust" herein.
Book-Entry Registration...... Except in certain limited circumstances as described herein,
the Class A Certificates, other than the Class A-1 and Class
A-10 Certificates, generally will be available only in
book-entry form through the facilities of The Depository
Trust Company ("DTC"). See "Description of the Certificates
-- Book-Entry Registration" herein.
Priority of Distributions.... Commencing in October 1997, on the 25th day of each month,
or if such 25th day is not a business day, on the
immediately succeeding business day (each, a "DISTRIBUTION
DATE"), prior to the Credit
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Support Depletion Date (as defined below), distributions
will in general be made in the order and priority as
follows: (1) first, Component A-1-4 receives a certain
portion of the principal received in respect of each
Mortgage Loan with a Pass-Through Rate of less than 7.250%
(a "PO MORTGAGE LOAN"), as described in "Description of the
Certificates -- Distributions of Principal -- PO PRINCIPAL
DISTRIBUTION AMOUNT" herein; (2) second, the Senior
Certificates (and Components thereof) entitled to interest
receive accrued and unpaid interest, as described in
"Description of the Certificates -- Distributions of
Interest" herein; PROVIDED, HOWEVER, that (i) on or before
the Component A-1-2 Accretion Termination Date (as defined
herein), interest otherwise distributable to Component A-1-2
will be distributed, as principal, to certain Classes and
Components as described in "Description of the Certificates
-- Priority of Distributions -- COMPONENT A-1-2 ACCRUAL"
herein and (ii) on or before the Class A-4 Accretion
Termination Date (as defined herein), interest otherwise
distributable to the Class A-4 Certificates will be
distributed, as principal, to certain Classes and Components
as described in "Description of the Certificates -- Priority
of Distributions -- CLASS A-4 ACCRUAL" herein; (3) third,
the Senior Certificates entitled to principal (other than
Component A-1-4) receive principal in the order described in
"Description of the Certificates -- Distributions of
Principal -- SENIOR PRINCIPAL DISTRIBUTION AMOUNT"; (4)
fourth, Component A-1-4 receives principal to make up for
certain losses on the PO Mortgage Loans, as described in
"Description of the Certificates -- Distributions of
Principal -- PO PRINCIPAL DISTRIBUTION AMOUNT"; (5) fifth,
the Subordinate Certificates receive interest and then
principal in the following order of seniority, with both
interest and principal being paid to one Class before any
payments are made to the next Class: Class B-1, Class B-2,
Class B-3, Class B-4, Class B-5 and Class B-6, as described
in "Description of the Certificates -- Priority of
Distributions" and "-- Distributions of Principal --
SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT"; and (6) sixth,
the Class R-1 Certificates receive the remainder of the
Available Distribution Amount (as defined in "Description of
the Certificates -- Available Distribution Amount" herein)
for such Distribution Date.
The "CREDIT SUPPORT DEPLETION DATE" is the first
Distribution Date on which the aggregate of the Class
Principal Balances of the Class B Certificates has been or
will be reduced to zero.
On each Distribution Date on or after the Credit Support
Depletion Date, distributions will in general be made in the
order and priority as follows: (1) first, Component A-1-4
receives a certain portion of the principal received in
respect of each PO Mortgage Loan, as described in
"Description of the Certificates -- Distributions of
Principal -- PO PRINCIPAL DISTRIBUTION AMOUNT"; (2) second,
the Senior Certificates entitled to interest receive accrued
and unpaid interest, as described in "Description of the
Certificates -- Distributions of Interest"; (3) third, the
Senior Certificates entitled to principal (other than
Component A-1-4) receives principal pro rata according to
their
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respective Class Principal Balances; and (4) fourth, the
Class R-1 Certificates receive the remainder of the
Available Distribution Amount for such Distribution Date.
For a description of the order and priority of
distributions, see "Description of the Certificates --
Priority of Distributions" herein.
Interest..................... With respect to each Class of Certificates (except Component
A-1-3 and Component A-1-4 of the Class A-1 Certificates,
which are not entitled to interest), interest will be passed
through monthly on each Distribution Date, commencing in
October 1997, except that (1) interest accrued on Component
A-1-2 on or before the Component A-1-2 Accretion Termination
Date will not be distributed to Component A-1-2 and will
instead be added to the Component A-1-2 Principal Balance
and (2) interest accrued on the Class A-4 Certificates on or
before the Class A-4 Accretion Termination Date will not be
distributed to the Class A-4 Certificates and will instead
be added to the Class A-4 Principal Balance. With respect to
each Distribution Date, an amount of interest will accrue or
accrete on each Class of Certificates, or, with respect to
the Class A-1 Certificates, Component A-1-1, Component A-1-2
and Component A-1-5, generally equal to 1/12th of the
applicable Remittance Rate for such Class or Component
multiplied by the related Class Principal Balance, Component
Principal Balance, Class Notional Amount or Component
Notional Amount, as applicable. The Remittance Rates for the
Offered Certificates entitled to interest (other than the
LIBOR Certificates) are fixed as set forth on the cover page
hereof. The Remittance Rates for Component A-1-1, Component
A-1-2 and Component A-1-5 of the Class A-1 Certificates will
be 7.400%, 7.400% and 7.250% per annum, respectively. For a
description of how the Class A-10 and Class X Notional
Amounts are determined, see "Description of the Certificates
-- Distributions of Interest". Interest to be distributed on
the Certificates on any Distribution Date will consist of
accrued and unpaid interest as of previous Distribution
Dates and interest accrued during the preceding calendar
month, except for the LIBOR Certificates which accrue
interest during the period commencing on the 25th day of the
preceding calendar month and ending on the 24th day of the
month of such Distribution Date. All distributions of
interest for each Class of Certificates will generally be
made only to the extent of the Available Distribution Amount
as described herein under "Description of the Certificates
-- Priority of Distributions".
See "Description of the Certificates -- Distributions of
Interest" herein.
LIBOR........................ The Remittance Rates for the LIBOR Certificates will be
determined by the Master Servicer based on the average of
quotations of the London Interbank Offered Rate for
one-month U.S. dollar deposits ("LIBOR") as provided by the
Reference Banks (as defined herein), as further described
herein. See "Description of the Certificates-- LIBOR"
herein.
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Compensating Interest........ Subject to the limitations described in this Prospectus
Supplement under "Yield and Prepayment Considerations", on
each Distribution Date the Master Servicer is obligated to
remit to the Certificate Account an amount equal to the
lesser of (a) any shortfall for the related month in
interest collections resulting from the timing of Payoffs
made from the 15th day of the calendar month preceding such
Distribution Date to the last day of such month, and (b) the
monthly Master Servicing Fee, any reinvestment income
realized by the Master Servicer relating to Payoffs made
from the 15th day of the calendar month preceding such
Distribution Date to the 14th day of the month of such
Distribution Date and interest payments on Payoffs received
during the period of the second day through the 14th day of
the month of such Distribution Date. The amount so passed
through will hereinafter be referred to as "COMPENSATING
INTEREST". Compensating Interest will be allocated to each
Class of Certificates pro rata according to the amount of
interest accrued thereon, and any remaining shortfall in
interest collections resulting from the timing of Payoffs
will be applied pro rata according to the amount of interest
to which each Class of Certificates would otherwise be
entitled in reduction thereof. See "Description of the
Certificates -- Distributions of Interest" herein.
Principal (including
Principal Prepayments)...... GENERAL. On each Distribution Date, Certificateholders will
be entitled to receive principal distributions from the
Available Distribution Amount to the extent described
herein. All distributions of principal will be made only to
the extent of the Available Distribution Amount as described
herein under "Description of the Certificates -- Priority of
Distributions".
The Class A-10 and Class X Certificates and Component A-1-5
will not receive any distributions of principal.
DISTRIBUTIONS TO COMPONENT A-1-4. Component A-1-4 will
receive a portion of the Available Distribution Amount
attributable to principal received on or in respect of any
PO Mortgage Loan. In addition, on each Distribution Date for
so long as any Class of Subordinate Certificates remains
outstanding, Component A-1-4 will receive distributions of
principal equal to a portion of certain losses on PO
Mortgage Loans. For a description of the principal
distributions to Component A-1-4 Certificates, see
"Description of the Certificates -- Distributions of
Principal -- PO PRINCIPAL DISTRIBUTION AMOUNT" herein.
DISTRIBUTIONS TO THE SENIOR CERTIFICATES (OTHER THAN
COMPONENT A-1-4). On each Distribution Date, prior to the
Credit Support Depletion Date, an amount, up to the amount
of the Senior Principal Distribution Amount (as defined in
"Description of the Certificates -- Distributions of
Principal -- SENIOR PRINCIPAL DISTRIBUTION AMOUNT" herein)
for such Distribution Date, will be distributed as principal
to the following Classes of Senior Certificates in the
following order of priority:
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(i) first, to the Class A-5, Class A-6 and Class A-14
Certificates, pro rata, an amount, up to the amount of
the Lockout Principal Distribution Amount (as
defined in "Description of the Certificates --
Distributions of Principal" herein) for such
Distribution Date, until the Principal Balances of
the Class A-5, Class A-6 and Class A-14
Certificates have been reduced to zero;
(ii) second, to the Residual Certificates, pro rata,
the portion of the Senior Principal Distribution Amount
remaining after the distribution described above,
until the Principal Balance of the Residual
Certificates have been reduced to zero;
(iii) third, the portion of the Senior Principal
Distribution Amount remaining after the distributions
described above, concurrently, as follows:
(A) 2.0270271292% to Component A-1-3, until the
Component A-1-3 Principal Balance has been
reduced to zero; and
(B) 97.9729728708% sequentially as follows:
(1) first, concurrently, to the extent
necessary to reduce the Class A-2 Principal
Balance to its Planned Principal Balance
for such Distribution Date, 71.1111101958%
to the Class A-2 Certificates and
28.8888898042% to Component A-9-1;
(2) second, concurrently, to the extent
necessary to reduce the Class A-7 Principal
Balance to its Planned Principal Balance
for such Distribution Date, 71.1111133993%
to the Class A-7 Certificates and
28.8888866007% to Component A-9-1;
(3) third, concurrently, in each case to the
extent necessary to reduce the Class A-8
Principal Balance and the Component A-9-1
Principal Balance to their Planned
Principal Balances for such Distribution
Date, 71.1111113230% to the Class A-8
Certificates and 28.8888886770% to
Component A-9-1;
(4) fourth, to Component A-1-1, to the extent
necessary to reduce the Component A-1-1
Principal Balance to its Planned Principal
Balance for such Distribution Date;
(5) fifth, concurrently, as follows:
(a) 13.8691202055% to the Class A-3
Certificates, to the extent necessary to
reduce the Class A-3 Principal Balance
to its Targeted Principal Balance for
such Distribution Date;
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(b) 12.5456616761% to the Class A-11
Certificates, to the extent necessary
to reduce the Class A-11 Principal
Balance to its Targeted Principal
Balance for such Distribution Date;
(c) 11.6393079627% to Component A-9-2, to
the extent necessary to reduce the Component
A-9-2 Principal Balance to its Targeted
Principal Balance for such Distribution
Date; and
(d) 61.9459101557%, to the extent necessary
to reduce the aggregate Class Principal
Balance of the Class A-12 and Class
A-13 Certificates to its combined
Targeted Principal Balance for such
Distribution Date, sequentially as
follows:
(I) to the Class A-13 Certificates, to
the extent necessary to reduce the Class
A-13 Principal Balance to its
Planned Principal Balance for such
Distribution Date;
(II) to the Class A-12 Certificates,
until the Class A-12 Principal Balance
has been reduced to zero; and
(III) to the Class A-13 Certificates,
until the Class A-13 Principal Balance
has been reduced to zero;
(6) sixth, to Component A-1-2, to the extent
necessary to reduce the Component A-1-2
Principal Balance to its Targeted
Principal Balance for such Distribution
Date;
(7) seventh, to the Class A-4 Certificates,
until the Class A-4 Principal Balance has been
reduced to zero;
(8) eighth, concurrently, as follows:
(a) 90.0000000000% concurrently as follows:
(I) 13.8691202055% to the Class A-3
Certificates, until the Class A-3
Principal Balance has been reduced
to zero;
(II) 12.5456616761% to the Class A-11
Certificates, until the Class
A-11 Principal Balance has been
reduced to zero;
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(III) 11.6393079627% to Component
A-9-2, until the Component A-9-2
Principal Balance has been
reduced to zero; and
(IV) 61.9459101557% sequentially as
follows:
(i) to the Class A-13
Certificates, to the extent
necessary to reduce the Class
A-13 Principal Balance to its
Planned Principal Balance for
such Distribution Date;
(ii) to the Class A-12
Certificates, until the Class A-12
Principal Balance has been
reduced to zero; and
(iii) to the Class A-13
Certificates, until the Class A-13
Principal Balance has been
reduced to zero; and
(b) 10.0000000000% to Component A-1-2;
(9) ninth, to Component A-1-2, until the
Component A-1-2 Principal Balance has been
reduced to zero;
(10) tenth, concurrently, until the Class A-2
Principal Balance has been reduced to zero,
71.1111101958% to the Class A-2
Certificates and 28.8888898042% to
Component A-9-1;
(11) eleventh, concurrently, until the Class
A-7 Principal Balance has been reduced to zero,
71.1111133993% to the Class A-7
Certificates and 28.8888866007% to
Component A-9-1;
(12) twelfth, concurrently, in each case until
the Class A-8 Principal Balance and the
Component A-9-1 Principal Balance have
been reduced to zero, 71.1111113230% to
the Class A-8 Certificates and
28.8888886770% to Component A-9-1; and
(13) thirteenth, to Component A-1-1, until the
Component A-1-1 Principal Balance has been
reduced to zero; and
(iv) fourth, to the Class A-5, Class A-6 and Class
A-14 Certificates, pro rata, the portion of the Senior
Principal Distribution Amount remaining after the
distributions described above, until the
Principal Balances of the Class A-5, Class A-6
and Class A-14 Certificates have been reduced to
zero.
On each Distribution Date on and after the Credit Support
Depletion Date, principal will not be distributed in the
order and priority
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described above. Instead, an amount up to the Senior
Principal Distribution Amount for such Distribution Date
will be distributed as principal to the Senior Certificates
entitled to principal (other than Component A-1-4), pro rata
according to their respective Class or Component Principal
Balances.
DISTRIBUTIONS TO THE CLASS B CERTIFICATES. On each
Distribution Date, an amount, up to the Subordinate
Principal Distribution Amount (as defined in "Description of
the Certificates -- Distributions of Principal --
SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT" herein) for such
Distribution Date, will be distributed as principal to the
Class B Certificates. On each Distribution Date, except
Distribution Dates on which the Subordination Level (as
defined in "Description of the Certificates -- Priority of
Distributions" herein) for any Class of Class B Certificates
is less than such Subordination Level as of the Cut-Off
Date, each Class of Class B Certificates will be entitled to
receive its pro rata share (by Class Principal Balance) of
the Subordinate Principal Distribution Amount, to the extent
of the Available Distribution Amount remaining after
distributions of interest and principal to the Senior
Certificates, distributions of interest and principal to all
Classes of Class B Certificates senior to such Class and
distributions of interest to such Class. See "Description of
the Certificates -- Priority of Distributions" herein. The
relative seniority, from highest to lowest, of the Class B
Certificates shall be as follows: Class B-1, Class B-2,
Class B-3, Class B-4, Class B-5 and Class B-6.
The rights of the holders of the Class B Certificates to
receive distributions of principal are subordinated to the
rights of the holders of the Senior Certificates to receive
distributions of principal. See "Description of the
Certificates -- Subordination and Allocation of Losses"
herein.
For a more detailed description of how distributions of
principal will be allocated among the various Classes of
Certificates, see "Description of the Certificates --
Distributions of Principal" herein.
Subordination and Allocation
of Losses................... The Class B Certificates will be subordinate in right of
payment to and provide credit support to the Senior
Certificates, the Junior Subordinate Certificates will be
subordinate in right of payment to and provide credit
support to the Senior Subordinate Certificates, the Class
B-3 Certificates will be subordinate in right of payment to
and provide credit support to the Class B-1 and Class B-2
Certificates and the Class B-2 Certificates will be
subordinate in right of payment to and provide credit
support to the Class B-1 Certificates, to the extent
described herein. The support provided by the Class B
Certificates is intended to enhance the likelihood of
regular receipt by the Senior Certificates of the full
amount of the monthly distributions of interest and
principal to which they are entitled and to afford such
holders protection against certain losses. The protection
afforded to the Senior Certificates by the Class B
Certificates will be accomplished by the preferential right
on each Distribution Date of the Senior
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Certificates to receive the distributions of interest and
principal to which they are entitled, prior to distributions
of interest or principal to the Class B Certificates. The
support provided by the Junior Subordinate Certificates to
the Senior Subordinate Certificates is intended to enhance
the likelihood of regular receipt by the Senior Subordinate
Certificates of the full amount of monthly distributions of
interest and principal to which they are entitled and to
afford such holders protection against certain losses. The
protection afforded the Senior Subordinate Certificates by
the Junior Subordinate Certificates will be accomplished by
the preferential right on each Distribution Date of the
Senior Subordinate Certificates to receive distributions of
interest and principal prior to distributions of interest or
principal to the Junior Subordinate Certificates. The
protection afforded the Class B-1 Certificates by the Class
B-2 and Class B-3 Certificates, and the protection afforded
the Class B-2 Certificates by the Class B-3 Certificates,
will be similarly accomplished by the preferential right of
the Class B-1 Certificates to receive distributions of
interest and principal prior to distributions of interest or
principal to the Class B-2 and Class B-3 Certificates and
the preferential right of the Class B-2 Certificates to
receive such distributions prior to such distributions to
the Class B-3 Certificates.
Except for Special Hazard Losses, Fraud Losses and
Bankruptcy Losses in excess of the designated amount of
Special Hazard Coverage, Fraud Coverage and Bankruptcy
Coverage, any loss realized with respect to a Mortgage Loan
will be allocated among the Certificates (i) for losses
allocable to principal (a) first, to the Junior Subordinate
Certificates, until the aggregate of the Class Principal
Balances thereof has been reduced to zero, (b) second, to
the Class B-3 Certificates, until the Class B-3 Principal
Balance has been reduced to zero, (c) third, to the Class
B-2 Certificates, until the Class B-2 Principal Balance has
been reduced to zero, (d) fourth, to the Class B-1
Certificates, until the Class B-1 Principal Balance has been
reduced to zero and (e) fifth, to the Senior Certificates
(other than the Class A-10 and Class X Certificates and
Component A-1-4), pro rata, according to their Class
Principal Balances (or Component Principal Balances, in the
case of Component A-9-1, Component A-9-2, Component A-1-1,
Component A-1-2 and Component A-1-3) in reduction of their
respective Class Principal Balances or Component Principal
Balances, PROVIDED, HOWEVER, that if the loss is recognized
with respect to a PO Mortgage Loan, the PO Fraction of such
loss will first be allocated to Component A-1-4 and the
remainder of such loss will be allocated as described above
in this clause (i); and (ii) for losses allocable to
interest (a) first, to the Junior Subordinate Certificates,
in reduction of accrued but unpaid interest thereon and then
in reduction of the Class Principal Balances of the Junior
Subordinate Certificates, (b) second, to the Class B-3
Certificates, in reduction of accrued but unpaid interest
thereon and then in reduction of the Class B-3 Principal
Balance, (c) third, to the Class B-2 Certificates, in
reduction of accrued but unpaid interest thereon and then in
reduction of the Class B-2 Principal Balance,
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(d) fourth, to the Class B-1 Certificates, in reduction of
accrued but unpaid interest thereon and then in reduction of
the Class B-1 Principal Balance and (e) fifth, to the Senior
Certificates (other than Component A-1-3 and Component
A-1-4), pro rata according to accrued but unpaid interest
thereon and then pro rata according to their Class Principal
Balances (or Component Principal Balances, in the case of
the Component A-9-1 Principal Balance, the Component A-9-2
Principal Balance, the Component A-1-1 Principal Balance and
the Component A-1-2 Principal Balance) in reduction of their
respective Class or Component Principal Balances, as
applicable; PROVIDED, FURTHER, that all losses allocated to
principal and interest that would otherwise be allocable to
the Class A-1 Certificates (other than losses allocated to
Component A-1-4) on any Distribution Date will be allocated
to the Class A-14 Certificates, until the Class A-14
Principal Balance has been reduced to zero.
The allocation of (i) the principal portion of losses
relating to a Mortgage Loan to all Classes of Certificates
(other than Component A-1-4 in the case of the Class A-1
Certificates) pro rata according to their respective Class
or Component Principal Balances (except if the loss is
recognized with respect to a PO Mortgage Loan, in which
event the PO Fraction of such loss will first be allocated
to Component A-1-4 and the remainder of such loss will be
allocated as described above) and (ii) the interest portion
of losses pro rata according to the amount of interest
accrued on each such Class in reduction thereof and then,
pro rata, in reduction of their related Class Principal
Balance (or Component Principal Balances, in the case of
Component A-9-1, Component A-9-2, Component A-1-1 and
Component A-1-2), (except that all losses allocated to
principal and interest that would otherwise be allocable to
the Class A-1 Certificates (other than losses allocated to
Component A-1-4) on any Distribution Date will be allocated
to the Class A-14 Certificates, until the Class A-14
Principal Balance has been reduced to zero) is hereinafter
referred to as "PRO RATA ALLOCATION".
Special Hazard Losses, Fraud Losses and Bankruptcy Losses in
excess of the applicable coverage will be allocated to all
outstanding Classes of Certificates by Pro Rata Allocation.
Each of the applicable coverages may be reduced
periodically, as described herein. See "Description of the
Certificates -- Subordination and Allocation of Losses"
herein.
See also "Description of the Certificates -- Distributions
of Principal" herein.
Credit Enhancements.......... SUBORDINATION. The subordination of the Class B
Certificates and the further subordination within the Class
B Certificates described above and in "Description of the
Certificates -- Subordination and Allocation of Losses" will
provide credit enhancement to the Senior Certificates and
each Class of Class B Certificates with lower numerical
Class designations.
SHIFTING OF INTERESTS. The Senior Certificates entitled to
principal, other than the Prepayment Lockout Certificates,
will receive 100% of
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Principal Prepayments received with respect to the Mortgage
Loans until the fifth anniversary of the first Distribution
Date. During the next four years, the Senior Certificates
entitled to principal, other than the Prepayment Lockout
Certificates, will receive a disproportionately large, but
decreasing, share of Principal Prepayments. This will result
in an acceleration of the amortization of such Senior
Certificates, other than the Prepayment Lockout
Certificates, subject to the priorities described in
"Description of the Certificates -- Distributions of
Principal" herein, enhancing the likelihood that holders of
such Classes of Certificates will be paid the full amount of
principal to which they are entitled. For a more detailed
description or how Principal Prepayments are allocated among
the Senior Certificates and the Class B Certificates, see
"Description of the Certificates -- Distributions of
Principal" herein.
Advances..................... With respect to each Mortgage Loan, the Master Servicer will
make Advances on each Distribution Date to the Certificate
Account to cover any shortfall between (i) payments
scheduled to be received in respect of such Mortgage Loan
and (ii) the amounts actually deposited in the Certificate
Account on account of such payments; provided that the
Master Servicer determines, in good faith, on such
Distribution Date that such Advances will be recoverable
from Insurance Proceeds, Liquidation Proceeds (as defined in
the Prospectus) or other amounts received with respect to
such Mortgage Loan. Advances are reimbursable to the Master
Servicer from cash in the Certificate Account prior to
payments to the Certificateholders if the Master Servicer
determines that any such Advances previously made are not
recoverable from Insurance Proceeds, Liquidation Proceeds or
other amounts recoverable with respect to the applicable
Mortgage Loan. See "Description of the Certificates --
Advances" herein.
Yield and Prepayment
Considerations.............. The effective yield to maturity of each Class of
Certificates will depend upon, among other things, the price
at which such Certificates are purchased, the applicable
Remittance Rate, the actual characteristics of the Mortgage
Loans, the rate of principal payments (including Principal
Prepayments) on the Mortgage Loans and the rate of
liquidations on the Mortgage Loans. A higher than
anticipated rate of principal payments (including Principal
Prepayments) and liquidations would reduce the aggregate
principal balance of the Mortgage Loans more quickly than
expected, thereby reducing the aggregate interest payments
with respect to such Mortgage Loans. Therefore, a higher
rate of principal payments (including Principal Prepayments)
and liquidations could result in a lower than expected yield
to maturity on Classes of Certificates purchased at a
premium. Conversely, a lower than anticipated rate of
principal payments (including Principal Prepayments) and
liquidations could result in a lower than expected yield to
maturity on Classes of Certificates purchased at a discount,
in that payments of principal with respect to the Mortgage
Loans would occur later than anticipated.
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The actual rate of payments of principal (including
Principal Prepayments) and liquidations on the Mortgage
Loans may be influenced by a variety of economic,
geographic, social and other factors. In general, if
interest rates generally rise above the interest rates on
the Mortgage Loans, the rate of prepayment would be expected
to decrease. Conversely, if prevailing interest rates fall
significantly below the interest rates on the Mortgage
Loans, the Mortgage Loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above
the interest rates on the Mortgage Loans. See "Risk Factors"
and "Yield and Prepayment Considerations" herein.
For a discussion of special yield and prepayment
considerations applicable to the Class X, LIBOR, PAC, TAC,
Senior Subordinate and Prepayment Lockout Certificates, see
"Risk Factors" herein.
Ratings...................... It is a condition to the issuance of the Offered
Certificates that the Class A Certificates (other than the
Class A-10 Certificates) and the Residual Certificates each
be rated "AAA" by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P") and by Fitch Investors
Service, L.P. ("FITCH"), that the Class A-10 and Class X
Certificates each be rated "AAAr" by S&P and "AAA" by Fitch
and that the Class B-1 Certificates be rated not less than
"AA" by Fitch, the Class B-2 Certificates be rated not less
than "A" by Fitch and the Class B-3 Certificates be rated
not less than "BBB" by Fitch. See "Certificate Ratings",
"Risk Factors" and "Yield and Prepayment Considerations"
herein. The ratings on the Offered Certificates address the
likelihood of the receipt by holders of Offered Certificates
of all distributions with respect to the underlying Mortgage
Loans to which they are entitled and do not address the
likely actual rate of Principal Prepayments, which rate
could, if different than originally anticipated, adversely
affect the yield realized by Certificateholders or cause the
Class A-10 and Class X Certificateholders to fail to recoup
their initial investments.
Last Scheduled Distribution
Date........................ The Last Scheduled Distribution Date for all Classes of
Certificates is the Distribution Date in October 2027, which
is the Distribution Date in the month after the scheduled
maturity date for the latest maturing Mortgage Loan in the
Mortgage Pool.
The actual rate of principal payments on the Certificates
will depend on the rate of payments of principal (including
Principal Prepayments) on the Mortgage Loans which, in turn,
may be influenced by a variety of economic, geographic and
social factors, as well as the level of prevailing interest
rates. No assurance can be given as to the actual payment
experience on the Mortgage Loans. See "Description of the
Certificates -- Last Scheduled Distribution Date" and "Yield
and Prepayment Considerations" herein.
Legal Investment............. As of the date of their issuance, the Offered Certificates,
other than the Class B-2 and Class B-3 Certificates, will
constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market
</TABLE>
S-19
<PAGE>
<TABLE>
<S> <C>
Enhancement Act of 1984 ("SMMEA"). SMMEA provides that
states may override its provisions on legal investment and
restrict or condition investment in mortgage related
securities by taking statutory action prior to October 4,
1991. Certain states have enacted legislation which has
overridden the provisions of SMMEA. See "Certain Legal
Investment Aspects" herein.
Institutions whose investment activities are subject to
review by certain regulatory authorities may be or may
become subject to restrictions on investment in the Offered
Certificates, and such restrictions may be retroactively
imposed. The Federal Financial Institutions Examination
Council, the Federal Deposit Insurance Corporation, the
Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Office of
Thrift Supervision and the National Credit Union
Administration have adopted guidelines, and have proposed
policies, regarding the suitability of investments in
various types of derivative mortgage-backed securities,
including securities such as the Offered Certificates. In
addition, several states have adopted or are considering
regulations that would prohibit regulated institutions
subject to their jurisdiction from holding mortgage-backed
securities such as the Offered Certificates, including such
securities previously purchased. Investors should consult
their own legal advisors in determining whether and to what
extent the Offered Certificates constitute legal investments
for such investors.
ERISA Considerations......... See "ERISA Considerations" herein and in the Prospectus.
Certain Federal Income Tax
Consequences................ For federal income tax purposes, the Company will cause
elections to be made to treat the Certificate Trust and the
Mortgage Trust as REMICs. The Certificates, other than the
Class R-1 Certificates and the Class R Certificates, will
represent ownership of REMIC regular interests. Such
Certificates will generally be treated as representing
ownership of debt for federal income tax purposes.
Certificateholders will be required to include in income all
interest and original issue discount ("OID") on such
Certificates in accordance with the accrual method of
accounting regardless of the Certificateholders' usual
methods of accounting. For federal income tax purposes, (i)
the Class R-1 Certificates will be the residual interest in
the Mortgage Trust and (ii) the Class R Certificates will be
the residual interest in the Certificate Trust.
The Class A-4, Class A-10 and Class X Certificates will, and
the Class A-5, Class A-8, Class A-13, Class A-14, Class B-1,
Class B-2 and Class B-3 Certificates may, be treated as
having been issued with OID for federal income tax purposes.
Certain Classes of Certificates may be treated for federal
income tax purposes as having been issued at a premium. The
prepayment assumption that will be used in determining the
rate of accrual of market discount and premium, if any, for
federal income tax purposes is 250% of the Basic Prepayment
Assumption ("BPA") as described herein under "Yield and
Prepayment Considerations". The BPA represents an assumed
annual
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
rate of prepayment relative to the then outstanding
principal balance of a pool of mortgage loans which
increases incrementally each month after origination until
the 30th month after origination, when the rate remains
constant at 6% per annum. No representation is made that the
Mortgage Loans will prepay at any given percentage of the
BPA.
If actual prepayments differ sufficiently from the
prepayment assumption, the calculation of OID for certain
Classes of Offered Certificates might produce a negative
number for certain accrual periods. In such event,
Certificateholders will not be entitled to a deduction for
such amount, but will be required to carry such amount
forward as an offset to OID, if any, accruing in future
accrual periods.
Under the REMIC Regulations (as defined herein), the
Residual Certificates will not be regarded as having
"significant value" for purposes of applying the rules
relating to "excess inclusions". In addition, the Residual
Certificates may constitute "noneconomic" residual interests
for purposes of the REMIC Regulations. Transfers of the
Residual Certificates will be restricted under the Pooling
Agreement to United States Persons (as defined in the
Prospectus) in a manner designed to prevent a transfer of a
noneconomic residual interest from being disregarded under
the REMIC Regulations. See "Certain Federal Income Tax
Consequences -- Special Tax Considerations Applicable to the
Residual Certificates" herein and "Certain Federal Income
Tax Consequences -- Taxation of Owners of REMIC Residual
Certificates -- Excess Inclusions" and "-- Noneconomic REMIC
Residual Certificates" in the Prospectus.
The Residual Certificateholders may be required to report an
amount of taxable income with respect to the early years of
the REMIC's term that significantly exceeds distributions on
the Residual Certificates during such years, with
corresponding tax deductions or losses deferred until the
later years of the REMIC's term. Accordingly, on a present
value basis, the tax detriments occurring in the earlier
years may substantially exceed the sum of any tax benefits
in the later years. As a result, the Residual
Certificateholders' after-tax rate of return may be zero or
negative, even if their pre-tax rate of return is positive.
The Offered Certificates will generally be treated as
"qualifying real property loans" for mutual savings banks
and domestic building and loan associations, "loans secured
by an interest in real property" for domestic building and
loan associations, and "real estate assets" for real estate
investment trusts ("REITS") in the same proportion that the
assets in the REMIC would be so treated. In addition,
interest on the Offered Certificates will generally be
treated as "interest on obligations secured by mortgages on
real property" for REITs to the extent that such
Certificates are treated as "real estate assets". See
"Certain Federal Income Tax Consequences" in the Prospectus.
For further information regarding the federal income tax
consequences of investing in the Offered Certificates, see
"Certain Federal Income Tax Consequences" herein and in the
Prospectus.
</TABLE>
S-21
<PAGE>
RISK FACTORS
EFFECT OF PRINCIPAL PREPAYMENTS
The rate of principal payments, amount of each interest payment and yield to
maturity on each Class of the Certificates are directly related to the rate of
payments of principal on the Mortgage Loans, which may be in the form of
scheduled amortization, Principal Prepayments (as defined below) or
liquidations. In general, when the level of prevailing mortgage interest rates
declines significantly below the interest rates on the Mortgage Loans, the rate
of prepayment is likely to increase, although the prepayment rate is influenced
by a number of other factors, including general economic conditions and
homeowner mobility. The rate of payment of principal will also be affected by
any repurchase by the Company of the Mortgage Loans. See "Maturity, Average Life
and Prepayment Assumptions" and "Description of Certificates -- Termination" in
the Prospectus and "Description of the Certificates -- Optional Termination of
the Mortgage Trust" and "Yield and Prepayment Considerations" herein. In such
event, the repurchase price paid by the Company would be passed through to
Certificateholders on the Distribution Date following the month of repurchase.
All of the Mortgage Loans contain "due-on-sale" clauses. Consequently,
acceleration of maturity as a result of transfers of Mortgaged Properties will
affect the level of prepayments on the Mortgage Loans.
"PRINCIPAL PREPAYMENTS" include prepayments in full on a Mortgage Loan
("PAYOFFS") and partial principal prepayments on a Mortgage Loan
("CURTAILMENTS").
The Class A-3, Class A-4, Class A-11, Class A-12 and Class A-13 Certificates
and Component A-1-2 and Component A-9-2 (the "ACCRUAL DIRECTED" Classes and
Components) will receive distributions of principal otherwise payable as
interest to Component A-1-2 (on or before the Component A-1-2 Accretion
Termination Date) and the Class A-4 Certificates (on or before the Class A-4
Accretion Termination Date). Because the Accrual Directed Classes and Components
receive such distributions of principal, they may amortize faster than otherwise
would be the case.
If any Certificate is purchased at a discount from its original Certificate
Principal Balance, and if a purchaser of such Certificate calculates the yield
to maturity based on an assumed rate of principal payments (including Principal
Prepayments) and liquidations faster than that actually received on the Mortgage
Loans, the actual yield to maturity will be lower than that so calculated. If
any Certificate is purchased at a premium from its original Certificate
Principal Balance, and if a purchaser of such Certificate calculates the yield
to maturity based on an assumed rate of principal payments (including Principal
Prepayments) and liquidations slower than that actually received on the Mortgage
Loans, the actual yield to maturity will be lower than that so calculated.
Principal distributions on the Class A-2, Class A-7, Class A-8 and Class
A-13 Certificates, Component A-1-1 and Component A-9-1 (the "PACS") on any
Distribution Date will be payable in amounts determined on the basis of their
respective planned principal balances for such Distribution Date as set forth in
Appendix A (each, a "PLANNED PRINCIPAL BALANCE"). The Planned Principal Balances
for the PACs were determined assuming that the prepayment rate of the Mortgage
Loans occur each month at a constant level between approximately 100% and 500%
of the BPA (except for the Class A-13 Certificates which assumed a constant
level between approximately 0% and 250% of the BPA). However, as discussed
herein, actual principal distributions may deviate from the described amounts,
because the actual prepayment rate of the Mortgage Loans each month may not
occur at a constant level between approximately 100% and 500% (or between 0% and
250% in the case of the Class A-13 Certificates) of the BPA. If the Class and
Component Principal Balances of the Class A-3, Class A-11 and Class A-12
Certificates, Component A-1-2 and Component A-9-2 (the "TACS") and the Class A-4
Principal Balance are reduced to zero before the Class and Component Principal
Balances of the PACs are reduced to zero, the weighted average lives of the PACs
will become significantly more sensitive to changes in the prepayment rate of
the Mortgage Loans, and principal distributions thereon will be more likely to
deviate from the described amounts.
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<PAGE>
Principal distributions on the TACs on any Distribution Date are payable
based on their respective targeted principal balances for such Distribution Date
as set forth in Appendix B (each, a "TARGETED PRINCIPAL BALANCE"). The Targeted
Principal Balances were determined assuming that the prepayment rate of the
Mortgage Loans remains constant at 250% of the BPA. However, as discussed
herein, actual principal distributions may deviate from the described amounts,
because the actual prepayment rate of the Mortgage Loans each month may not
remain constant at 250% of the BPA. If the Class A-4 Principal Balance has been
reduced to zero, the rate of principal distributions and the weighted average
life of the TACs will become significantly more sensitive to changes in the
prepayment rate of the Mortgage Loans.
Principal Prepayments on the Mortgage Loans and other unscheduled payments
of principal may result in principal available for distribution to the PACs and
TACs on a Distribution Date in an amount greater than the amount necessary to
reduce the applicable Class and Component Principal Balances of the PACs and
TACs to their scheduled amounts. Such excess will generally be distributed first
to the Class A-4 Certificates until the Class A-4 Principal Balance has been
reduced to zero, then to the TACs and then to the PACS as more fully described
in "Description of the Certificates -- Distributions of Principal -- SENIOR
PRINCIPAL DISTRIBUTION AMOUNT" herein. Accordingly, the rate of payments on the
Mortgage Loans is expected to have a greater effect on the weighted average life
of the Class A-4 Certificates, and under certain prepayment scenarios, the TACs,
than on the weighted average lives of the PACs. If the rate of Principal
Prepayments and other unscheduled payments of principal causes the principal
available for distribution on the Certificates on any Distribution Date to be
less than the amounts necessary to reduce the Class or Component Principal
Balances of the PACs then entitled to receive principal to their Planned
Principal Balances and to reduce the Class or Component Principal Balances of
the TACs to their Targeted Principal Balances, the Class A-4 Certificates will
not receive any distribution of principal. See "Yield and Prepayment
Considerations" herein.
The yield to maturity on the Class X Certificates will be extremely
sensitive to the level of Principal Prepayments on the Mortgage Loans. The
interest payable to the Class X Certificates is based on the weighted average of
the Stripped Interest Rates (as defined herein) of the Mortgage Loans having
Pass-Through Rates in excess of 7.250% (the "PREMIUM RATE MORTGAGE LOANS") and
therefore the yield to maturity of such Certificates will generally decrease as
a result of faster than expected Principal Prepayments on the Premium Rate
Mortgage Loans. Prospective investors should fully consider the risks associated
with an investment in the Class X Certificates, including the possibility that
if the rate of Principal Prepayments on the Premium Rate Mortgage Loans is
rapid, such investors may not fully recoup their initial investments. See "Yield
and Prepayment Considerations" herein.
The yield to maturity on the Floater Certificates will be sensitive to
fluctuations in the level of LIBOR (as defined herein) and to the rate of
Principal Prepayments on the Mortgage Loans, and the yield to maturity on the
Inverse Floater Certificates will be extremely sensitive to fluctuations in the
level of LIBOR and to the rate of Principal Prepayments on the Mortgage Loans.
Prospective investors should fully consider the risks associated with an
investment in the Class A-10 Certificates, including the possibility that if the
rate of Principal Prepayments on the Mortgage Loans is rapid or if the level of
LIBOR is high, the holders of the Class A-10 Certificates may not fully recoup
their initial investment. See "Yield and Prepayment Considerations" herein.
Although the Prepayment Lockout Certificates are Senior Certificates, the
Class A-5, Class A-6 and Class A-14 Certificates will generally not be entitled
to receive any distributions of Principal Prepayments until the Distribution
Date in October 2002. Therefore, the Class A-5, Class A-6 and Class A-14
Certificates will not be entitled to receive the disproportionate allocation of
Principal Prepayments that the other Senior Certificates are entitled to
receive.
The yield to maturity on each Class of the Senior Subordinate Certificates
will be extremely sensitive to realized losses on the Mortgage Loans (other than
Special Hazard Losses, Fraud Losses and Bankruptcy Losses (each as defined in
the Prospectus) in excess of the applicable coverage therefor provided by the
S-23
<PAGE>
Class B Certificates), because a disproportionately large amount of such losses
(rather than a pro rata portion thereof) generally will be allocable to such
Classes of Certificates following the reduction of the aggregate of the Class
Principal Balances of the Junior Subordinate Certificates to zero, as described
under "Description of the Certificates -- Subordination and Allocation of
Losses" herein.
BOOK-ENTRY SYSTEM
Since transactions in the Class A Certificates, other than the Class A-1 and
Class A-10 Certificates (the "BOOK-ENTRY CERTIFICATES") generally can be
effected only through The Depository Trust Company ("DTC"), participating
organizations, indirect participants and certain banks, the ability of a
Certificateholder to pledge a Book-Entry Certificate to persons or entities that
do not participate in the DTC system, or otherwise to take actions with respect
to such Certificates, may be limited due to a lack of a physical certificate
representing the Book-Entry Certificates. In addition, the Certificateholders
may experience some delay in their receipt of distributions of interest and
principal on the Book-Entry Certificates, since such distributions will be
forwarded by the Trustee (or its duly appointed paying agent, if any) to DTC,
and DTC will credit such distributions to the accounts of DTC Participants (as
defined herein) which will thereafter credit them to the accounts of
Certificateholders either directly or indirectly through indirect participants.
Also, issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity thereof in any secondary trading market that may develop therefor
because investors may be unwilling to purchase securities for which they cannot
obtain delivery of physical certificates. See "Description of the Certificates
- -- Book-Entry Registration" herein.
THE CERTIFICATE TRUST AND THE MORTGAGE TRUST
The assets of the Certificate Trust will consist of the certificates (other
than the Class R-1 Certificates) issued by the Mortgage Trust. The primary
assets of the Mortgage Trust will consist of a pool (the "MORTGAGE POOL") of
Mortgage Loans. The Mortgage Trust will also contain (i) certain insurance
policies related to the Mortgage Loans, (ii) any property which secured a
Mortgage Loan and which is acquired by foreclosure or by deed in lieu of
foreclosure after the Cut-Off Date, (iii) amounts held in the Certificate
Account, and (iv) certain other assets. Funds otherwise required to be held in
the Certificate Account may be held in an investment account and invested for
the benefit of the Company in Eligible Investments pursuant to the terms of the
Pooling Agreement described herein. The Mortgage Loans will be assigned to the
Trustee, together with all principal and interest due on the Mortgage Loans
after the Cut-Off Date. The Trustee will, concurrently with such assignment,
authenticate and deliver the Certificates. Each Mortgage Loan will be identified
in a schedule appearing as an exhibit to the Pooling Agreement (the "MORTGAGE
LOAN SCHEDULE") which will specify with respect to each Mortgage Loan, among
other things, the original principal balance and the outstanding principal
balance as of the close of business on the Cut-Off Date, the term of the
Mortgage Note and the Mortgage Interest Rate.
S-24
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL*
The Mortgage Pool will consist of Mortgage Loans that will have an aggregate
principal balance outstanding as of September 1, 1997 (the "CUT-OFF DATE"),
after deducting payments due on or before that date, of approximately
$350,143,810. Certain of the risks of loss on certain Mortgage Loans will be
covered up to specified limits by Primary Insurance Policies.
The Mortgage Loans are secured by first mortgages or first deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties (the "MORTGAGED PROPERTIES"), which may include detached
homes, duplexes, townhouses, individual condominium units, individual units in
planned unit developments and other attached dwelling units which are part of
buildings consisting of more than four units (so long as the property subject to
the lien of the related Mortgage consists of no more than four units), and
having the additional characteristics described below and in the Prospectus.
Each Mortgage Loan will have a first payment date during the period from
May, 1996 through October, 1997 inclusive, and will have an original term to
maturity of not more than 30 years. As of the Cut-Off Date, the Mortgage
Interest Rate on each Mortgage Loan will be not less than 7.000% and not more
than 9.375% per annum. As of the Cut-Off Date, the weighted average of the
Mortgage Interest Rates on the Mortgage Loans will be approximately 8.208% per
annum. As of the Cut-Off Date, the Pass-Through Rate for each Mortgage Loan will
be not less than 6.750% and not more than 9.083% per annum. As of the Cut-Off
Date, the weighted average of the Pass-Through Rates for the Mortgage Loans will
be approximately 7.919% per annum.
All of the Mortgage Loans will have principal and interest payable on the
first day of each month (the "DUE DATE"). Approximately 0.4% of the Mortgage
Loans will be Buydown Loans. The latest original scheduled maturity of any
Mortgage Loan will be September, 2027. Each of the Mortgage Loans will have
original terms to maturity of not more than 30 years, and as of the Cut-Off
Date, the weighted average remaining term to maturity (adjusted for
Curtailments) of the Mortgage Loans will be approximately 357.3 months. At
origination, based upon an appraisal of the Mortgaged Property securing each
Mortgage Loan, approximately 88.6% of the Mortgage Loans will have had
Loan-to-Value Ratios less than or equal to 80%, and approximately 11.4% of the
Mortgage Loans will have had Loan-to-Value Ratios greater than 80% but less than
or equal to 95%. No Mortgage Loan will have had a Loan-to-Value Ratio at
origination greater than 95%. At origination, the weighted average of the
Loan-to-Value Ratios of the Mortgage Loans was approximately 75.1%. As of the
Cut-Off Date, the weighted average of the Loan-to-Value Ratios of the Mortgage
Loans is approximately 75.0%. As of the Cut-Off Date, approximately 11.7% of the
Mortgage
- ------------------------
* The description herein of the Mortgage Pool and the Mortgaged Properties is
based upon the Mortgage Loans at the close of business on the Cut-Off Date,
after deducting the scheduled principal payments due on or before such date,
whether or not actually received. All references herein to "principal
balance" refer to the principal balance as of the Cut-Off Date, unless
otherwise specifically stated or required by the context. References herein
to percentages of Mortgage Loans refer in each case to the percentage of the
aggregate principal balance of the Mortgage Loans, based on the outstanding
principal balances of the Mortgage Loans after giving effect to scheduled
Monthly Payments due on or prior to the Cut-Off Date, whether or not
received. References to weighted averages refer, in each case, to weighted
averages by principal balance as of the Cut-Off Date of the Mortgage Loans
(determined as described in the preceding sentence). Prior to the issuance
of the Certificates, Mortgage Loans may be removed from the Mortgage Pool as
a result of principal prepayments in full ("PAYOFFS"), delinquencies or
otherwise. In such event, other Mortgage Loans may be included in the
Mortgage Pool. The Company believes that the information set forth herein
with respect to the Mortgage Pool is representative of the characteristics
of the Mortgage Pool as it will actually be constituted at the time the
Certificates are issued, although the range of Mortgage Interest Rates and
certain other characteristics of the Mortgage Loans in the Mortgage Pool may
vary. See "-- Additional Information" herein.
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<PAGE>
Loans are covered by a Primary Insurance Policy. All of the Mortgage Loans with
Loan-to-Value Ratios as of the Cut-Off Date in excess of 80% were covered by a
Primary Insurance Policy. At origination, each Mortgage Loan will have had a
principal balance of not less than $12,000 nor more than $1,000,000, and the
average principal balance of the Mortgage Loans as of the Cut-Off Date will be
approximately $251,540. Approximately 94.1% of the Mortgage Loans will have been
secured by owner-occupied Mortgaged Properties which were the primary residences
of the related Mortgagors, based solely on representations of the Mortgagors
obtained at the origination of the related Mortgage Loans, and approximately
0.8% of the Mortgage Loans will have been secured by owner-occupied Mortgaged
Properties which were second or vacation homes of the related Mortgagors, based
solely on such representations. Approximately 5.1% of the Mortgage Loans will
have been secured by Mortgaged Properties which were investor properties of the
related Mortgagors, based solely on such representations. None of the Mortgage
Loans are secured by interests in cooperative apartments. The aggregate
principal balance of Mortgage Loans originated under reduced and no
documentation programs (including certain Mortgage Loans for which verification
of income and deposits was not required), which generally limit the original
Loan-to-Value Ratio of the Mortgage Loan, will be approximately $96,243,265,
which will be approximately 27.5% of the Mortgage Loans. As of the Cut-Off Date,
the weighted average of the Loan-to-Value Ratios of such Mortgage Loans
originated under such reduced and no documentation programs is approximately
71.4%.
Approximately 50.6% of the Mortgage Loans are secured by Mortgaged
Properties located in California; 8.2%, in Texas; and no other single state
contains Mortgaged Properties securing more than 5.0% of the Mortgage Loans. No
more than 1.7% of the Mortgage Loans will be secured by Mortgaged Properties
located in any one California zip code area, and no more than 0.5% of the
Mortgage Loans will be secured by Mortgaged Properties located in any other
single zip code area. Approximately 31.9% of the Mortgage Loans will have been
originated for the purpose of refinancing existing mortgage debt, including
cash-out refinancings. Approximately 68.1% of the Mortgage Loans will have been
originated for the purpose of purchasing the Mortgaged Property.
ADDITIONAL INFORMATION
A Current Report on Form 8-K relating to the Offered Certificates containing
a detailed description of the Mortgage Loans will be available to purchasers of
Offered Certificates at or before initial issuance of the Offered Certificates
and will be filed with the Securities and Exchange Commission within 15 days
after such initial issuance. The Current Report on Form 8-K will specify as of
the Cut-Off Date the aggregate principal balance of the Mortgage Loans and will
set forth in detail the following information regarding such Mortgage Loans: the
number of Mortgage Loans, the range of Mortgage Interest Rates, the range of
Mortgage Loan original principal balances, the years in which initial Monthly
Payments on the Mortgage Loans are due, the weighted average remaining term to
maturity of the Mortgage Loans, the range of Loan to-Value Ratios of the
Mortgage Loans as of the Cut-Off Date, the types of Mortgaged Properties, the
stated owner occupancy status of the Mortgaged Properties at the time the
Mortgage Loans were originated, the geographic distribution by state of the
Mortgage Properties, the scheduled maturity years of the Mortgage Loans
(adjusted for Curtailments), the original terms of the Mortgage Loans, the
Mortgagors' purpose of financing, the number of Mortgage Loans originated under
a reduced documentation program, if any, and the number of Buydown Loans, if
any.
S-26
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "POOLING AGREEMENT") to be dated as of the Cut-Off Date between
the Company, as Depositor and Master Servicer, and U.S. Bank National
Association, as trustee (the "TRUSTEE"), a form of which is filed as an exhibit
to the Registration Statement of which this Prospectus Supplement is a part.
Reference is made to the Prospectus for important additional information
regarding the terms and conditions of the Pooling Agreement and the
Certificates. It is a condition to the issuance of the Offered Certificates that
the Class A Certificates (other than the Class A-10 Certificates) and the
Residual Certificates each be rated "AAA" by Standard & Poor's, a division of
The McGraw-Hill Companies, Inc. ("S&P") and by Fitch Investors Service, L.P. ("
FITCH"), that the Class A-10 and Class X Certificates each be rated "AAAr" by
S&P and "AAA" by Fitch and that the Class B-1 Certificates be rated not less
than "AA" by Fitch, the Class B-2 Certificates be rated not less than "A" by
Fitch and the Class B-3 Certificates be rated not less than "BBB" by Fitch. See
"Certificate Ratings" herein. At the time of their issuance, the Offered
Certificates, other than the Class B-2 and Class B-3 Certificates, will qualify
as "mortgage related securities" within the meaning of the Secondary Mortgage
Market Enhancement Act of 1984.
The Master Servicer will be obligated to make Advances with respect to
delinquent payments on Mortgage Loans as described herein under "-- Advances".
The Certificates, other than the Class R-1 Certificates, will evidence all
the beneficial ownership interest in a trust (the "CERTIFICATE TRUST")
established by the Company, the assets of which, together with the Class R-1
Certificates described below, will evidence all the beneficial ownership
interest in another trust (the "MORTGAGE TRUST") into which the mortgage loans
(the "MORTGAGE LOANS") will be deposited. The Mortgage Pass-Through
Certificates, Series 1997-5 (the "CERTIFICATES"), will consist of the following
twenty-three classes: (i) Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class A-7, Class A-8, Class A-9, Class A-10, Class A-11, Class A-12,
Class A-13 and Class A-14 (the "CLASS A CERTIFICATES"), (ii) Class X, (iii)
Class B-1, Class B-2 and Class B-3 (the "SENIOR SUBORDINATE CERTIFICATES"), (iv)
Class B-4, Class B-5 and Class B-6 (the "JUNIOR SUBORDINATE CERTIFICATES" and,
together with the Senior Subordinate Certificates, the "SUBORDINATE
CERTIFICATES" or the "CLASS B CERTIFICATES") and (v) Class R and Class R-1 (the
"RESIDUAL CERTIFICATES" and, together with the Class A and Class X Certificates,
the "Senior Certificates"). The Class A-5, Class A-6 and Class A-14 Certificates
are sometimes referred to as the "PREPAYMENT LOCKOUT CERTIFICATES". The Class
A-9 and Class A-10 Certificates are sometimes referred to as the "LIBOR
CERTIFICATES". The Class A-9 Certificates are sometimes referred to as the
"FLOATER CERTIFICATES" and the Class A-10 Certificates are sometimes referred to
as the "INVERSE FLOATER CERTIFICATES". Only the Senior Certificates (other than
the Class A-1 Certificates) and the Senior Subordinate Certificates
(collectively, the "OFFERED CERTIFICATES") are offered hereby. The Class A-1
Certificates and the Junior Subordinate Certificates are not offered hereby. The
"CLASS PRINCIPAL BALANCE" for any Class of Certificates (other than the Class
A-1 and Class A-9 Certificates) will equal the aggregate amount of principal to
which such Class is entitled, after giving effect to prior (i) distributions of
principal to such Class, (ii) allocations of losses required to be borne by such
Class and (iii) in the case of the Class A-4 Certificates, increased by all
interest accrued and added to the Class Principal Balance thereof.
The Class A-1 and Class A-9 Certificates will be comprised of multiple
components (each, a "COMPONENT"), each of which will have a specified principal
balance (a "COMPONENT PRINCIPAL BALANCE") or notional amount (a "COMPONENT
NOTIONAL AMOUNT"), which functions in a manner comparable to that of a Class
Principal Balance or Class Notional Amount, respectively, on which interest will
accrue at a designated Remittance Rate (except Component A-1-3 and Component
A-1-4 which will not be entitled to interest). Holders of a Class of
Certificates comprised of Components will be entitled to receive distributions
on any Distribution Date to the extent of the amount distributed with respect to
the related Components on such Distribution Date. Holders of a Class of
Certificates comprised of Components may
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not transfer such Components separately. The Class A-9 Certificates will be
comprised of Component A-9-1 and Component A-9-2 with initial Component
Principal Balances of $18,264,039 and $16,050,172, respectively. The Class A-1
Certificates (which are not offered hereby) will be comprised of Component
A-1-1, Component A-1-2, Component A-1-3, Component A-1-4 and Component A-1-5.
The Class Principal Balances of the Class A-9 and Class A-1 Certificates will
equal the sum of the Component Principal Balances thereof. The Component
Principal Balance for each Component will equal the aggregate amount of
principal to which such Component is entitled, after giving effect to prior (i)
distributions of principal to such Component, (ii) allocations of losses
required to be borne by such Component and (iii) in the case of Component A-1-2,
increased by all interest accrued and added to the Component Principal Balance
thereof.
The "CERTIFICATE PRINCIPAL BALANCE" for any Certificate will be the portion
of the corresponding Class Principal Balance represented by such Certificate.
The aggregate initial Certificate Principal Balance will be approximately equal
to the aggregate principal balance of the Mortgage Loans as of the Cut-Off Date.
The Senior Certificates will comprise approximately 94.50%, the Senior
Subordinate Certificates will comprise approximately 4.50%, and the Junior
Subordinate Certificates will comprise approximately 1.00% of the initial
aggregate Certificate Principal Balance of the Certificates. The Offered
Certificates, other than the Class A-10, Class X and Residual Certificates, are
offered in minimum denominations equivalent to not less than $25,000 initial
Certificate Principal Balance each and multiples of $1 in excess thereof. The
Class A-10 and Class X Certificates are offered in minimum denominations
equivalent to not less than $100,000 initial Class Notional Amount each and
multiples of $1 in excess thereof, except that one Class X Certificate may be
issued in a different amount. The Residual Certificates, which will each have an
initial Class Principal Balance of $50, will each be offered in registered,
certificated form in a single denomination of a 99.99% Percentage Interest. The
remaining 0.01% Percentage Interest of the Class R and Class R-1 Certificates
will be retained by the Company as set forth herein under "Certain Federal
Income Tax Consequences".
Each Class of Book-Entry Certificates will initially be represented by a
global Certificate registered in the name of the nominee of DTC. DTC has advised
the Company that DTC's nominee will be Cede & Co. ("CEDE"). Accordingly, Cede is
expected to be the holder of record of the Book-Entry Certificates. No
Book-Entry Certificateholder will be entitled to receive a certificate
representing such person's interest in such Certificate. Unless and until
Definitive Certificates (as defined below) are issued under the limited
circumstances described herein, all references herein to actions by Book-Entry
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants (as defined below), and all references herein to distributions,
notices, reports, and statements to Book-Entry Certificateholders shall refer to
distributions, notices, reports, and statements to Cede, as the registered
holder of such Certificates, for distribution to Book-Entry Certificateholders
in accordance with DTC procedures. See "-- Book-Entry Registration" and "--
Definitive Certificates" herein.
BOOK-ENTRY REGISTRATION
Certificateholders may hold their Book-Entry Certificates through DTC, if
they are DTC Participants (as defined below), or indirectly through
organizations which are DTC Participants. Transfers between DTC Participants
will occur in the ordinary way in accordance with DTC rules. Cede, as nominee of
DTC,will hold the global Certificates for the Book-Entry Certificates.
DTC has advised the Company that it is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended. DTC holds securities
that its participants ("DTC PARTICIPANTS") deposit with DTC. DTC also
facilitates the settlement among DTC Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-
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entry changes in DTC Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. DTC Participants include the
Underwriter, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to the DTC system
also is available to other entities, such as banks, brokers, dealers, and trust
companies that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly ("INDIRECT DTC PARTICIPANTS").
Certificateholders that are not DTC Participants or Indirect DTC
Participants but desire to purchase, sell, or otherwise transfer ownership of or
other interests in Book-Entry Certificates may do so only through DTC
Participants and Indirect DTC Participants. In addition, unless Definitive
Certificates are issued, Certificateholders will receive all distributions of
principal and interest on the Book-Entry Certificates through DTC Participants.
Under a book-entry format, Certificateholders will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede, as nominee for DTC, on each such date, DTC will forward such payments
to DTC Participants which thereafter will be required to forward them to
Indirect DTC Participants or Certificateholders. It is anticipated that the sole
"CERTIFICATEHOLDER" (as such term is used in the Pooling Agreement) for each
Class of Book-Entry Certificates will be Cede, as nominee of DTC, and that
Book-Entry Certificateholders will not be recognized by the Trustee as
Certificateholders under the Pooling Agreement. Book-Entry Certificateholders
will be permitted to exercise the rights of Certificateholders under the Pooling
Agreement only indirectly through DTC Participants, who in turn will exercise
their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "RULES"), DTC is required to make book-entry transfers among
DTC Participants on whose behalf it acts with respect to the Book-Entry
Certificates and is required to receive and transmit payments of principal and
interest, if any, on such Book-Entry Certificates. DTC Participants and Indirect
DTC Participants with whom Book-Entry Certificateholders have accounts with
respect to the Book-Entry Certificates similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Book-Entry Certificateholders. Accordingly, although owners of Book-Entry
Certificates will not possess Definitive Certificates, the Rules provide a
mechanism by which owners of the Book-Entry Certificates through their DTC
Participants will receive payments and will be able to transfer their interest.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
Book-Entry Certificateholder to pledge Book-Entry Certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of a
physical certificate for such Book-Entry Certificates.
DTC has advised the Company that it will take any action permitted to be
taken by a Book-Entry Certificateholder under the Pooling Agreement only at the
direction of one or more DTC Participants to whose account with DTC the
Certificates are credited. Additionally, DTC has advised the Company that it
will take such actions with respect to a Book-Entry Certificate only at the
direction of and on behalf of the DTC Participant whose holdings include that
Certificate. DTC may take conflicting actions with respect to other Book-Entry
Certificates to the extent that such actions are taken on behalf of DTC
Participants whose holdings include such Book-Entry Certificates.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Book-Entry Certificates among DTC Participants, it is under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
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DEFINITIVE CERTIFICATES
The Book-Entry Certificates will be issued in fully registered, certificated
form to Certificateholders or their nominees ("DEFINITIVE CERTIFICATES"), rather
than to DTC or its nominee, only if (i) the Company advises the Trustee in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as Depository with respect to the Book-Entry Certificates and
the Trustee or the Company is unable to locate a qualified successor, (ii) the
Company, at its option, elects to terminate the book-entry system through DTC or
(iii) after the occurrence of an Event of Default, Certificateholders of
Book-Entry Certificates evidencing not less than 66% of the aggregate
outstanding Certificate Principal Balance advise the Trustee and DTC through DTC
Participants in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of the
Certificateholders.
Upon notice of the occurrence of any of the events described in the
immediately preceding paragraph, DTC is required to notify all DTC Participants
of the availability of Definitive Certificates. Upon surrender by DTC of the
global Certificates and receipt from DTC of instructions for re-registration,
the Trustee will issue the Book-Entry Certificates in the form of Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders under the Pooling Agreement.
Distributions of principal and interest on the Definitive Certificates, as
well as the other Classes of Certificates, will be made by the Trustee (or its
duly appointed paying agent, if any) directly to holders of such Certificates in
accordance with the procedures set forth herein and in the Pooling Agreement.
Distributions of principal and interest on each Distribution Date will be made
to holders in whose names such Certificates were registered at the close of
business on the related Record Date. Distributions will be made by wire transfer
in immediately available funds for the account of each such holder or, if a
holder has not provided wire instructions, by check mailed to the address of
such holder as it appears on the register maintained by the Certificate
Registrar. The final payment on any Certificate (whether Class X, Residual,
Class B or Definitive Certificates or the global Certificates registered in the
name of Cede) will be made only upon presentation and surrender of such
Certificate at the offices of the Trustee or its agent or such office or agency
as is specified in the notice of final distribution to holders of Certificates
being retired. The Trustee will provide such notice to registered
Certificateholders not later than the fifteenth day of the month in which all
remaining outstanding Certificates will be retired.
Definitive Certificates, as well as the other Classes of Certificates, will
be transferable and exchangeable at the offices of the Trustee in New York City.
A reasonable service charge may be imposed for any registration of transfer or
exchange, and the Trustee or such agent may require payment of a sum sufficient
to cover any tax or other governmental charge imposed in connection therewith.
PRIORITY OF DISTRIBUTIONS
Commencing in October 1997, on the 25th day of each month, or if such 25th
day is not a business day, on the immediately succeeding business day (each, a
"DISTRIBUTION DATE"), prior to the Credit Support Depletion Date (as defined
herein), distributions will be made in the order and priority as follows,
subject, in each case, to the extent of the Available Distribution Amount (as
defined herein) remaining following prior distributions, if any, on such
Distribution Date:
(i) first, to Component A-1-4, the PO Fraction (as defined herein) of
all principal received on or in respect of each PO Mortgage Loan (as defined
herein);
(ii) second, (a) to the Senior Certificates (other than Component A-1-3
and Component A-1-4 of the Class A-1 Certificates), accrued and unpaid
interest at their respective Remittance Rates on their respective Class
Principal Balances, Component Principal Balances, Class Notional Amounts or
Component Notional Amounts, as the case may be, provided, however, that no
such distributions will be made to Component A-1-2 on or before the
Component A-1-2 Accretion Termination Date (as
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defined herein) or to the Class A-4 Certificates on or before the Class A-4
Accretion Termination Date (as defined herein), and (b) on or before the
Component A-1-2 Accretion Termination Date, to the Classes and Components in
the manner described below, as principal, the Component A-1-2 Accrual Amount
and (c) on or before the Class A-4 Accretion Termination Date, to the
Classes and Components in the manner described below, as principal, the
Class A-4 Accrual Amount;
(iii) third, to the Senior Certificates, other than the Class A-10 and
Class X Certificates and Component A-1-4 and Component A-1-5, as principal,
the Senior Principal Distribution Amount in the order described in "--
Distributions of Principal -- SENIOR PRINCIPAL DISTRIBUTION AMOUNT" herein;
(iv) fourth, to Component A-1-4, to the extent of amounts otherwise
available to pay the Subordinate Principal Distribution Amount (as defined
herein) (without regard to clause (B) of such definition) on such
Distribution Date, the sum of (a) principal in an amount equal to the PO
Fraction of certain principal losses on the PO Mortgage Loans, as described
in "-- Distributions of Principal -- PO PRINCIPAL DISTRIBUTION AMOUNT"
herein and (b) the sum of amounts, if any, by which the amount described in
clause (a) above on each prior Distribution Date exceeded the amount
actually distributed in respect thereof on such prior Distribution Dates and
not subsequently distributed; PROVIDED that any amounts distributed in
respect of losses pursuant to this paragraph shall not cause a further
reduction in the Component A-1-4 Principal Balance;
(v) fifth, to the Class B-1 Certificates, accrued and unpaid interest at
the Class B-1 Remittance Rate on the Class B-1 Principal Balance;
(vi) sixth, to the Class B-1 Certificates, their pro rata share of the
Subordinate Principal Distribution Amount;
(vii) seventh, to the Class B-2 Certificates, accrued and unpaid interest
at the Class B-2 Remittance Rate on the Class B-2 Principal Balance;
(viii) eighth, to the Class B-2 Certificates, their pro rata share of the
Subordinate Principal Distribution Amount;
(ix) ninth, to the Class B-3 Certificates, accrued and unpaid interest
at the Class B-3 Remittance Rate on the Class B-3 Principal Balance;
(x) tenth, to the Class B-3 Certificates, their pro rata share of the
Subordinate Principal Distribution Amount;
(xi) eleventh, to the Junior Subordinate Certificates, interest and
principal in the same manner as for the Senior Subordinate Certificates,
first to the Class B-4 Certificates, then to the Class B-5 Certificates and
then to the Class B-6 Certificates; and
(xii) twelfth, to the Class R-1 Certificates, the remaining portion, if
any, of the Available Distribution Amount for such Distribution Date.
COMPONENT A-1-2 ACCRUAL. The "COMPONENT A-1-2 ACCRETION TERMINATION DATE"
is the earlier to occur of (i) the Distribution Date on which the Class
Principal Balances of the Class A-3, Class A-11, Class A-12 and Class A-13
Certificates and the Component A-9-2 Principal Balance have been reduced to zero
and (ii) the Credit Support Depletion Date. On each Distribution Date on or
before the Component A-1-2 Accretion Termination Date, an amount (the "COMPONENT
A-1-2 ACCRUAL AMOUNT") equal to the accrued interest that would otherwise be
distributable in respect of Component A-1-2 on such Distribution Date will be
added to the Component A-1-2 Principal Balance (such amount to thereafter accrue
interest at the Component A-1-2 Remittance Rate) and such amount will be
distributed, as principal, to the following Certificates and Components:
(1) first, concurrently, as follows:
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(a) 13.8691202055% to the Class A-3 Certificates to the extent necessary
to reduce the Class A-3 Principal Balance to its Targeted Principal Balance
for such Distribution Date;
(b) 12.5456616761% to the Class A-11 Certificates to the extent
necessary to reduce the Class A-11 Principal Balance to its Targeted
Principal Balance for such Distribution Date;
(c) 11.6393079627% to Component A-9-2 to the extent necessary to reduce
the Component A-9-2 Principal Balance to its Targeted Principal Balance for
such Distribution Date; and
(d) 61.9459101557%, to the extent necessary to reduce the aggregate
Class Principal Balance of the Class A-12 and Class A-13 Certificates to its
combined Targeted Principal Balance for such Distribution Date, sequentially
as follows:
(I) to the Class A-13 Certificates to the extent necessary to reduce
the Class A-13 Principal Balance to its Planned Principal Balance for
such Distribution Date;
(II) to the Class A-12 Certificates, until the Class A-12 Principal
Balance has been reduced to zero; and
(III) to the Class A-13 Certificates, until the Class A-13 Principal
Balance has been reduced to zero;
(2) second, to Component A-1-2 to the extent necessary to reduce the
Component A-1-2 Principal Balance to its Targeted Principal Balance for such
Distribution Date;
(3) third, to the Class A-4 Certificates, until the Class A-4 Principal
Balance has been reduced to zero;
(4) fourth, concurrently, as follows:
(a) 90.0000000000%, concurrently, as follows:
(I) 13.8691202055% to the Class A-3 Certificates, until the Class
A-3 Principal Balance has been reduced to zero;
(II) 12.5456616761% to the Class A-11 Certificates, until the Class
A-11 Principal Balance has been reduced to zero;
(III) 11.6393079627% to Component A-9-2, until the Component A-9-2
Principal Balance has been reduced to zero; and
(IV) 61.9459101557% sequentially as follows:
(i) to the Class A-13 Certificates to the extent necessary to
reduce the Class A-13 Principal Balance to its Planned Principal
Balance for such Distribution Date;
(ii) to the Class A-12 Certificates, until the Class A-12
Principal Balance has been reduced to zero; and
(iii) to the Class A-13 Certificates, until the Class A-13
Principal Balance has been reduced to zero; and
(b) 10.0000000000% to Component A-1-2; and
(5) fifth, to Component A-1-2, until the Component A-1-2 Principal Balance
has been reduced to zero.
CLASS A-4 ACCRUAL. The "CLASS A-4 ACCRETION TERMINATION DATE" is the
earlier to occur of (i) the Distribution Date on which the Component A-1-2
Principal Balance has been reduced to zero and (ii) the Credit Support Depletion
Date. On each Distribution Date on or before the Class A-4 Accretion Termination
Date, after the Component A-1-2 Accrual Amount has been distributed as described
above,
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an amount (the "CLASS A-4 ACCRUAL AMOUNT") equal to the accrued interest that
would otherwise be distributable in respect of the Class A-4 Certificates on
such Distribution Date will be added to the Class A-4 Principal Balance (such
amount to thereafter accrue interest at the Class A-4 Remittance Rate) and such
amount will be distributed, as principal, to the following Certificates and
Components: (1) first, as in clause (1) of the preceding paragraph; (2) second,
as in clause (2) of the preceding paragraph; and (3) third, as in clause (3) of
the preceding paragraph.
With respect to the Class B Certificates, notwithstanding the foregoing, on
any Distribution Date on which the Subordination Level (as defined below) for
any Class of Class B Certificates is less than such percentage as of the Cut-Off
Date, the portion of the Subordinate Principal Distribution Amount otherwise
allocable to the Class or Classes junior to such Class will be allocated to the
most senior Class of Class B Certificates for which the Subordination Level is
less than such percentage as of the Cut-Off Date and to the Class or Classes of
Class B Certificates senior thereto, pro rata according to the Class Principal
Balances of such Classes. The "SUBORDINATION LEVEL" on any specified date with
respect to any Class of Class B Certificates is the percentage obtained by
dividing the sum of the Class Principal Balances of all Classes of Certificates
which are subordinate in right of payment to such Class by the sum of the Class
Principal Balances of all of the Certificates as of such date prior to giving
effect to distributions or allocations of realized losses on the Mortgage Loans
on such date.
On each Distribution Date on or after the Credit Support Depletion Date,
distributions will be made in the order and priority as follows, subject, in
each case, to the extent of the Available Distribution Amount remaining
following prior distributions, if any, on such Distribution Date:
(i) first, to Component A-1-4, the PO Fraction of all principal received
on or in respect of each PO Mortgage Loan;
(ii) second, to the Senior Certificates (other than Component A-1-3 and
A-1-4 of the Class A-1 Certificates), accrued and unpaid interest at their
respective Remittance Rates on their respective Class Principal Balances,
Component Principal Balances, Class Notional Amounts or Component Notional
Amounts, as the case may be;
(iii) third, to the Senior Certificates (other than the Class A-10 and
Class X Certificates and Component A-1-4 and Component A-1-5 of the Class
A-1 Certificates), as principal, the Senior Principal Distribution Amount
pro rata according to their respective Class Principal Balances and
Component Principal Balances; and
(iv) fourth, to the Class R-1 Certificates, the remaining portion, if
any, of the Available Distribution Amount for such Distribution Date.
The "CREDIT SUPPORT DEPLETION DATE" is the first Distribution Date on which
the aggregate of the Class Principal Balances of the Class B Certificates has
been or will be reduced to zero.
Distributions of interest and principal will be based solely on payments
received with respect to the Mortgage Loans.
DISTRIBUTIONS OF INTEREST
With respect to each Class of Certificates (except Component A-1-3 and
Component A-1-4 of the Class A-1 Certificates, which are not entitled to
interest), interest will be passed through monthly on each Distribution Date,
commencing in October 1997, except that (1) interest accrued on Component A-1-2
on or before the Component A-1-2 Accretion Termination Date will be added to the
Component A-1-2 Principal Balance and (2) interest accrued on the Class A-4
Certificates on or before the Class A-4 Accretion Termination Date will be added
to the Class A-4 Principal Balance. With respect to each Distribution Date, an
amount of interest will accrue or accrete on each Class of Certificates, or,
with respect to the Class A-1 Certificates, Component A-1-1, Component A-1-2 and
Component A-1-5,
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generally equal to 1/12th of the applicable Remittance Rate for such Class or
Component multiplied by the related Class Principal Balance, Component Principal
Balance, Class Notional Amount or Component Notional Amount, as applicable.
Interest to be distributed on the Certificates on any Distribution Date will
consist of accrued and unpaid interest as of previous Distribution Dates and
interest accrued during the preceding calendar month, except for the LIBOR
Certificates which accrue interest as described below. All distributions of
interest for each Class of Certificates will generally be made only to the
extent of the Available Distribution Amount as described herein under "--
Priority of Distributions".
The Remittance Rates for the Offered Certificates (other than the LIBOR
Certificates) are fixed as set forth on the cover page hereof. The Remittance
Rates for Component A-1-1, Component A-1-2 and Component A-1-5 of the Class A-1
Certificates will be 7.400%, 7.400% and 7.250% per annum, respectively.
The Remittance Rates for the LIBOR Certificates are adjustable monthly based
on changes in LIBOR, as described herein. Interest to be distributed to the
LIBOR Certificates on any Distribution Date will consist of interest accrued
during the period commencing on the 25th day of the preceding calendar month and
ending on the 24th day of the month of such Distribution Date. The initial
Remittance Rates for the Class A-9 Certificates will be 6.025% per annum, and
thereafter they will accrue interest at a per annum rate equal to LIBOR plus
0.400%, subject to a minimum and maximum Remittance Rate of 0.400% and 9.000%
per annum, respectively. The initial Remittance Rates for Class A-10
Certificates will be 2.975% per annum, and thereafter the Class A-10
Certificates will accrue interest at a per annum rate equal to 8.600% minus
LIBOR, subject to a minimum and maximum Remittance Rate of 0.000% and 8.600% per
annum, respectively.
The Class A-10 and Class X Certificates and Component A-1-5 will accrue
interest on the applicable Class Notional Amount or Component Notional Amount,
as applicable.
The "CLASS A-10 NOTIONAL AMOUNT" will equal the Class A-9 Principal Balance
as of any date of determination.
The "CLASS X NOTIONAL AMOUNT" with respect to any Distribution Date will
equal 68.60% of the WAC IO Notional Amount. The "COMPONENT A-1-5 NOTIONAL
AMOUNT" with respect to any Distribution Date will equal 31.40% of the WAC IO
Notional Amount. The "WAC IO NOTIONAL AMOUNT" with respect to any Distribution
Date will equal the product of (x) the aggregate scheduled principal balance, as
of the second preceding Due Date after giving effect to payments scheduled to be
received as of such Due Date, whether or not received, or with respect to the
initial Distribution Date, as of the Cut-Off Date, of the Premium Rate Mortgage
Loans and (y) a fraction, the numerator of which is the weighted average of the
Stripped Interest Rates for the Premium Rate Mortgage Loans as of such Due Date
and the denominator of which is 7.250%. The "STRIPPED INTEREST RATE" for each
Mortgage Loan is the excess, if any, of the Pass-Through Rate for such Mortgage
Loan over 7.250%. The "PASS-THROUGH RATE" for each Mortgage Loan is equal to the
Mortgage Interest Rate thereon less the sum of the related Master Servicing Fee
and Servicing Fee (each, as defined herein). As of the Cut-Off Date, The WAC IO
Notional Amount, the Class X Notional Amount and the Component A-1-5 Notional
Amount will be approximately $32,422,696, $22,241,969 and $10,180,726,
respectively.
COMPENSATING INTEREST. Subject to the limitations described in this
Prospectus Supplement under "Yield and Prepayment Considerations", on each
Distribution Date the Master Servicer is obligated to remit to the Certificate
Account an amount equal to the lesser of (a) any shortfall for the related month
in interest collections resulting from the timing of Payoffs made from the 15th
day of the calendar month preceding such Distribution Date to the last day of
such month, and (b) the monthly Master Servicing Fee, any reinvestment income
realized by the Master Servicer relating to Payoffs made from the 15th day of
the calendar month preceding such Distribution Date to the 14th day of the month
of such Distribution Date and interest payments on Payoffs received during the
period of the second day through the 14th day of the month of such Distribution
Date. The amount so passed through will hereinafter be referred to as
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"COMPENSATING INTEREST". Compensating Interest will be allocated to each Class
of Certificates pro rata according to the amount of interest accrued thereon,
and any remaining shortfall in interest collections resulting from the timing of
Payoffs will be applied pro rata according to the amount of interest to which
each Class of Certificates would otherwise be entitled in reduction thereof. See
"Yield and Prepayment Considerations" herein and "Yield Considerations --
Effective Interest Rate" in the Prospectus.
LIBOR
The LIBOR Certificates will bear interest at their respective Remittance
Rates, which are based on the London Interbank Offered Rate for one-month U.S.
dollar deposits ("LIBOR") determined by the Master Servicer on the basis of
quotations provided by the reference banks meeting the criteria set forth herein
(the "REFERENCE BANKS"). The initial Reference Banks will be Barclays Bank PLC,
Bankers Trust Company and The Bank of Tokyo, Ltd. The Master Servicer will
determine LIBOR and the Remittance Rates for the LIBOR Certificates for a given
accrual period, other than the initial accrual period, on the second business
day prior to the day on which such accrual period commences (a "LIBOR
DETERMINATION DATE"). For this purpose a "BUSINESS DAY" is any day on which
banks in London and New York City are open for the transaction of international
business. The Remittance Rates for the LIBOR Certificates, and the outstanding
Class Principal Balances or Class Notional Amounts, as applicable, for each
Class of LIBOR Certificates (expressed as percentages of the initial Class
Principal Balances and as percentages of the initial Class Notional Amounts,
respectively) applicable to the then current and the immediately preceding
accrual period will appear on Telerate (as defined below). The specific Telerate
page number upon which such information appears may be obtained from the Master
Servicer.
With respect to any accrual period commencing on or after October 25, 1997,
the determination of LIBOR will be made in accordance with the following
provisions:
(i) On each LIBOR Determination Date, the Master Servicer will determine
LIBOR on the basis of LIBOR quotations provided by each of the Reference
Banks as of approximately 11:00 a.m. (London time) on the LIBOR
Determination Date in question, as such quotations appear on the Telerate
Page 3750 (each as defined in the International Swap Dealers Association
Inc. Code of 1987 Interest Rate and Currency Exchange Definitions).
(ii) If, on any LIBOR Determination Date, at least two of the Reference
Banks provide quotations, LIBOR will be determined as the arithmetic mean
(rounded upward, if necessary, to the nearest multiple of 1/16 of 1%) of
such offered quotations.
(iii) If, on any LIBOR Determination Date, only one or none of the
Reference Banks provides quotations, LIBOR will be the higher of:
(a) LIBOR as determined on the previous LIBOR Determination Date (or,
in the case of the first LIBOR Determination Date, 5.625%); or
(b) the Reserve Rate. The Reserve Rate will be the rate per annum
(rounded upward, if necessary, to the nearest multiple of 1/16 of 1%)
that the Master Servicer determines to be either (1) the arithmetic mean
of the offered quotations that the leading banks in New York City
selected by the Master Servicer are quoting on the relevant LIBOR
Determination Date for one-month United States dollar deposits to the
principal London office of each of the Reference Banks or those of them
(being at least two in number) to which such offered quotations are, in
the opinion of the Master Servicer, being so made, or (2) in the event
that the Master Servicer can determine no such arithmetic mean, the
arithmetic mean of the offered quotations that leading banks in New York
City selected by the Master Servicer are quoting on such LIBOR
Determination Date to leading European banks for one-month United States
dollar deposits; provided, however, that if the banks selected by the
Master Servicer are not quoting as mentioned above, LIBOR for the next
accrual period will be LIBOR as specified in (a) above.
S-35
<PAGE>
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) shall not
control, be controlled by, or be under common control with, the Master Servicer
and (iii) shall have an established place of business in London. If any such
Reference Bank should be unwilling or unable to act as such or if the Master
Servicer should terminate the designation of any such Reference Bank, the Master
Servicer will promptly designate another leading bank meeting the criteria
specified above.
The establishment of LIBOR on each LIBOR Determination Date by the Master
Servicer and the Master Servicer's calculation of the Remittance Rate for the
LIBOR Certificates for the related accrual period shall, in the absence of
manifest error, be final and binding.
Listed below are some historical values of LIBOR since January 1992. Such
values were not determined in accordance with the provisions set forth above and
are intended only to provide a historical summary of the movement in yields on
LIBOR; the monthly figures set forth below are the value of LIBOR as derived
from various sources.
<TABLE>
<CAPTION>
YEAR
----------------------------------------------------------------
MONTH 1997 1996 1995 1994 1993 1992
- ------------------------------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
January......................................... 5.43750% 5.43750% 6.09375% 3.12500% 3.18750% 4.18750%
February........................................ 5.43750 5.31250 6.12500 3.56250 3.18750 4.25000
March........................................... 5.68750 5.43750 6.12500 3.68750 3.18750 4.25000
April........................................... 5.68750 5.43750 6.06250 4.00000 3.12500 3.93750
May............................................. 5.68750 5.43750 6.06250 4.37500 3.25000 4.00000
June............................................ 5.68750 5.49609 6.12500 4.56250 3.18750 3.93750
July............................................ 5.62500 5.46484 5.87500 4.50000 3.18750 3.37500
August.......................................... 5.65625 5.43750 5.87500 4.87500 3.18750 3.50000
September....................................... 5.43359 5.87500 5.06250 3.18750 3.12500
October......................................... 5.37500 5.83203 5.06250 3.18750 3.25000
November........................................ 5.56250 5.97656 6.06250 3.56250 4.25000
December........................................ 5.50000 5.68750 6.00000 3.25000 3.31250
</TABLE>
DISTRIBUTIONS OF PRINCIPAL
GENERAL. On each Distribution Date, Certificateholders will be entitled to
receive principal distributions from the Available Distribution Amount to the
extent described herein. All distributions of principal will be made only to the
extent of the Available Distribution Amount as described herein under "--
Priority of Distributions".
The Class A-10 and Class X Certificates and Component A-1-5 will not receive
any distributions of principal.
PO PRINCIPAL DISTRIBUTION AMOUNT. Component A-1-4 will receive a portion of
the Available Distribution Amount attributable to principal received on or in
respect of any Mortgage Loan with a Pass-Through Rate of less than 7.250% (a "PO
MORTGAGE LOAN"), equal to the amount of such principal so attributable
multiplied by a fraction, the numerator of which is 7.250% minus the
Pass-Through Rate on such PO Mortgage Loan and the denominator of which is
7.250% (the "PO FRACTION"). In addition, on each Distribution Date for so long
as any Class of Class B Certificates remains outstanding, Component A-1-4 will
also be allocated principal, to the extent of amounts available to pay the
Subordinate Principal Distribution Amount (without regard to clause (B) of such
definition) on such Distribution Date, in an amount equal to (i) the PO Fraction
of any principal loss on a PO Mortgage Loan except for Special Hazard Losses,
Fraud Losses and Bankruptcy Losses in excess of the designated amounts of
Special Hazard Coverage, Fraud Coverage and Bankruptcy Coverage (each, as
defined herein) and (ii) the sum of amounts, if any, by which the foregoing
amount on each prior Distribution Date exceeded the amount
S-36
<PAGE>
actually distributed in respect thereof on such prior Distribution Dates and not
subsequently distributed; PROVIDED that such payments in respect of losses shall
not cause a further reduction of the outstanding Component A-1-4 Principal
Balance. The aggregate of the amounts payable to Component A-1-4 described in
this paragraph is referred to herein as the "PO PRINCIPAL DISTRIBUTION AMOUNT".
SENIOR PRINCIPAL DISTRIBUTION AMOUNT. On each Distribution Date prior to
the Credit Support Depletion Date, an amount, up to the amount of the Senior
Principal Distribution Amount (as defined below) for such Distribution Date,
will be distributed as principal to the following Classes of Senior Certificates
in the following order of priority:
(i) first, to the Class A-5, Class A-6 and Class A-14 Certificates, pro
rata, an amount, up to the amount of the Lockout Principal Distribution Amount
(as defined below) for such Distribution Date, until the Principal Balances of
the Class A-5, Class A-6 and Class A-14 Certificates have been reduced to zero;
(ii) second, to the Residual Certificates, pro rata, the portion of the
Senior Principal Distribution Amount remaining after the distribution described
above, until the Principal Balance of the Residual Certificates have been
reduced to zero;
(iii) third, the portion of the Senior Principal Distribution Amount
remaining after the distributions described above, concurrently, as follows:
(A) 2.0270271292% to Component A-1-3, until the Component A-1-3 Principal
Balance has been reduced to zero; and
(B) 97.9729728708% sequentially as follows:
(1) first, concurrently, to the extent necessary to reduce the Class A-2
Principal Balance to its Planned Principal Balance for such
Distribution Date, 71.1111101958% to the Class A-2 Certificates and
28.8888898042% to Component A-9-1;
(2) second, concurrently, to the extent necessary to reduce the Class A-7
Principal Balance to its Planned Principal Balance for such
Distribution Date, 71.1111133993% to the Class A-7 Certificates and
28.8888866007% to Component A-9-1;
(3) third, concurrently, in each case to the extent necessary to reduce
the Class A-8 Principal Balance and the Component A-9-1 Principal
Balance to their Planned Principal Balances for such Distribution
Date, 71.1111113230% to the Class A-8 Certificates and 28.8888886770%
to Component A-9-1;
(4) fourth, to Component A-1-1, to the extent necessary to reduce the
Component A-1-1 Principal Balance to its Planned Principal Balance
for such Distribution Date;
(5) fifth, concurrently, as follows:
(a) 13.8691202055% to the Class A-3 Certificates, to the extent
necessary to reduce the Class A-3 Principal Balance to its Targeted
Principal Balance for such Distribution Date;
(b) 12.5456616761% to the Class A-11 Certificates, to the extent
necessary to reduce the Class A-11 Principal Balance to its Targeted
Principal Balance for such Distribution Date;
(c) 11.6393079627% to Component A-9-2, to the extent necessary to
reduce the Component A-9-2 Principal Balance to its Targeted
Principal Balance for such Distribution Date; and
(d) 61.9459101557%, to the extent necessary to reduce the
aggregate Class Principal Balance of the Class A-12 and Class A-13
Certificates to its combined Targeted Principal Balance for such
Distribution Date, sequentially as follows:
S-37
<PAGE>
(I) to the Class A-13 Certificates, to the extent necessary
to reduce the Class A-13 Principal Balance to its Planned
Principal Balance for such Distribution Date;
(II) to the Class A-12 Certificates, until the Class A-12
Principal Balance has been reduced to zero; and
(III) to the Class A-13 Certificates, until the Class A-13
Principal Balance has been reduced to zero;
(6) sixth, to Component A-1-2, to the extent necessary to reduce the
Component A-1-2 Principal Balance to its Targeted Principal Balance
for such Distribution Date;
(7) seventh, to the Class A-4 Certificates, until the Class A-4 Principal
Balance has been reduced to zero;
(8) eighth, concurrently, as follows:
(a) 90.0000000000% concurrently as follows:
(I) 13.8691202055% to the Class A-3 Certificates, until the
Class A-3 Principal Balance has been reduced to zero;
(II) 12.5456616761% to the Class A-11 Certificates, until the
Class A-11 Principal Balance has been reduced to zero;
(III) 11.6393079627% to Component A-9-2, until the Component
A-9-2 Principal Balance has been reduced to zero; and
(IV) 61.9459101557% sequentially as follows:
(i) to the Class A-13 Certificates, to the extent necessary
to reduce the Class A-13 Principal Balance to its Planned
Principal Balance for such Distribution Date;
(ii) to the Class A-12 Certificates, until the Class A-12
Principal Balance has been reduced to zero; and
(iii) to the Class A-13 Certificates, until the Class A-13
Principal Balance has been reduced to zero; and
(b) 10.0000000000% to Component A-1-2;
(9) ninth, to Component A-1-2, until the Component A-1-2 Principal
Balance has been reduced to zero;
(10) tenth, concurrently, until the Class A-2 Principal Balance has been
reduced to zero, 71.1111101958% to the Class A-2 Certificates and
28.8888898042% to Component A-9-1;
(11) eleventh, concurrently, until the Class A-7 Principal Balance has
been reduced to zero, 71.1111133993% to the Class A-7 Certificates
and 28.8888866007% to Component A-9-1;
(12) twelfth, concurrently, in each case until the Class A-8 Principal
Balance and the Component A-9-1 Principal Balance have been reduced
to zero, 71.1111113230% to the Class A-8 Certificates and
28.8888886770% to Component A-9-1; and
(13) thirteenth, to Component A-1-1, until the Component A-1-1 Principal
Balance has been reduced to zero; and
(iv) fourth, to the Class A-5, Class A-6 and Class A-14 Certificates, pro
rata, the portion of the Senior Principal Distribution Amount remaining after
the distributions described above, until the Principal Balances of the Class
A-5, Class A-6 and Class A-14 Certificates have been reduced to zero.
S-38
<PAGE>
On each Distribution Date on and after the Credit Support Depletion Date, an
amount up to the Senior Principal Distribution Amount for such Distribution Date
will be distributed as principal to the Senior Certificates (other than the
Class A-10 and Class X Certificates and Component A-1-4 and Component A-1-5 of
the Class A-1 Certificates), pro rata according to their respective Class or
Component Principal Balances, as applicable.
The "SENIOR PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date will
equal the sum of (i) the Senior Percentage (as defined herein) of the Principal
Payment Amount (as defined below) (exclusive of the portion thereof attributable
to the PO Principal Distribution Amount), (ii) the Senior Prepayment Percentage
(as defined below) of the Principal Prepayment Amount (as defined below)
(exclusive of the portion thereof attributable to the PO Principal Distribution
Amount) and (iii) the Senior Liquidation Amount (as defined below).
The "PRINCIPAL PAYMENT AMOUNT" with respect to each Distribution Date is the
sum of (i) scheduled principal payments on the Mortgage Loans due on the related
Due Date, (ii) the principal portion of repurchase proceeds received with
respect to any Mortgage Loan which was repurchased as permitted or required by
the Pooling Agreement during the calendar month preceding the month of the
Distribution Date and (iii) any other unscheduled payments of principal which
were received during the preceding calendar month, other than Payoffs,
Curtailments or Liquidation Principal. For any Distribution Date, the "PRINCIPAL
PREPAYMENT AMOUNT" is the sum of (i) all Curtailments which were received during
the preceding calendar month and (ii) all Payoffs received from the 15th day of
the month immediately prior to the month of such Distribution Date through the
14th day of the month of such Distribution Date (except for Payoffs received
from the Cut-Off Date through September 14, 1997, which will be passed through
to holders of Certificates on the October 1997 Distribution Date).
The "SENIOR LIQUIDATION AMOUNT" is the aggregate, for each Mortgage Loan
which became a Liquidated Mortgage Loan (as defined herein) during the calendar
month preceding the month of the Distribution Date, of the lesser of (i) the
Senior Percentage of the principal balance of such Mortgage Loan (exclusive of
the PO Fraction thereof, if applicable) and (ii) the Senior Prepayment
Percentage of the Liquidation Principal with respect to such Mortgage Loan.
"LIQUIDATION PRINCIPAL" is the principal portion of Liquidation Proceeds (as
defined in the Prospectus) received with respect to each Mortgage Loan which
became a Liquidated Mortgage Loan (but not in excess of the principal balance
thereof) during the calendar month preceding the month of the Distribution Date,
exclusive of the portion thereof attributable to the PO Principal Distribution
Amount. A "Liquidated Mortgage Loan" is a Mortgage Loan as to which the Master
Servicer or a servicer has determined that all amounts which it expects to
recover from or on account of such Mortgage Loan, whether from Insurance
Proceeds, Liquidation Proceeds or otherwise have been recovered.
The "SENIOR PERCENTAGE" for any Distribution Date will equal the sum of the
Class Principal Balances of the Senior Certificates (other than the Component
A-1-4 Principal Balance) divided by the aggregate Class Principal Balance of the
Certificates (other than the Component A-1-4 Principal Balance), in each case
immediately prior to the Distribution Date. The "Subordinate Percentage" for any
Distribution Date will equal the excess of 100% over the Senior Percentage for
such date. The Senior Percentage and the Subordinate Percentage as of the
Cut-Off Date will be approximately 94.50% and 5.50%, respectively.
The "SENIOR PREPAYMENT PERCENTAGE" for any Distribution Date occurring
during the five years beginning on the first Distribution Date will equal 100%.
The Senior Prepayment Percentage on the Distribution Date in each of the months
of the fifth through ninth anniversaries of the first Distribution Date will be
as follows: for any Distribution Date in or after the month of the fifth
anniversary of the month of the first Distribution Date but before the sixth
anniversary of the month of the first Distribution Date, the Senior Percentage
for such Distribution Date plus 70% of the Subordinate Percentage for such
Distribution Date; for any Distribution Date in or after the month of the sixth
anniversary of the month of the first Distribution Date but before the seventh
anniversary of the month of the first Distribution Date,
S-39
<PAGE>
the Senior Percentage for such Distribution Date plus 60% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date in or after the
month of the seventh anniversary of the month of the first Distribution Date but
before the eighth anniversary of the month of the first Distribution Date, the
Senior Percentage for such Distribution Date plus 40% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date in or after the
month of the eighth anniversary of the month of the first Distribution Date but
before the ninth anniversary of the month of the first Distribution Date, the
Senior Percentage for such Distribution Date plus 20% of the Subordinate
Percentage for such Distribution Date. For any Distribution Date in or after the
ninth anniversary of the month of the first Distribution Date, the Senior
Prepayment Percentage will be the Senior Percentage for such Distribution Date.
Notwithstanding the foregoing, if on any Distribution Date the Senior
Percentage for such Distribution Date exceeds the initial Senior Percentage as
of the Cut-Off Date, the Senior Prepayment Percentage for such Distribution Date
will equal 100%. The scheduled reductions in the Senior Prepayment Percentage
for Distribution Dates occurring on or after the fifth anniversary of the month
of the first Distribution Date will be subject to certain conditions specified
in the Pooling Agreement. Such conditions may include requirements that no such
reduction may occur if delinquencies or losses on the Mortgage Loans exceed
specified limits at the time of, or on a date preceding, the Distribution Date
for which such reduction would otherwise be applicable. Notwithstanding the
foregoing, on any Distribution Date if the delinquencies or losses on the
Mortgage Loans exceed such limits such that the Pooling Agreement restricts a
reduction of the Senior Prepayment Percentage, the Senior Prepayment Percentage
for such Distribution Date will equal 100% for such Distribution Date. If on any
Distribution Date the allocation to the Senior Certificates (other than
Component A-1-4 of the Class A-1 Certificates) in the percentage required would
reduce the sum of the Class Principal Balances of such Senior Certificates below
zero, the Senior Prepayment Percentage for such Distribution Date will be
limited to the percentage necessary to reduce such sum to zero.
The "LOCKOUT PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date will
equal the sum of (i) the Lockout Percentage (as defined below) of the Principal
Payment Amount (exclusive of the portion thereof attributable to the PO
Principal Distribution Amount), (ii) the Lockout Prepayment Percentage (as
defined herein) of the Principal Prepayment Amount (exclusive of the portion
thereof attributable to the PO Principal Distribution Amount) and (iii) the
Lockout Liquidation Amount (as defined below).
The "LOCKOUT PERCENTAGE" for any Distribution Date will equal the sum of the
Class Principal Balances of the Class A-5, Class A-6 and Class A-14 Certificates
divided by the aggregate Class Principal Balance of the Certificates (less the
Component A-1-4 Principal Balance), in each case immediately prior to the
Distribution Date. The Lockout Percentage as of the Cut-Off Date will be
approximately 18.91%.
The "LOCKOUT LIQUIDATION AMOUNT" is the aggregate of, for each Mortgage Loan
which became a Liquidated Mortgage Loan during the calendar month preceding the
month of the Distribution Date, the lesser of (i) the Lockout Percentage of the
principal balance of such Mortgage Loan (exclusive of the PO Fraction thereof,
if applicable) and (ii) the Lockout Percentage on any Distribution Date
occurring prior to the fifth anniversary of the first Distribution Date, and the
Lockout Prepayment Percentage on any Distribution Date thereafter, in each case,
of the Liquidation Principal with respect to such Mortgage Loan.
The "LOCKOUT PREPAYMENT PERCENTAGE" for any Distribution Date will equal the
product of (a) the Lockout Percentage for such Distribution Date and (b) the
applicable Step Down Percentage.
S-40
<PAGE>
The "STEP DOWN PERCENTAGE" for any Distribution Date will be the percentage
indicated below:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN STEP DOWN PERCENTAGE
- ------------------------------------------- ---------------------
<S> <C>
October 1997 through September 2002 0%
October 2002 through September 2003 30%
October 2003 through September 2004 40%
October 2004 through September 2005 60%
October 2005 through September 2006 80%
October 2006 and thereafter 100%
</TABLE>
SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT. On each Distribution Date, an
amount, up to the Subordinate Principal Distribution Amount (as defined below)
for such Distribution Date, will be distributed as principal to the Class B
Certificates. On each Distribution Date, except Distribution Dates on which the
Subordination Level for any Class of Class B Certificates is less than such
Subordination Level as of the Cut-Off Date, each Class of Class B Certificates
will be entitled to receive its pro rata (by Class Principal Balance) share of
the Subordinate Principal Distribution Amount, to the extent of the Available
Distribution Amount remaining after distributions of interest and principal to
the Senior Certificates, distributions of interest and principal to all Classes
of Class B Certificates senior to such Class and distributions of interest to
such Class. See "-- Priority of Distributions" herein. The relative seniority,
from highest to lowest, of the Class B Certificates shall be as follows: Class
B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6.
The "SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date
will be equal to the excess of (A) the sum of (i) the Subordinate Percentage of
the Principal Payment Amount (exclusive of the portion thereof attributable to
the PO Principal Distribution Amount), (ii) the Subordinate Prepayment
Percentage (as defined herein) of the Principal Prepayment Amount (exclusive of
the portion thereof attributable to the PO Principal Distribution Amount) and
(iii) the Subordinate Liquidation Amount over (B) the amounts required to be
distributed to Component A-1-4 pursuant to clause (iv) of the first paragraph
under "-- Priority of Distributions" herein.
The "SUBORDINATE PREPAYMENT PERCENTAGE" for any Distribution Date will equal
the excess of 100% over the Senior Prepayment Percentage; PROVIDED, HOWEVER,
that if the Class Principal Balance of the Senior Certificates (other than the
Component A-1-4 Principal Balance) has been reduced to zero, then the
Subordinate Prepayment Percentage will equal 100%.
The "SUBORDINATE LIQUIDATION AMOUNT" will equal the excess, if any, of the
aggregate Liquidation Principal for all Mortgage Loans which became Liquidated
Mortgage Loans during the calendar month preceding the month of the Distribution
Date, over the Senior Liquidation Amount for such Distribution Date.
The rights of the holders of the Class B Certificates to receive
distributions of interest and principal are subordinated to the rights of the
holders of the Senior Certificates to receive scheduled distributions of
interest and principal. See "-- Subordination and Allocation of Losses" herein.
SUBORDINATION AND ALLOCATION OF LOSSES
The Class B Certificates will be subordinate in right of payment to and
provide credit support to the Senior Certificates, the Junior Subordinate
Certificates will be subordinate in right of payment to and provide credit
support to the Senior Subordinate Certificates, the Class B-3 Certificates will
be subordinate in right of payment to and provide credit support to the Class
B-1 and Class B-2 Certificates and the Class B-2 Certificates will be
subordinate in right of payment to and provide credit support to the Class B-1
Certificates, to the extent described herein. The support provided by the Class
B Certificates is intended to enhance the likelihood of regular receipt by the
Senior Certificates of the full amount of the monthly distributions of interest
and principal to which they are entitled and to afford such holders
S-41
<PAGE>
protection against certain losses. The protection afforded to the Senior
Certificates by the Class B Certificates will be accomplished by the
preferential right on each Distribution Date of the Senior Certificates to
receive the distributions of interest and principal to which they are entitled,
prior to distributions of interest or principal to the Class B Certificates. The
support provided by the Junior Subordinate Certificates to the Senior
Subordinate Certificates is intended to enhance the likelihood of regular
receipt by the Senior Subordinate Certificates of the full amount of monthly
distributions of interest and principal to which they are entitled and to afford
such holders protection against certain losses. The protection afforded the
Senior Subordinate Certificates by the Junior Subordinate Certificates will be
accomplished by the preferential right on each Distribution Date of the Senior
Subordinate Certificates to receive distributions of interest and principal
prior to distributions of interest or principal to the Junior Subordinate
Certificates. The protection afforded the Class B-1 Certifi-cates by the Class
B-2 and Class B-3 Certificates, and the protection afforded the Class B-2
Certificates by the Class B-3 Certificates, will be similarly accomplished by
the preferential right of the Class B-1 Certificates to receive distributions of
interest and principal prior to distributions of interest or principal to the
Class B-2 and Class B-3 Certificates and the preferential right of the Class B-2
Certificates to receive such distributions prior to such distributions to the
Class B-3 Certificates.
Except for Special Hazard Losses, Fraud Losses and Bankruptcy Losses in
excess of the designated amount of Special Hazard Coverage, Fraud Coverage and
Bankruptcy Coverage, any loss realized with respect to a Mortgage Loan will be
allocated among the Certificates (i) for losses allocable to principal (a)
first, to the Junior Subordinate Certificates, until the aggregate of the Class
Principal Balances thereof has been reduced to zero, (b) second, to the Class
B-3 Certificates, until the Class B-3 Principal Balance has been reduced to
zero, (c) third, to the Class B-2 Certificates, until the Class B-2 Principal
Balance has been reduced to zero, (d) fourth, to the Class B-1 Certificates,
until the Class B-1 Principal Balance has been reduced to zero and (e) fifth, to
the Senior Certificates (other than the Class A-10 and Class X Certificates and
Component A-1-4), pro rata, according to their Class Principal Balances (or
Component Principal Balances, in the case of Component A-9-1, Component A-9-2,
Component A-1-1, Component A-1-2 and Component A-1-3) in reduction of their
respective Class Principal Balances or Component Principal Balances, PROVIDED,
HOWEVER, that if the loss is recognized with respect to a PO Mortgage Loan, the
PO Fraction of such loss will first be allocated to Component A-1-4 and the
remainder of such loss will be allocated as described above in this clause (i);
and (ii) for losses allocable to interest (a) first, to the Junior Subordinate
Certificates, in reduction of accrued but unpaid interest thereon and then in
reduction of the Class Principal Balances of the Junior Subordinate
Certificates, (b) second, to the Class B-3 Certificates, in reduction of accrued
but unpaid interest thereon and then in reduction of the Class B-3 Principal
Balance, (c) third, to the Class B-2 Certificates, in reduction of accrued but
unpaid interest thereon and then in reduction of the Class B-2 Principal
Balance, (d) fourth, to the Class B-1 Certificates, in reduction of accrued but
unpaid interest thereon and then in reduction of the Class B-1 Principal Balance
and (e) fifth, to the Senior Certificates (other than Component A-1-3 and
Component A-1-4), pro rata according to accrued but unpaid interest thereon and
then pro rata according to their Class Principal Balances (or Component
Principal Balances, in the case of the Component A-9-1 Principal Balance, the
Component A-9-2 Principal Balance, the Component A-1-1 Principal Balance and the
Component A-1-2 Principal Balance) in reduction of their respective Class or
Component Principal Balances, as applicable; PROVIDED, FURTHER, that all losses
allocated to principal and interest that would otherwise be allocable to the
Class A-1 Certificates (other than losses allocated to Component A-1-4) on any
Distribution Date will be allocated to the Class A-14 Certificates, until the
Class A-14 Principal Balance has been reduced to zero.
The allocation of (i) the principal portion of losses relating to a Mortgage
Loan to all Classes of Certificates (other than Component A-1-4 in the case of
the Class A-1 Certificates) pro rata according to their respective Class or
Component Principal Balances (except if the loss is recognized with respect to a
PO Mortgage Loan, in which event the PO Fraction of such loss will first be
allocated to Component A-1-4 and the remainder of such loss will be allocated as
described above) and (ii) the interest portion of losses pro rata according to
the amount of interest accrued on each such Class in reduction thereof and then,
pro
S-42
<PAGE>
rata, in reduction of their related Class Principal Balance (or Component
Principal Balances, in the case of Component A-9-1, Component A-9-2, Component
A-1-1 and Component A-1-2), (except that all losses allocated to principal and
interest that would otherwise be allocable to the Class A-1 Certificates (other
than losses allocated to Component A-1-4) on any Distribution Date will be
allocated to the Class A-14 Certificates, until the Class A-14 Principal Balance
has been reduced to zero) is hereinafter referred to as "PRO RATA ALLOCATION".
Special Hazard Losses in excess of the Special Hazard Coverage will be
allocated to the outstanding Classes of Certificates by Pro Rata Allocation.
"SPECIAL HAZARD COVERAGE" is expected to equal approximately $5,838,756 as of
the Cut-Off Date. Special Hazard Coverage will be reduced, from time to time, by
the amount of Special Hazard Losses allocated to the Certificates. On each
anniversary of the Cut-Off Date, the Special Hazard Coverage will be reduced,
but not increased, to an amount equal to the lesser of (1) the greatest of (a)
the aggregate principal balance of the Mortgage Loans located in the single
California zip code area containing the largest aggregate principal balance of
the Mortgage Loans, (b) 1% of the aggregate unpaid principal balance of the
Mortgage Loans and (c) twice the unpaid principal balance of the largest single
Mortgage Loan, in each case calculated as of the Due Date in the immediately
preceding month and (2) the Special Hazard Coverage as of the Cut-Off Date as
reduced by the Special Hazard Losses allocated to the Certificates since the
Cut-Off Date.
Fraud Losses in excess of the Fraud Coverage will be allocated to the
outstanding Classes of Certificates by Pro Rata Allocation. "FRAUD COVERAGE" is
expected to equal approximately $7,002,876 as of the Cut-Off Date. Fraud
Coverage will be reduced, from time to time, by the amount of Fraud Losses
allocated to the Certificates. On each anniversary of the Cut-Off Date, Fraud
Coverage will be reduced to the lesser of (i) on the first, second, third and
fourth anniversaries of the Cut-Off Date, 1.0% of the aggregate principal
balance of the Mortgage Loans as of the Due Date in the preceding month and (ii)
the excess of the Fraud Coverage as of the Cut-Off Date over cumulative Fraud
Losses allocated to the Certificates since the Cut-Off Date. On the fifth
anniversary of the Cut-Off Date, Fraud Coverage will be reduced to zero.
Bankruptcy Losses in excess of the Bankruptcy Coverage will be allocated to
the outstanding Classes of Certificates by Pro Rata Allocation. "BANKRUPTCY
COVERAGE" is expected to equal approximately $127,085 as of the Cut-Off Date.
Bankruptcy Coverage will be reduced, from time to time, by the amount of
Bankruptcy Losses allocated to the Certificates.
Special Hazard Coverage, Fraud Coverage or Bankruptcy Coverage may also be
reduced upon written confirmation from the Rating Agencies that such reduction
will not adversely affect the then current ratings assigned to the Offered
Certificates by the Rating Agencies and upon receipt by the Trustee of the prior
written consent of the Certificate Insurer. Such a reduction, in the event of
Special Hazard Losses, Fraud Losses or Bankruptcy Losses, could adversely affect
the level of protection afforded the Senior Certificates by subordination of the
Class B Certificates or the level of protection afforded the Senior Subordinate
Certificates by the Junior Subordinate Certificates.
THE RESIDUAL CERTIFICATES
On each Distribution Date, in addition to payments of interest and principal
to the Residual Certificates described herein, any amounts remaining (which are
expected to be zero) in the Certificate Account from the Available Distribution
Amount after distributions of interest and principal on the certificates issued
by the Mortgage Trust and payment of expenses, if any of the Mortgage Trust will
be distributed to the Class R-1 Certificates, together with Excess Liquidation
Proceeds (as defined below), if any. Distributions of such remaining amounts to
the Class R-1 Certificateholders will be subordinate to all payments required to
be made with respect to the other Offered Certificates (other than distributions
on the Class R Certificates not in respect of principal or interest) and each
other class of Mortgage Trust certificates on any Distribution Date. The Class R
Certificates, in addition to payments of interest and
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principal on such Certificates described herein, shall be entitled to any
amounts remaining (which are expected to be zero) in the Certificate Trust.
Payments of such amounts will be subordinate to all payments required to be made
on the Certificates (other than the distributions on Residual Certificates not
in respect of principal or interest).
ADVANCES
With respect to each Mortgage Loan, the Master Servicer will make Advances
to the Certificate Account on each Distribution Date to cover any shortfall
between (i) payments scheduled to be received in respect of such Mortgage Loan
and (ii) the amounts actually deposited in the Certificate Account on account of
such payments; provided that the Master Servicer determines, in good faith, on
such Distribution Date that such Advances will be recoverable from Insurance
Proceeds, Liquidation Proceeds or other amounts received with respect to such
Mortgage Loan. Advances are reimbursable to the Master Servicer from cash in the
Certificate Account prior to payments to the Certificateholders if the Master
Servicer determines that such Advances previously made are not recoverable from
Insurance Proceeds, Liquidation Proceeds or other amounts recoverable with
respect to the applicable Mortgage Loan.
AVAILABLE DISTRIBUTION AMOUNT
On each Distribution Date, the Available Distribution Amount, which
generally include scheduled principal and interest payments due on the related
Due Date, Curtailments received in the previous calendar month (as set forth
below), Payoffs received in the applicable period to the extent set forth below
and amounts received with respect to liquidations of Mortgage Loans in the
previous calendar month, will be distributed by or on behalf of the Trustee to
the Certificateholders, as specified herein.
The Due Date related to each Distribution Date is the first day of the month
in which such Distribution Date occurs. The determination date (the
"DETERMINATION DATE") is a day not later than the 10th day preceding the related
Distribution Date in the month in which such Distribution Date occurs.
The "AVAILABLE DISTRIBUTION AMOUNT", as more fully described in the Pooling
Agreement, will equal the sum of the following amounts:
(1) the total amount of all cash received by or on behalf of the Master
Servicer with respect to the Mortgage Loans by the Determination Date for such
Distribution Date and not previously distributed (including advances made by
servicers, proceeds of Liquidated Mortgage Loans, and scheduled amounts of
distributions from Buydown Funds respecting Buydown Loans, if any), except:
(a) all scheduled payments of principal and interest collected but due
on a date subsequent to the related Due Date;
(b) all Curtailments received after the previous calendar month
(together with any interest payment received with such prepayments to the
extent that it represents the payment of interest accrued on the related
Mortgage Loans for the period subsequent to the previous calendar month);
(c) all Payoffs received on or after the 15th day of the month of any
such Determination Date (together with any interest payment received with
such Payoffs to the extent that it represents the payment of interest
accrued on the related Mortgage Loans for the period subsequent to the
previous calendar month), and interest which was accrued and received on
Payoffs received during the period from the first to the 14th day of the
month of such Determination Date, which interest shall not be included in
the calculation of the Available Distribution Amount for any Distribution
Date;
(d) Liquidation Proceeds and Insurance Proceeds received after the
previous calendar month;
(e) all amounts in the Certificate Account which are due and
reimbursable to a servicer or the Master Servicer pursuant to the terms of
the Pooling Agreement;
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(f) the sum of the Servicing Fee and the Master Servicing Fee for each
Mortgage Loan; and
(g) the excess, if any, of aggregate Liquidation Proceeds received
during the previous calendar month over the amount that would have been
received if Payoffs had been made with respect to the related Mortgage Loans
on the date such Liquidation Proceeds were received ("EXCESS LIQUIDATION
PROCEEDS");
(2) the total, to the extent not previously distributed, of the following
amounts, to the extent advanced or received, as applicable, by the Master
Servicer:
(a) all Advances made by the Master Servicer to the Trustee with respect
to such Distribution Date; and
(b) any amounts payable as Compensating Interest on such Distribution
Date; and
(3) the total amount of any cash received by the Trustee or the Master
Servicer in respect of the obligation or the right of the Company to repurchase
Mortgage Loans from the Mortgage Pool.
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for all Classes of Certificates is the
Distribution Date in October 2027, which is the Distribution Date in the month
after the scheduled maturity date for the latest maturing Mortgage Loan in the
Mortgage Pool.
The actual rate of principal payments on the Certificates will depend on the
rate of payments of principal (including Principal Prepayments) on the Mortgage
Loans which, in turn, may be influenced by a variety of economic, geographic and
social factors, as well as the level of prevailing interest rates. No assurance
can be given as to the actual payment experience on the Mortgage Loans.
OPTIONAL TERMINATION OF THE MORTGAGE TRUST
On any Distribution Date after the first date on which the aggregate
outstanding principal balance of the Mortgage Loans is less than 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-Off Date, the
Company may repurchase the Mortgage Loans and all property acquired in respect
of any Mortgage Loan remaining in the Mortgage Trust, and thereby effect the
termination of the Mortgage Trust and, as a result, the Certificate Trust and
the retirement of the Certificates. The repurchase price will equal, after
deductions of related advances by the Master Servicer, the sum of (1) 100% of
the aggregate outstanding principal balance of such Mortgage Loans (other than
Liquidated Mortgage Loans), plus accrued interest thereon at the applicable
Pass-Through Rates through the last day of the month of such repurchase, less
any Bankruptcy Losses realized with respect to the Mortgage Loans not already
allocated to the Certificates and (2) the fair market value of all other
property remaining in the Mortgage Trust. The proceeds of such repurchase will
be treated as a prepayment of the Mortgage Loans for purposes of distributions
to Certificateholders. Accordingly, an optional termination of the Mortgage
Trust will cause the outstanding principal balance of the Certificates to be
paid in full through the distribution of such proceeds and the allocation of the
associated realized losses, if any, on each Mortgaged Property in the Mortgage
Trust the fair market value of which is less than the aggregate principal
balance of the related Mortgage Loans as of the time that the Mortgage Trust
acquired such Mortgaged Property, and upon such payment in full the Mortgage
Trust will be terminated. In no event will the Mortgage Trust continue beyond
the expiration of 21 years from the death of the survivor of certain persons
identified in the Pooling Agreement. See "Description of Certificates --
Termination" in the Prospectus.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee with respect to each Mortgage Loan ranges from a minimum
of 0.150% to a maximum of 0.250%, with a weighted average of 0.240%. The Master
Servicing Fee with respect to each
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Mortgage Loan ranges from a minimum of 0.043% to a maximum of 0.100%, with a
weighted average of 0.048%. See "Description of Certificates -- Servicing
Compensation and Payment of Expenses" in the Prospectus for information
regarding other possible compensation to the Company and the servicers.
The Company, as Master Servicer, will pay all expenses incurred in
connection with its responsibilities under the Pooling Agreement (subject to
reimbursement as described in the Prospectus), including, without limitation,
the various items of expense enumerated in the Prospectus. In particular,
pursuant to the Pooling Agreement, each month or year, as applicable, the Master
Servicer will be obligated to pay from the Master Servicing Fee the fees of the
Trustee and certain other fees and expenses of the Mortgage Trust and
Certificate Trust, as prescribed by the Pooling Agreement.
SPECIAL SERVICING AGREEMENTS
The Pooling Agreement may permit the Master Servicer to enter into a special
servicing agreement with an unaffiliated holder of a Class of Class B
Certificates or of a class of securities representing interests in the Class B
Certificates and/or other subordinated mortgage pass-through certificates.
Pursuant to such an agreement, such holder may instruct the Master Servicer to
instruct the Servicers, to the extent provided in the applicable Servicing
Contract to commence or delay foreclosure proceedings with respect to delinquent
Mortgage Loans. Such commencement or delay at such holder's direction will be
taken by the Master Servicer only after such holder deposits a specified amount
of cash with the Master Servicer. Such cash will be available for distribution
to Certificateholders if Liquidation Proceeds are less than they otherwise may
have been had the Servicers acted pursuant to their normal servicing procedures.
YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The effective yield to maturity of each Class of Certificates will depend
upon, among other things, the price at which such Certificates are purchased,
the applicable Remittance Rate, the actual characteristics of the Mortgage
Loans, the rate of principal payments (including Principal Prepayments) on the
Mortgage Loans and the rate of liquidations on the Mortgage Loans. The effective
yield to maturity to holders of the Certificates (other than the LIBOR
Certificates) will be lower than the yield to maturity otherwise produced by the
applicable Remittance Rate and purchase price of such Certificates because
principal and interest distributions will not be payable to such
Certificateholders until the 25th day of the month following the month of
accrual (without any additional distribution of interest or earnings thereon
with respect to such delay).
PRINCIPAL PREPAYMENTS AND COMPENSATING INTEREST
When a Mortgagor prepays a Mortgage Loan in full between Due Dates for such
Mortgage Loan, the Mortgagor pays interest on the amount prepaid only to the
date of prepayment instead of for the entire month. Also, when a Curtailment is
made on a Mortgage Loan together with the scheduled Monthly Payment for a month
on or after the related Due Date, the principal balance of the Mortgage Loan is
reduced by the amount of the Curtailment as of such Due Date, but such principal
is not distributed to related Certificateholders until the Distribution Date in
the next month; therefore, one month of interest shortfall accrues on the amount
of such Curtailment.
In order to reduce the adverse effect on Certificateholders from the
deficiency in interest payable as a result of a Payoff on a Mortgage Loan
between its Due Dates, the Master Servicer will pass through Compensating
Interest to the related Certificateholders to the limited extent and in the
manner set forth below. Payoffs received from the first day through the 14th day
of any month will be passed through to related Certificateholders on the
Distribution Date of the same month (except for Payoffs received from the
Cut-Off Date through September 14, 1997, which will be passed through to holders
of related Certificates on the October 1997 Distribution Date), rather than on
the Distribution Date of the following
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<PAGE>
month, together with a full month's interest with respect to the prior month.
Accordingly, no Compensating Interest will be payable with respect to Payoffs
received during such period. Payoffs received during the period from the 15th
day through the last day of any month will be passed through on the Distribution
Date in the following month, and, in order to provide for a full month's
interest payment with respect to the prior month, Compensating Interest will be
passed through to related Certificateholders with respect to such period.
The amount available for payment of Compensating Interest on any
Distribution Date will include interest at the Pass-Through Rate to the extent
of interest payments paid by Mortgagors on Payoffs received from the second
through the 14th day of the month of such Distribution Date. To the extent that
the amount available to pay Compensating Interest is insufficient to cover the
deficiency in interest payable as a result of a Payoff on a Mortgage Loan, or to
the extent that there is an interest deficiency from a Curtailment, such
remaining deficiency will be allocated to the related Certificates pro rata
according to the amount of interest to which each related Class of Certificates
would otherwise be entitled in reduction thereof.
PREPAYMENT LOCKOUT CERTIFICATES
Investors in the Prepayment Lockout Certificates should be aware that
because the Class A-5, Class A-6 and Class A-14 Certificates will generally not
be entitled to receive any distributions of Principal Prepayments until the
Distribution Date in October 2002, the weighted average lives of the Prepayment
Lockout Certificates will be longer than would otherwise be the case, and the
effect on the market value of the Prepayment Lockout Certificates arising out of
changes in market interest rates or market yields for similar securities will be
greater than for other Classes of Class A Certificates entitled to such
distributions.
RATE OF PAYMENTS
The rate of principal payments on the Certificates entitled to receive
principal generally is directly related to the rate of principal payments on the
Mortgage Loans, which may be in the form of scheduled payments or Principal
Prepayments. See "Risk Factors" herein and "Yield Considerations" in the
Prospectus. Mortgagors may prepay the Mortgage Loans at any time without
penalty. A higher than anticipated rate of Principal Prepayments would reduce
the aggregate principal balance of the Mortgage Loans more quickly than
expected. As a consequence, aggregate interest payments with respect to the
Mortgage Loans would be substantially less than expected. Therefore, a higher
rate of Principal Prepayments could result in a lower than expected yield to
maturity on each Class of Certificates purchased at a premium and in certain
circumstances such investors may not fully recoup their initial investments.
Conversely, a lower than anticipated rate of Principal Prepayments would reduce
the return to investors on any related Classes of Certificates purchased at a
discount, in that principal payments with respect to the Mortgage Loans would
occur later than anticipated. There can be no assurance that Certificateholders
will be able to reinvest amounts received with respect to the Certificates at a
rate which is comparable to the applicable Remittance Rate. Investors should
fully consider all of the associated risks.
SPECIAL SENSITIVITIES
The Class A-4 Certificates will be especially sensitive to the rate of
prepayment on the Mortgage Loans because the Class A-4 Certificates will receive
distributions of principal on any Distribution Date only to the extent of the
portion of the Senior Principal Distribution Amount remaining, if any, after
distributions to the PACs, to the extent of their respective Planned Principal
Balances, and to the TACs, to the extent of their respective Targeted Principal
Balances. Furthermore, if the Senior Principal Distribution Amount on any
Distribution Date is not sufficient to reduce the Class or Component Principal
Balances of the PACs to their Planned Principal Balances and to reduce the Class
or Component Principal Balances of the TACs to their Targeted Principal
Balances, the Class A-4 Certificates will receive no principal distribution on
such Distribution Date. See "Risk Factors" herein.
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<PAGE>
BASIC PREPAYMENT ASSUMPTION
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement (the "BASIC
PREPAYMENT ASSUMPTION" or "BPA") assumes a per annum rate of prepayment of 0.2%
of the then outstanding principal balance of a pool of mortgage loans in the
first month after formation of such pool of mortgage loans, following which,
such annual prepayment rate increases by 0.2% each month until the 30th month
after formation of such pool of mortgage loans and remains constant at 6% per
annum in the 30th month after formation of such pool of mortgage loans and in
each month thereafter. 0% of the BPA indicates no prepayments are received; 100%
of the BPA indicates prepayments at 1.00 times the BPA; 250% of the BPA
indicates prepayments at 2.50 times the BPA; 500% of the BPA indicates
prepayments at 5.00 times the BPA; and 600% of the BPA indicates prepayments at
6.00 times the BPA.
The BPA does not purport to be either an 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 Pool, and there is no assurance that the Mortgage Loans will prepay at
any given percentage of the BPA. The actual rate of Principal Prepayments on the
Mortgage Loans may be influenced by a variety of economic, geographic, social
and other factors. In general, if prevailing interest rates fall significantly
below the interest rates on the Mortgage Loans, the Mortgage Loans are likely to
be subject to higher prepayment rates than if prevailing rates remain at or
above the interest rates on the Mortgage Loans. Conversely, if interest rates
rise above the interest rates on the Mortgage Loans, the rate of prepayment
would be expected to decrease. A comparatively low interest-rate environment may
result in a higher than expected rate of prepayments on the Mortgage Loans and
an earlier than expected retirement of the Certificates.
The Company makes no representation as to the specific factors that will
affect the prepayment of the Mortgage Loans or the relative importance of such
factors. Factors not identified by the Company or discussed herein may
significantly affect the prepayment rate of the Mortgage Loans. In particular,
the Company makes no representation as to the percentage of the principal amount
of the Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment.
For purposes of the tables set forth in Appendix C, it is assumed that the
Mortgage Loans included in the Mortgage Pool on the Closing Date have the actual
characteristics of the Mortgage Loans described herein and that (i) scheduled
payments on all Mortgage Loans are received on the first day of each month
beginning October 1, 1997, (ii) any Payoffs on the Mortgage Loans are received
on the last day of each month beginning in September 1997 and include 30 days of
interest thereon, (iii) there are no defaults or delinquencies on the Mortgage
Loans, (iv) optional termination of the Mortgage Trust does not occur, (v) there
are no partial prepayments on the Mortgage Loans and prepayments are computed
after giving effect to scheduled payments received on the following day, (vi)
the Mortgage Loans prepay at the indicated constant percentages of the BPA,
(vii) the date of issuance for the Certificates is September 30, 1997, (viii)
cash distributions are received by the Certificateholders on the 25th day of
each month when due and (ix) the scheduled monthly payments for each Mortgage
Loan are computed based upon its unpaid principal balance, Mortgage Interest
Rate and remaining term such that the Mortgage Loan will fully amortize on its
maturity date (collectively, the "MODELING ASSUMPTIONS"). The approximate Class
Principal Balances of the Junior Subordinate Certificates as of the Cut Off-Date
will be as follows: Class B-4, $1,575,647; Class B-5, $700,287; and Class B-6,
$1,225,508.
Any discrepancy between the actual characteristics of the Mortgage Loans and
the characteristics of the Mortgage Loans set forth above may affect the
percentages of the initial Class Principal Balances set forth in the tables and
the weighted average lives of the Offered Certificates. In addition, to the
extent that the characteristics of the Mortgage Loans differ and the initial
Class Principal Balances differ, from those assumed in preparing the tables in
Appendix C, the outstanding Class Principal Balance of any Class of Offered
Certificates may be reduced to zero earlier or later than indicated by such
tables.
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<PAGE>
Variations in actual prepayment experience may increase or decrease the
percentages of the original outstanding Class Principal Balances and the
weighted average lives shown in the tables in Appendix C. Such variations may
occur even if the average prepayment experience of all the Mortgage Loans equals
the indicated percentage of the BPA. There is no assurance, however, that
prepayment of the Mortgage Loans will conform to any given percentage of the
BPA.
Based on the foregoing assumptions, the tables in Appendix C indicate the
projected weighted average lives of the Offered Certificates and set forth the
percentages of the initial outstanding Class Principal Balance of each such
Class of Offered Certificates that would be outstanding after each of the dates
shown at various constant percentages of the BPA.
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS A-10 AND CLASS X CERTIFICATES
The yield to investors in the LIBOR Certificates will be sensitive to
fluctuations in LIBOR. The yield to maturity on the Class A-10 Certificates will
be extremely sensitive to fluctuations in LIBOR, and the Remittance Rates on
such Certificates will vary inversely with LIBOR. Changes in LIBOR may not
correlate with changes in prevailing mortgage interest rates. It is possible
that lower prevailing mortgage interest rates, which might be expected to result
in faster prepayments, could occur concurrently with an increased level of
LIBOR. Conversely, higher prevailing mortgage interest rates (which would be
expected to result in slower prepayments) could occur concurrently with a lower
level of LIBOR.
The yield to maturity on the Class X Certificates will be extremely
sensitive to the level of Principal Prepayments on the Mortgage Loans. The
interest payable to the Class X Certificates is based on the weighted average of
the Stripped Interest Rates (as defined herein) of the Premium Rate Mortgage
Loans and therefore the yield to maturity of such Certificates will generally
decrease as a result of faster than expected Principal Prepayments on the
Premium Rate Mortgage Loans. Prospective investors should fully consider the
risks associated with an investment in the Class X Certificates, including the
possibility that if the rate of Principal Prepayments on the Premium Rate
Mortgage Loans is rapid, such investors may not fully recoup their initial
investments. See "Yield and Prepayment Considerations" herein.
To illustrate the significance of different rates of prepayment and, in the
case of the Inverse Floater Certificates, different levels of LIBOR, on the
distributions on the Class X and Inverse Floater Certificates, the following
tables indicate the approximate pre-tax yields to maturity (on a corporate bond
equivalent basis) under the different percentages of the BPA indicated and, with
respect to the Inverse Floater Certificates, different levels of LIBOR. Because
the rate of distribution of interest on the Class X Certificates and the Inverse
Floater Certificates will be directly related to the actual amortization
(including prepayments) of the Mortgage Loans, which will include Mortgage Loans
that have remaining terms to maturity shorter or longer than those assumed and
interest rates higher or lower than those assumed, the pre-tax yields to
maturity on the Class X and Inverse Floater Certificates are likely to differ
from those shown in the following tables even if all the Mortgage Loans prepay
at the indicated constant percentages of the BPA and the weighted average
remaining terms to maturity of the Mortgage Loans are as assumed and, for the
Inverse Floater Certificates, LIBOR, remains at the levels assumed. Any
differences between such assumptions and the actual characteristics and
performance of the Mortgage Loans and of the Certificates may result in yields
to maturity being different from those shown in such tables. Discrepancies
between assumed and actual characteristics and performances underscore the
hypothetical nature of the tables, which are provided only to give a general
sense of the sensitivity of yields to maturity in varying prepayment scenarios
and, for the Inverse Floater Certificates, different levels of LIBOR. In
addition, it is highly unlikely that the Mortgage Loans will prepay at a
constant level of the BPA until maturity or that all of such Mortgage Loans will
prepay at the same rate or, for the Inverse Floater Certificates, that the
levels of LIBOR will remain constant. The timing of changes to the rate of
prepayments or rate of LIBOR may significantly affect the actual yield to
maturity to an investor, even if the average rate of Principal Prepayments or
average rate of LIBOR is consistent with an investors expectation. In general,
the earlier a payment of principal of the Mortgage Loans or change in LIBOR, the
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greater the effect on an investor's yield to maturity. As a result, the effect
on an investor's yield to maturity 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 Certificates or changes in the level
of LIBOR, as applicable, occurring at a rate higher or lower than the rate
anticipated by the investor during the period immediately following the issuance
of the Certificates will not be equally offset by a subsequent like reduction
(or increase) in the rate of Principal Prepayments or level of LIBOR.
In addition, the yield to maturity on the Class A-10 and X Certificates may
be adversely affected if an optional termination of the Mortgage Trust occurs.
The tables set forth below are based on the Modeling Assumptions and assume
further that (i) the Certificates are purchased at prices (which include accrued
interest in the case of the Class X Certificates) equal to those set forth in
the tables and (ii) in the case of the Inverse Floater Certificates, on the
LIBOR Determination Date in October 1997 and on each LIBOR Determination Date
thereafter, the applicable LIBOR will be the rate shown and on the first
Distribution Date, the Inverse Floater Certificateholders will receive 30 days
of interest at their respective initial Remittance Rates. There can be no
assurance that the Mortgage Loans will have the assumed characteristics, will
prepay at any of the rates shown herein, that the purchase prices of the
Certificates will be as assumed or that the pre-tax yields to maturity will
correspond to any of the pre-tax yields shown herein, that for, the Inverse
Floater Certificates that the rate of LIBOR will correspond to the levels shown
herein, or that the purchase prices of the Inverse Floater Certificates will be
as assumed. The actual prices to be paid on the Class X and Inverse Floater
Certificates have not been determined and will be dependent on the
characteristics of the Mortgage Pool as ultimately constituted. In addition to
any other factors an investor may deem material, each investor must make its own
decision as to the appropriate prepayment assumptions to be used and, in the
case of the Inverse Floater Certificates, the appropriate rates of LIBOR to be
assumed in deciding whether or not to purchase a Class of Certificates.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS X CERTIFICATES TO PREPAYMENTS AT A
SPECIFIED ASSUMED PRICE
<TABLE>
<CAPTION>
PERCENTAGE OF THE BPA
--------------------------------------------------------------------
ASSUMED PRICE 0% 100% 250% 500% 600%
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$6,468,861................................................. 25.0% 19.8% 11.7% (2.2%) (8.0%)
</TABLE>
On the basis of a constant prepayment rate of approximately 461% of the BPA,
a purchase price of $6,468,861, which includes accrued interest, and the
assumptions described above, the pre-tax yield to maturity of the Class X
Certificates would be approximately 0%. If the actual prepayment rate were to
exceed the rates assumed above, even for one month, while equaling such rates
for all other months, an investor in the Class X Certificates would not fully
recoup the initial purchase price of such Certificates.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS A-10 CERTIFICATES TO PREPAYMENTS AND LIBOR
AT AN ASSUMED PURCHASE PRICE OF 5.531250% OF THE CLASS A-10 NOTIONAL AMOUNT
<TABLE>
<CAPTION>
PERCENTAGE OF THE BASIC
PREPAYMENT ASSUMPTION
-----------------------------------------------------
LIBOR 0% 100% 250% 500% 600%
<S> <C> <C> <C> <C> <C>
3.62500%....................................................... 101.7% 93.0% 84.0% 76.4% 72.7%
4.62500%....................................................... 78.5% 68.5% 58.5% 50.5% 46.7%
5.62500%....................................................... 56.1% 44.2% 32.6% 24.4% 20.3%
6.62500%....................................................... 34.3% 19.7% 5.1% (3.3%) (7.7%)
7.62500%....................................................... 11.7% (7.5%) (27.4%) (35.7%) (41.0%)
</TABLE>
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The pre-tax yields to maturity set forth in the preceding tables were
calculated by determining the monthly discount rates (whether positive or
negative) which, when applied to the assumed streams of cash flows to be paid on
the Class A-10 and Class X Certificates, would cause the discounted present
values of such assumed streams of cash flows to equal the assumed purchase
price, including accrued interest. These monthly discount rates were converted
to corporate bond equivalent rates, which are higher than the monthly discount
rates because they are based on semiannual compounding. These yields to maturity
do not take into account the different interest rates at which investors may be
able to reinvest funds received by them as distributions on the Class A-10 or
Class X Certificates and thus do not reflect the return on any investment in the
Class A-10 or Class X Certificates when any reinvestment rates other than the
discount rates are considered.
There are no historical prepayment data available for the Mortgage Pool, and
comparable data are not available because the Mortgage Loans do not constitute a
representative sample of mortgage loans generally. In addition, historical data
available with respect to mortgage loans underlying mortgage pass-through
certificates issued by the Government National Mortgage Association ("GNMA"),
FNMA and FHLMC may not be comparable to prepayments expected to be experienced
by the Mortgage Pool because the Mortgage Loans may have characteristics which
differ from the mortgage loans underlying certificates issued by GNMA, FNMA and
FHLMC.
The Company makes no representation that the Mortgage Loans will prepay in
the manner or at any of the rates assumed above. Each investor must make its own
decision as to the appropriate prepayment assumptions to be used in deciding
whether or not to purchase any of the Certificates. Since the rate of principal
payments (including prepayments) with respect to, and repurchases of, the
Mortgage Loans will significantly affect the yields to maturity on the Offered
Certificates, prospective investors are urged to consult their investment
advisors as to both the anticipated rate of future principal payments (including
prepayments) on the Mortgage Loans and the suitability of the Certificates to
their investment objectives.
YIELD CONSIDERATIONS WITH RESPECT TO THE SENIOR SUBORDINATE CERTIFICATES
The tables beginning on page S-52 have been prepared using the Modeling
Assumptions, except that it has been assumed that (i) defaults occur monthly on
the last day of the previous month at rates which in the aggregate are equal to
the following percentages of the aggregate principal balance of the Mortgage
Loans as of the Cut-Off Date for the number of months indicated (and none
thereafter); (ii) the scheduled monthly payments for each Mortgage Loan are
computed based upon its unpaid principal balance after giving effect to any
default; (iii) certain delinquency experience levels specified in the Pooling
Agreement for the determination of the Senior Prepayment Percentages and the
Subordinate Prepayment Percentages are not exceeded; and (iv) prepayments are
calculated as assumed above but before giving effect to any such defaults
(unless such defaults would reduce the aggregate principal balance of the
Mortgage Loans below the aggregate amount of such assumed prepayments, in which
case prepayments are limited to the outstanding principal balance of such
Mortgage Loans after such defaults).
<TABLE>
<CAPTION>
PRINCIPAL BALANCE OF DEFAULTED
MORTGAGE LOANS AS A PERCENTAGE
OF THE AGGREGATE PRINCIPAL NUMBER OF MONTHS
BALANCE OF THE MORTGAGE LOANS COMMENCING IN
AS OF THE CUT-OFF DATE SEPTEMBER 1998
- ------------------------------- -------------------
<S> <C>
0.00% N.A.
0.35% 24
0.75% 24
1.50% 24
</TABLE>
S-51
<PAGE>
For example, if defaulted Mortgage Loans total 0.35% of the aggregate
principal balance of the Mortgage Loans as of the Cut-Off Date as assumed for
purposes of the following tables (approximately $1,225,503, which is 0.35% of
$350,143,810), and such defaults occur at an amount per month equal to
approximately $51,062 (1/24th of $1,225,503) in each month of the 24-month
period commencing in September 1998, the effect on the pre-tax yield to maturity
of the Senior Subordinate Certificates from such aggregate defaults on the
Mortgage Loans over such 24-month period would be as shown in the tables below
for BPAs of 0%, 100%, 250%, 500%, and 600%.
In addition, it was assumed that (i) realized losses on liquidation of the
Mortgage Loans occur at a rate of 20% and 30% of the outstanding principal
balance of such defaulted Mortgage Loans at the time of default as indicated in
the table (referred to as a "LOSS SEVERITY PERCENTAGE") in the month in which
the Mortgage Loans first default, (ii) there are no Special Hazard Losses, Fraud
Losses or Bankruptcy Losses, (iii) the Senior Subordinate Certificates are
purchased at the assumed purchase prices equal to the indicated percentages of
the Class B-1, Class B-2 or Class B-3 Principal Balance, as applicable, plus
accrued interest from the Cut-Off Date and (iv) all scheduled payments on
Mortgage Loans are advanced by the Master Servicer whether or not received from
the related Mortgagors.
The rate of distributions in reduction of the Class Principal Balance of any
Class of Senior Subordinate Certificates will be related to the actual
amortization schedule of the Mortgage Loans; accordingly, the interest
distributions and distributions in reduction of the Class Principal Balances of
the Senior Subordinate Certificates may result in yields to maturity which
differ from those reflected below.
The Mortgage Loans will not have the characteristics assumed, and it is
unlikely that they will prepay at any of the constant rates specified. The
assumed percentages of the BPA, the principal balance of the defaulted Mortgage
Loans and the loss severities on the Mortgage Loans shown in the tables below
are for illustrative purposes only and the Company makes no representations with
respect to the reasonableness of such assumptions or that the actual rates of
prepayment and liquidation and loss severity experience of the Mortgage Loans
will in any way correspond to any of the assumptions made herein. In addition,
it is unlikely that liquidations will occur in the month of default, and the
timing of such liquidations may cause the pre-tax yield to maturity of the
Senior Subordinate Certificates to differ from those shown below.
PRE-TAX YIELD TO MATURITY OF THE CLASS B-1 CERTIFICATES
AT AN ASSUMED PURCHASE PRICE OF 101.00% OF THE CLASS B-1
PRINCIPAL BALANCE PLUS ACCRUED INTEREST FROM THE CUT-OFF DATE
<TABLE>
<CAPTION>
DEFAULTED MORTGAGE
LOANS EXPRESSED AS A
PERCENTAGE OF THE
AGGREGATE PRINCIPAL
BALANCE OF THE MORTGAGE
LOANS AS OF THE CUT-OFF
DATE OVER THE 24-MONTH PERCENTAGE OF THE BPA LOSS
PERIOD COMMENCING IN ----------------------------------------------------- SEVERITY
SEPTEMBER 1998 0% 100% 250% 500% 600% PERCENTAGE
- ----------------------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
0.00% 7.21% 7.18% 7.15% 7.12% 7.11% 0%
0.35% 7.21% 7.18% 7.15% 7.12% 7.11% 20%
0.35% 7.20% 7.18% 7.15% 7.12% 7.11% 30%
0.75% 7.20% 7.18% 7.15% 7.12% 7.11% 20%
0.75% 7.20% 7.18% 7.15% 7.12% 7.11% 30%
1.50% 7.20% 7.18% 7.15% 7.12% 7.11% 20%
1.50% 7.20% 7.18% 7.15% 7.12% 7.11% 30%
</TABLE>
S-52
<PAGE>
PRE-TAX YIELD TO MATURITY OF THE CLASS B-2 CERTIFICATES
AT AN ASSUMED PURCHASE PRICE OF 100.00% OF THE CLASS B-2
PRINCIPAL BALANCE PLUS ACCRUED INTEREST FROM THE CUT-OFF DATE
<TABLE>
<CAPTION>
DEFAULTED MORTGAGE
LOANS EXPRESSED AS A
PERCENTAGE OF THE
AGGREGATE PRINCIPAL
BALANCE OF THE MORTGAGE
LOANS AS OF THE CUT-OFF
DATE OVER THE 24-MONTH PERCENTAGE OF THE BPA LOSS
PERIOD COMMENCING IN ----------------------------------------------------- SEVERITY
SEPTEMBER 1998 0% 100% 250% 500% 600% PERCENTAGE
- ----------------------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
0.00% 7.31% 7.30% 7.29% 7.28% 7.28% 0%
0.35% 7.31% 7.30% 7.29% 7.28% 7.28% 20%
0.35% 7.31% 7.30% 7.29% 7.28% 7.28% 30%
0.75% 7.31% 7.30% 7.29% 7.28% 7.28% 20%
0.75% 7.31% 7.30% 7.29% 7.28% 7.28% 30%
1.50% 7.31% 7.30% 7.29% 7.28% 7.28% 20%
1.50% 7.31% 7.30% 7.29% 7.28% 7.28% 30%
</TABLE>
PRE-TAX YIELD TO MATURITY OF THE CLASS B-3 CERTIFICATES
AT AN ASSUMED PURCHASE PRICE OF 98.75% OF THE CLASS B-3
PRINCIPAL BALANCE PLUS ACCRUED INTEREST FROM THE CUT-OFF DATE
<TABLE>
<CAPTION>
DEFAULTED MORTGAGE
LOANS EXPRESSED AS A
PERCENTAGE OF THE
AGGREGATE PRINCIPAL
BALANCE OF THE MORTGAGE
LOANS AS OF THE CUT-OFF
DATE OVER THE 24-MONTH PERCENTAGE OF THE BPA LOSS
PERIOD COMMENCING IN ----------------------------------------------------- SEVERITY
SEPTEMBER 1998 0% 100% 250% 500% 600% PERCENTAGE
- ----------------------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
0.00% 7.44% 7.45% 7.47% 7.49% 7.49% 0%
0.35% 7.44% 7.45% 7.47% 7.49% 7.49% 20%
0.35% 7.44% 7.45% 7.47% 7.49% 7.49% 30%
0.75% 7.44% 7.45% 7.47% 7.49% 7.49% 20%
0.75% 7.44% 7.45% 7.47% 7.49% 7.49% 30%
1.50% 7.43% 7.45% 7.47% 7.49% 7.49% 20%
1.50% 7.43% 7.45% 7.47% 7.49% 7.49% 30%
</TABLE>
The pre-tax yields to maturity set forth in the preceding tables were
calculated by determining the monthly discount rates which, when applied to the
assumed streams of cash flows to be paid on each Class of Senior Subordinate
Certificates, would cause the discounted present value of such assumed stream of
cash flows to equal the assumed offering prices (including accrued interest) of
each Class of the Senior Subordinate Certificates set forth above. In all cases
monthly rates are then converted to the corporate bond equivalent yields shown
above. Implicit in the use of any discounted present value or internal rate of
return calculation such as these is the assumption that intermediate cash flows
are invested at the discount rate or internal rate of return. Thus these
calculations do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as distributed on the
Senior Subordinate Certificates. Consequently, these yields to maturity do not
purport to reflect the return on any investment in the Senior Subordinate
Certificates when such reinvestment rates are considered.
S-53
<PAGE>
The characteristics of the Mortgage Loans will not correspond exactly to
those assumed in preparing the tables above. The yield to maturity of each Class
of the Senior Subordinate Certificates therefore will differ even if all the
Mortgage Loans prepay monthly at the related assumed prepayment rate. In
addition, it is not likely that the Mortgage Loans will prepay at the same
percentage of the BPA, and the timing of changes in the rate of prepayments may
affect significantly the yield to maturity received by a holder of a Class of
Senior Subordinate Certificates. There are no historical prepayment data
available for the Mortgage Pool, and comparable data are not available because
the Mortgage Loans do not constitute a representative sample of mortgage loans
generally. In addition, historical data available with respect to mortgage loans
underlying mortgage pass-through certificates issued by GNMA, FNMA or FHLMC may
not be comparable to prepayments expected to be experienced by the Mortgage
Pool, because the Mortgage Loans may have characteristics which differ from
mortgage loans underlying certificates issued by GNMA, FNMA and FHLMC.
The Company makes no representation that the Mortgage Loans will prepay in
the manner or at any of the rates assumed above. Each investor must make its own
decision as to the appropriate prepayment assumptions to be used in deciding
whether or not to purchase any of the Senior Subordinate Certificates. Since the
rate of principal payments (including Principal Prepayments) with respect to,
and repurchases of, the Mortgage Loans will significantly affect the yield to
maturity on each Class of the Senior Subordinate Certificates, prospective
investors are urged to consult their investment advisors as to both the
anticipated rate of future principal payments (including Principal Prepayments)
on the Mortgage Loans and the suitability of the Senior Subordinate Certificates
to their investment objectives.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The Residual Certificateholders' after-tax rate of return on their
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to such Certificates. Holders of Residual
Certificates may have tax liabilities with respect to their Certificates during
the early years of the REMIC's term that substantially exceed any distributions
payable thereon during any such period. In addition, holders of Residual
Certificates may have tax liabilities with respect to their Certificates the
present value of which substantially exceeds the present value of distributions
payable thereon and of any tax benefits that may arise with respect thereto.
Accordingly, the after-tax rate of return on the Residual Certificates may be
negative or may otherwise be significantly adversely affected. The timing and
amount of taxable income attributable to the Residual Certificates will depend
on, among other things, the timing and amounts of prepayments and losses
experienced with respect to the Mortgage Pool.
The Residual Certificateholders should consult their own tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ADDITIONAL INFORMATION
The Company intends to file with the Securities and Exchange Commission
certain additional yield tables and other computational materials with respect
to one or more Classes of the Offered Certificates on a Current Report on Form
8-K. Such tables and materials were prepared by the Underwriter at the request
of certain prospective investors, based on assumptions provided by, and
satisfying the special requirements of, such prospective investors. Such tables
and materials are preliminary in nature, and the information contained therein
is subject to, and superseded by, the information in this Supplement.
S-54
<PAGE>
CREDIT ENHANCEMENTS
SUBORDINATION
The holders of the Senior Certificates will receive distributions of
interest (except Component A-1-3 and Component A-1-4, which are not entitled to
interest) and principal (except the Class A-10 and Class X Certificates and
Component A-1-5, which are not entitled to principal) before distributions of
interest or principal to the holders of the Class B Certificates. No Class B
Certificates will receive distributions of interest or principal on any
Distribution Date until the Class or Classes senior to such Class have received
all distributions of interest and principal due on or before such Distribution
Date. See "Description of the Certificates -- Priority of Distributions" herein.
Losses on Mortgage Loans will be allocated, in each case until the
applicable Class Principal Balances have been reduced to zero: first, to the
Junior Subordinate Certificates; second, to the Class B-3 Certificates; third,
to the Class B-2 Certificates; fourth, to the Class B-1 Certificates; and fifth,
to the outstanding Classes of Senior Certificates by Pro Rata Allocation;
PROVIDED, HOWEVER, that only a certain specified amount of Special Hazard
Losses, Fraud Losses and Bankruptcy Losses will be allocated solely to the Class
B Certificates, following which such losses will be allocated among all
outstanding Classes of Certificates by Pro Rata Allocation; PROVIDED, FURTHER,
that in the event any loss is incurred with respect to a PO Mortgage Loan, the
PO Fraction of such loss will first be allocated to Component A-1-4 and the
remainder of such loss will be allocated as described above.
SHIFTING OF INTERESTS
The Senior Certificates entitled to principal, other than the Prepayment
Lockout Certificates, will receive 100% of Principal Prepayments received with
respect to the Mortgage Loans until the fifth anniversary of the first
Distribution Date. During the next four years, the Senior Certificates entitled
to principal, other than the Prepayment Lockout Certificates, will receive a
disproportionately large, but decreasing, share of Principal Prepayments
received with respect to the Mortgage Loans. This will result in an acceleration
of the amortization of such Senior Certificates, other than the Prepayment
Lockout Certificates, subject to the priorities described in "Description of the
Certificates -- Distributions of Principal" herein, enhancing the likelihood
that holders of such Classes of Certificates will be paid the full amount of
principal to which they are entitled. See "Description of the Certificates --
Distributions of Principal" herein.
Although the Prepayment Lockout Certificates are Senior Certificates, the
Class A-5, Class A-6 and Class A-14 Certificates will generally not be entitled
to receive any distributions of Principal Prepayments until the Distribution
Date in October 2002. Therefore, the Class A-5, Class A-6 and Class A-14
Certificates will not be entitled to receive the disproportionate allocation of
Principal Prepayments that the other Senior Certificates are entitled to
receive. See "Description of the Certificates -- Distributions of Principal".
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Company will cause elections to be made
to treat the Certificate Trust and the Mortgage Trust as REMICs. The
Certificates, other than the Class R-1 Certificates and the Class R
Certificates, will represent ownership of REMIC regular interests. Such
Certificates will generally be treated as representing ownership of debt for
federal income tax purposes. Certificateholders will be required to include in
income all interest and original issue discount ("OID") on such Certificates in
accordance with the accrual method of accounting regardless of the
Certificateholders' usual methods of accounting. For federal income tax
purposes, (i) the Class R-1 Certificates will be the residual interest in the
Mortgage Trust and (ii) the Class R Certificates will be the residual interest
in the Certificate Trust.
S-55
<PAGE>
The Class A-4, Class A-10 and Class X Certificates will, and the Class A-5,
Class A-8, Class A-13, Class A-14, Class B-1, Class B-2 and Class B-3
Certificates may, be treated as having been issued with OID for federal income
tax purposes. The prepayment assumption that will be used in determining the
rate of accrual of market discount and premium, if any, for federal income tax
purposes is 250% of the BPA as described herein under "Yield and Prepayment
Considerations". No represen-tation is made that the Mortgage Loans will prepay
at any given percentage of the BPA.
In certain circumstances OID Regulations (as defined in "Certain Federal
Income Tax Consequences" in the Prospectus) permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Company in preparing reports to the
Certificateholders and the IRS.
If actual prepayments differ sufficiently from the prepayment assumption,
the calculation of OID for certain Classes of Offered Certificates might produce
a negative number for certain accrual periods. In such event, Certificateholders
will not be entitled to a deduction for such amount, but will be required to
carry such amount forward as an offset to OID, if any, accruing in future
accrual periods.
Purchasers of the Floater Certificates and Inverse Floater Certificates
should be aware that Section 1272(a)(6) of the Code and the OID Regulations do
not adequately address certain issues relevant to, or applicable to, prepayable
securities bearing a variable rate of interest such as the Floater Certificates
and Inverse Floater Certificates. In the absence of other authority, the REMIC
Administrator intends to be guided by certain principles of the OID Regulations
applicable to variable rate debt instruments in determining whether such
Certificates should be treated as issued with original issue discount and in
adapting the provisions of Section 1272(a)(6) of the Code to such Certificates
for the purpose of preparing reports furnished to Certificateholders and the
IRS. Because of the uncertainties concerning the application of Section
1272(a)(6) of the Code to such Certificates and because the rules relating to
debt instruments having a variable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Floater Certificates and Inverse Floater Certificates should be governed by
some other method not yet set forth in regulations. Prospective purchasers of
the Floater Certificates and Inverse Floater Certificates are advised to consult
their tax advisors concerning the tax treatment of such Certificates.
The REMIC Administrator intends to report all income with respect to the
Inverse Floater Certificates as original issue discount for each period,
computing such original issue discount (i) by assuming that the value of the
applicable index will remain constant for purposes of determining the original
yield to maturity of each such class of Certificates and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. It appears that an approach similar to
that used to report income on the Inverse Floater Certificates would be a
reasonable application of the principles of the OID Regulations to the Floater
Certificates if such Certificates were deemed to have been issued with original
issue discount under the OID Regulations. See "Certain Federal Income Tax
Consequences-- Taxation of Owners of REMIC Regular Certificates -- Original
Issue Discount" in the Prospectus.
Certain Classes of Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a Certificate
will be treated as holding a Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of such Classes of Certificates should consult their
own tax advisors regarding the possibility of making an election to
S-56
<PAGE>
amortize any such premium. See "Certain Federal Income Tax Consequences --
Taxation of Owners of REMIC Regular Certificates -- Original Issue Discount" and
"-- Market Discount and Premium" in the Prospectus.
The Offered Certificates will generally be treated as "qualifying real
property loans" for mutual savings banks and domestic building and loan
associations, "loans secured by an interest in real property" for domestic
building and loan associations, and "real estate assets" for real estate
investment trusts ("REITS") in the same proportion that the assets in the REMICs
would be so treated. In addition interest on the Offered Certificates will
generally be treated as "interest on obligations secured by mortgages on real
property" for REITs to the extent that such Offered Certificates are treated as
"real estate assets". Recently enacted legislation repealed the provisions of
Section 593(d) of the Internal Revenue Code allowing the reserve method of
accounting for bad debts, effective for taxable years beginning after December
31, 1995. See "Certain Federal Income Tax Consequences" in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO THE RESIDUAL CERTIFICATES
The Internal Revenue Service has issued regulations under the provisions of
the Code related to REMICs (the "REMIC REGULATIONS") that significantly affect
holders of the Residual Certificates. The REMIC Regulations impose restrictions
on the transfer or acquisition of certain residual interests, including the
Residual Certificates. In addition, the REMIC Regulations contain restrictions
that apply to the transfer of "noneconomic" residual interests to United States
persons. Pursuant to the Pooling Agreement, the Residual Certificates may not be
transferred to non-United States persons.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("THRIFT INSTITUTIONS") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The REMIC Regulations also provide that a transfer to a United States person
of "noneconomic" residual interests will be disregarded for all federal income
tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax". Based on the REMIC
Regulations, the Residual Certificates may constitute noneconomic residual
interests during some or all of their terms for purposes of the REMIC
Regulations and, accordingly, unless no significant purpose of a transfer is to
impede the assessment or collection of tax, transfers of the Residual
Certificates may be disregarded and purported transferors may remain liable for
any taxes due with respect to the income on the Residual Certificates. All
transfers of the Residual Certificates will be subject to certain restrictions
under the terms of the Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded to the extent that the
Residual Certificates constitute noneconomic residual interests. See "Certain
Federal Income Tax Consequences -- Taxation of Owners of REMIC Residual
Certificates -- Noneconomic REMIC Residual Certificates" in the Prospectus.
S-57
<PAGE>
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the REMIC's term
that significantly exceeds the amount of cash distributions received by such
Class R Certificateholders from the REMIC with respect to such periods.
Consequently, the Class R Certificateholders should have other sources of funds
sufficient to pay any federal income taxes due in the earlier years of the REMIC
as a result of their ownership of such Class R Certificates. In addition, the
required inclusion of this amount of taxable income during the REMIC's earlier
accrual periods and the deferral of corresponding tax losses or deductions until
later accrual periods or until the ultimate sale or disposition of a Class R
Certificate (or possibly later under the "wash sale" rules of Section 1091 of
the Code) may cause the Class R Certificateholders' after-tax rate of return to
be zero or negative even if the Class R Certificateholders' pre-tax rate of
return is positive. That is, on a present value basis, the Class R
Certificateholders' resulting tax liabilities could substantially exceed the sum
of any tax benefits and the amount of any cash distributions on such Class R
Certificates over their life.
As discussed above, the rules for accrual of original issue discount with
respect to certain Classes of Certificates are subject to significant complexity
and uncertainty. Because original issue discount on the Certificates will be
deducted by the related REMIC in determining its taxable income, any changes
required by the Internal Revenue Service in the application of those rules to
the Certificates may significantly affect the timing of original issue discount
deductions to the related REMIC and therefore the amount of the related REMIC's
taxable income allocable to holders of the Residual Certificates.
Purchasers of the Residual Certificates are strongly advised to consult
their own tax advisors as to the economic and tax consequences of investment in
such Certificates.
For further information regarding the federal income tax consequences of
investing in the Residual Certificates, see "Certain Yield and Prepayment
Considerations -- Additional Yield Considerations Applicable Solely to the
Residual Certificates" herein and "Certain Federal Income Tax Consequences --
Taxation of Owners of REMIC Residual Certificates" in the Prospectus.
An individual, trust or estate that holds (whether directly or indirectly
through certain pass-through entities) a Residual Certificate, particularly a
Class R-1 Certificate, may have significant additional gross income with respect
to, but may be subject to limitations on the deductibility of, servicing and
trustee's fees and other administrative expenses properly allocable to the
related REMIC in computing such Certificateholder's regular tax liability and
will not be able to deduct such fees or expenses to any extent in computing such
Certificateholder's alternative minimum tax liability. Such expenses will be
allocated for federal income tax information reporting purposes entirely to the
Class R-1 Certificates and not to the Class R Certificates. However, it is
possible that the IRS may require all or some portion of such fees and expenses
to be allocated to the Class R Certificates. See "Certain Federal Income Tax
Consequences -- Pass-Through of Servicing Fees" and "-- Taxation of Owners of
REMIC Residual Certificates" in the Prospectus.
The Company will be designated as the "tax matters persons" with respect to
the Mortgage Trust and Certificate Trust as defined in the REMIC Regulations
(defined below), and in connection therewith will be required to hold not less
than 0.01% of each of the Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences" in
the Prospectus.
S-58
<PAGE>
CERTAIN LEGAL INVESTMENT ASPECTS
As of the date of their issuance, the Offered Certificates, other than the
Class B-2 and Class B-3 Certificates, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), and as such will be legal investments for persons, trusts,
corpora-tions, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies, and pension funds)
created pursuant to or existing under the laws of the United States or of any
state whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Under SMMEA, if a state
enacted legislation prior to October 4, 1991 specifically limiting the legal
investment authority of any of such entities with respect to "mortgage related
securities", the Offered Certificates, other than the Class B-2 and Class B-3
Certificates, will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Certain states have enacted
such legislation. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates, constitute
legal investments for such investors.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with the Offered
Certificates, other than the Class B-2 and Class B-3 Certificates, without
limitation as to the percentage of their assets represented thereby, federal
credit unions may invest in the Offered Certificates, other than the Class B-2
and Class B-3 Certificates, and national banks may purchase the Offered
Certificates, other than the Class B-2 and Class B-3 Certificates, for their own
accounts without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), in each case subject to such
regulations as the applicable federal regulatory authority may prescribe.
Institutions whose investment activities are subject to review by certain
regulatory authorities hereafter may be or may become subject to restrictions on
investment in the Offered Certificates, and such restrictions may be
retroactively imposed. The Federal Financial Institutions Examination Council,
the Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Office of
Thrift Supervision and the National Credit Union Administration have adopted
guidelines, and have proposed policies, regarding the suitability of investments
in various types of derivative mortgage-backed securities, including securities
such as the Offered Certificates. In addition, several states have adopted or
are considering regulations that would prohibit regulated institutions subject
to their jurisdiction from holding mortgage-backed securities such as the
Offered Certificates, including such securities previously purchased. Investors
should consult their own legal advisors in determining whether and to what
extent the Offered Certificates constitute legal investments for such investors.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase the Offered Certificates
or to purchase the Offered Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Offered Certificates
constitute legal investments for such investors.
ERISA CONSIDERATIONS
Any fiduciary of an employee benefit plan or other benefit plan or
arrangement which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of
1986, as amended (the "CODE") (each, a "PLAN"), or other person that proposes to
use "plan assets" of any Plan to acquire any Offered Certificates should consult
with its counsel with respect to the potential consequences under ERISA and
Section 4975 of the Code of the acquisition and
S-59
<PAGE>
ownership of such Certificates by, on behalf of or with "plan assets" of any
Plan. See "ERISA Considerations" in the Prospectus.
UNDERWRITER'S PTE
Donaldson, Lufkin & Jenrette Securities Corporation (the " UNDERWRITER") is
the recipient of a final prohibited transaction exemption (the "UNDERWRITER'S
PTE") which may afford protection from violations under Sections 406 and 407 of
ERISA and Section 4975 of the Code for Plans that acquire Offered Certificates
(other than the Class A-14 and Senior Subordinate Certificates). It is not clear
whether exemptive relief is available under the Underwriter's PTE for Plans that
acquire the Residual Certificates. Plans (or persons using "plan assets" of any
Plan) that acquire Offered Certificates (other than the Class A-14 and Senior
Subordinate Certificates) may be eligible for exemptive relief under the
Underwriter's PTE if:
(a) The Class of such Certificates acquired by the Plan is not
subordinated to other Classes of Certificates with respect to the right to
receive payment in the event of defaults or delinquencies on the underlying
Mortgage Loans;
(b) The Plan is an "accredited investor" (as defined in Rule 501(a)(1)
of Regulation D under the Securities Act of 1933, as amended (the "ACT"));
(c) The acquisition of such Certificates by the Plan is on terms
(including the price paid 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; and
(d) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of such Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Company pursuant to the sale of the
Mortgage Loans to the Mortgage Trust represents not more than the fair
market value of the Mortgage Loans; and the sum of all payments made to and
retained by the Company or any other servicer represents not more than
reasonable compensation for their services under the Pooling Agreement and
reimbursement of their reasonable expenses in connection therewith.
In addition, the Underwriter's PTE will not provide exemptive relief for
certain transactions prohibited by Section 406(b) of ERISA or Section
4975(c)(1)(E) or (F) of the Code that may result from an investment of "plan
assets" of any Plan in such Certificates if:
(e) The Plan's investment in any Class of such Certificates exceeds 25%
of the outstanding Certificates of that Class at the time of acquisition;
(f) 25% or more of the Plan assets with respect to which the investing
fiduciary has discretionary authority or renders investment advice are
invested in certificates evidencing interests in trusts sponsored or
containing assets sold or serviced by the Company;
(g) The Plan is sponsored by the Company, the Underwriter, the Trustee,
any servicer, the obligor under any credit support mechanism, or any
mortgagor with respect to Mortgage Loans constituting more than 5% of the
aggregate unamortized principal balance of the Mortgage Loans on the Closing
Date (a "Major Obligor") or their affiliates; or
(h) The Plan fiduciary responsible for the decision to invest or any of
its affiliates is a Major Obligor.
Whether the conditions of the Underwriter's PTE will be satisfied with
respect to Offered Certificates of a particular Class (other than the Class A-14
and Senior Subordinate Certificates, for which the Underwriter's PTE will not
afford exemptive relief) will depend upon the facts and circumstances existing
at the time the Plan acquires (or "plan assets" of the Plan are used to acquire)
Certificates of that Class.
S-60
<PAGE>
Any Plan fiduciary or other person that proposes to use "plan assets" of any
Plan to acquire such Offered Certificates in reliance upon the Underwriter's PTE
should determine whether such acquisition will satisfy all applicable conditions
and consult with its counsel regarding other factors that may affect the
applicability of the Underwriter's PTE.
PROHIBITED TRANSACTION CLASS EXEMPTIONS
To qualify for exemption under PTCE 83-1 (see "ERISA Considerations --
Prohibited Transaction Class Exemption 83-1" in the Prospectus), a Certificate
(i) must entitle its holder to more than nominal pass-through payments of both
principal and interest from the Mortgage Loans, (ii) must not be subordinated to
other Classes of Certificates with respect to the right to receive payments in
the event of defaults or delinquencies on the underlying Mortgage Loans and
(iii) must not be issued by a Trust which holds cooperative apartment Mortgage
Loans. See "ERISA Considerations -- Prohibited Transaction Class Exemption 83-1"
in the Prospectus.
Because the Class A-10 and Class X Certificates are not entitled to
principal, and the Class A-14 and Senior Subordinate Certificates are
subordinated to the extent specified herein (see "Description of the
Certificates -- Subordination and Allocation of Losses" herein), PTCE 83-1 will
not afford exemptive relief to Plans (or persons using "plan assets" of any
Plan) that acquire such Certificates from the prohibited transaction rules of
ERISA or Section 4975 of the Code. It is not clear whether PTCE 83-1 will afford
such relief to Plans (or such persons) that acquire the Residual Certificates.
Purchasers using insurance company general account assets to effect the purchase
of the Class A-10, Class A-14, Class X and Senior Subordinate Certificates
should consider the availability of exemptive relief under Sections I and III of
PTCE 95-60. See "ERISA Considerations -- Prohibited Transaction Class Exemption
83-1" and "-- Other Exemptions" in the Prospectus.
RESTRICTIONS ON THE CLASS A-14, SENIOR SUBORDINATE AND RESIDUAL CERTIFICATES
Because the Class A-14 and Senior Subordinate Certificates will not qualify
for exemptive relief under the Underwriter's PTE or PTCE 83-1, and because it is
not clear whether the Residual Certificates may qualify for exemptive relief
under the Underwriter's PTE, purchases of such Certificates by, on behalf of or
with "plan assets" of any Plan are not to be registered unless the transferee
(i) provides an opinion of counsel satisfactory to the Trustee and the Company
that the purchase of any such Certificate by, on behalf of or with "plan assets"
of such Plan is permissible under applicable law, will not constitute or result
in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code,
and will not subject the Master Servicer, the Company or the Trustee to any
obligation in addition to those undertaken in the Pooling Agreement or (ii)
represents that it is an insurance company using assets of its general account
to effect such purchase in reliance upon the availability of exemptive relief
under Sections I and III of PTCE 95-60.
In addition, so long as the Class A-14 Certificates are Book-Entry
Certificates, any purchaser of a Class A-14 Certificate will be deemed to have
represented by such purchase that either (i) such purchaser is not a Plan and is
not purchasing such Certificates on behalf of, or with "plan assets" of, any
Plan or (ii) the purchase of any such Certificate by, on behalf of or with "plan
assets" of any Plan is permissible under applicable law, will not result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Code, and
will not subject the Master Servicer, the Company or the Trustee to any
obligation in addition to those undertaken in the Pooling Agreement. See "ERISA
Considerations" in the Prospectus.
S-61
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to the Underwriter, and the Underwriter has
agreed to purchase, all of the Offered Certificates, other than the 0.01%
Percentage Interest of each of the Class R and Class R-1 Certificates to be
retained by the Company. The aggregate proceeds (excluding accrued interest) to
the Company from the sale of the Offered Certificates, before deducting expenses
estimated to be $435,000 will be approximately 101.63098578% of the initial
aggregate Certificate Principal Balance of the Offered Certificates. Under the
terms and conditions of the Underwriting Agreement, the Underwriter is committed
to take and pay for all of such Offered Certificates, if any are taken.
Distribution of such Offered 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. The difference between the purchase price for
the Offered Certificates paid to the Company and the proceeds from the sale of
such Certificates realized by the Underwriter will constitute underwriting
discounts and commissions.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Thomas G.
Lehmann, General Counsel, Vice President and Secretary of the Company, and by
its special counsel, Orrick, Herrington & Sutcliffe LLP, San Francisco,
California. Brown & Wood LLP, New York, New York, will pass upon certain legal
matters on behalf of the Underwriter.
CERTIFICATE RATINGS
It is a condition to the issuance of the Offered Certificates that the Class
A Certificates (other than the Class A-10 Certificates) and the Residual
Certificates each be rated "AAA" by Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. ("S&P") and by Fitch Investors Service, L.P.
("FITCH"), that the Class A-10 and Class X Certificates each be rated "AAAr" by
S&P and "AAA" by Fitch and that the Class B-1 Certificates be rated not less
than "AA" by Fitch, the Class B-2 Certificates be rated not less than "A" by
Fitch and the Class B-3 Certificates be rated not less than "BBB" by Fitch. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the assigning Rating Agency.
Each security rating should be evaluated independently of any other security
rating.
The ratings on the Offered Certificates address the likelihood of the
receipt by Certificateholders of all distributions with respect to the
underlying Mortgage Loans to which they are entitled. The ratings do not
represent any assessment of the likelihood that the rate of Principal
Prepayments by Mortgagors might differ from those originally anticipated. As a
result of such differences in the rate of Principal Prepayments,
Certificateholders might suffer a lower than anticipated yield to maturity. See
"Risk Factors" and "Yield and Prepayment Considerations" herein.
The Depositor has not requested a rating on the Offered Certificates by any
rating agency other than S&P and Fitch. However, there can be no assurance as to
whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Offered Certificates by another rating agency, if assigned at all, may be
lower than the rating assigned to the Offered Certificates by S&P and Fitch.
S-62
<PAGE>
APPENDIX A
PLANNED PRINCIPAL BALANCE TABLES
<TABLE>
<CAPTION>
COMPONENT CLASS CLASS CLASS
DISTRIBUTION DATE A-1-1 A-2 A-7 A-8
- ------------------------------------------------------- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Initial Balance........................................ $ 898,297.00 $ 18,990,025.00 $ 11,050,000.00 $ 14,917,610.00
October 25, 1997....................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
November 25, 1997...................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
December 25, 1997...................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
January 25, 1998....................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
February 25, 1998...................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
March 25, 1998......................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
April 25, 1998......................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
May 25, 1998........................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
June 25, 1998.......................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
July 25, 1998.......................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
August 25, 1998........................................ 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
September 25, 1998..................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
October 25, 1998....................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
November 25, 1998...................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
December 25, 1998...................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
January 25, 1999....................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
February 25, 1999...................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
March 25, 1999......................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
April 25, 1999......................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
May 25, 1999........................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
June 25, 1999.......................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
July 25, 1999.......................................... 898,297.00 18,990,025.00 11,050,000.00 14,917,610.00
August 25, 1999........................................ 898,297.00 17,881,147.35 11,050,000.00 14,917,610.00
September 25, 1999..................................... 898,297.00 16,737,777.77 11,050,000.00 14,917,610.00
October 25, 1999....................................... 898,297.00 15,560,659.94 11,050,000.00 14,917,610.00
<CAPTION>
COMPONENT CLASS
DISTRIBUTION DATE A-9-1 A-13
- ------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Initial Balance........................................ $ 18,264,039.00 $ 18,772,000.00
October 25, 1997....................................... 18,264,039.00 18,461,459.90
November 25, 1997...................................... 18,264,039.00 18,148,880.43
December 25, 1997...................................... 18,264,039.00 17,834,307.14
January 25, 1998....................................... 18,264,039.00 17,517,727.27
February 25, 1998...................................... 18,264,039.00 17,199,127.98
March 25, 1998......................................... 18,264,039.00 16,878,496.34
April 25, 1998......................................... 18,264,039.00 16,555,819.36
May 25, 1998........................................... 18,264,039.00 16,231,083.95
June 25, 1998.......................................... 18,264,039.00 15,904,276.94
July 25, 1998.......................................... 18,264,039.00 15,575,385.06
August 25, 1998........................................ 18,264,039.00 15,244,394.99
September 25, 1998..................................... 18,264,039.00 14,911,293.28
October 25, 1998....................................... 18,264,039.00 14,576,066.44
November 25, 1998...................................... 18,264,039.00 14,238,700.86
December 25, 1998...................................... 18,264,039.00 13,899,182.86
January 25, 1999....................................... 18,264,039.00 13,557,498.65
February 25, 1999...................................... 18,264,039.00 13,213,634.38
March 25, 1999......................................... 18,264,039.00 12,867,576.10
April 25, 1999......................................... 18,264,039.00 12,519,309.75
May 25, 1999........................................... 18,264,039.00 12,168,821.22
June 25, 1999.......................................... 18,264,039.00 11,816,096.28
July 25, 1999.......................................... 18,264,039.00 11,461,120.61
August 25, 1999........................................ 17,813,557.44 11,221,197.08
September 25, 1999..................................... 17,349,063.52 10,979,794.03
October 25, 1999....................................... 16,870,859.38 10,736,902.32
</TABLE>
S-63
<PAGE>
PLANNED PRINCIPAL BALANCE TABLES
<TABLE>
<CAPTION>
COMPONENT CLASS CLASS CLASS
DISTRIBUTION DATE A-1-1 A-2 A-7 A-8
- ------------------------------------------------------- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
November 25, 1999...................................... $ 898,297.00 $ 14,351,977.46 $ 11,050,000.00 $ 14,917,610.00
December 25, 1999...................................... 898,297.00 13,115,539.14 11,050,000.00 14,917,610.00
January 25, 2000....................................... 898,297.00 11,857,217.20 11,050,000.00 14,917,610.00
February 25, 2000...................................... 898,297.00 10,591,971.67 11,050,000.00 14,917,610.00
March 25, 2000......................................... 898,297.00 9,332,753.10 11,050,000.00 14,917,610.00
April 25, 2000......................................... 898,297.00 8,080,287.22 11,050,000.00 14,917,610.00
May 25, 2000........................................... 898,297.00 6,834,542.68 11,050,000.00 14,917,610.00
June 25, 2000.......................................... 898,297.00 5,595,488.32 11,050,000.00 14,917,610.00
July 25, 2000.......................................... 898,297.00 4,363,093.19 11,050,000.00 14,917,610.00
August 25, 2000........................................ 898,297.00 3,137,326.49 11,050,000.00 14,917,610.00
September 25, 2000..................................... 898,297.00 1,918,157.64 11,050,000.00 14,917,610.00
October 25, 2000....................................... 898,297.00 705,556.21 11,050,000.00 14,917,610.00
November 25, 2000...................................... 898,297.00 0.00 10,549,491.96 14,917,610.00
December 25, 2000...................................... 898,297.00 0.00 9,349,934.82 14,917,610.00
January 25, 2001....................................... 898,297.00 0.00 8,156,854.96 14,917,610.00
February 25, 2001...................................... 898,297.00 0.00 6,970,222.70 14,917,610.00
March 25, 2001......................................... 898,297.00 0.00 5,790,008.52 14,917,610.00
April 25, 2001......................................... 898,297.00 0.00 4,616,183.11 14,917,610.00
May 25, 2001........................................... 898,297.00 0.00 3,448,717.31 14,917,610.00
June 25, 2001.......................................... 898,297.00 0.00 2,287,582.15 14,917,610.00
July 25, 2001.......................................... 898,297.00 0.00 1,132,748.84 14,917,610.00
August 25, 2001........................................ 898,297.00 0.00 0.00 14,901,798.76
September 25, 2001..................................... 898,297.00 0.00 0.00 13,759,483.51
October 25, 2001....................................... 898,297.00 0.00 0.00 12,623,384.79
November 25, 2001...................................... 898,297.00 0.00 0.00 11,493,474.49
December 25, 2001...................................... 898,297.00 0.00 0.00 10,369,724.72
January 25, 2002....................................... 898,297.00 0.00 0.00 9,252,107.71
February 25, 2002...................................... 898,297.00 0.00 0.00 8,140,595.90
March 25, 2002......................................... 898,297.00 0.00 0.00 7,035,161.89
April 25, 2002......................................... 898,297.00 0.00 0.00 5,935,778.44
May 25, 2002........................................... 898,297.00 0.00 0.00 4,842,418.50
June 25, 2002.......................................... 898,297.00 0.00 0.00 3,755,055.18
July 25, 2002.......................................... 898,297.00 0.00 0.00 2,673,661.75
August 25, 2002........................................ 898,297.00 0.00 0.00 1,598,211.66
September 25, 2002..................................... 898,297.00 0.00 0.00 528,678.52
October 25, 2002....................................... 268,800.80 0.00 0.00 0.00
November 25, 2002...................................... 0.00 0.00 0.00 0.00
December 25, 2002...................................... 0.00 0.00 0.00 0.00
January 25, 2003 and thereafter........................ 0.00 0.00 0.00 0.00
<CAPTION>
COMPONENT CLASS
DISTRIBUTION DATE A-9-1 A-13
- ------------------------------------------------------- --------------- ---------------
<S> <C> <C>
November 25, 1999...................................... $ 16,379,832.10 $ 10,492,512.78
December 25, 1999...................................... 15,877,529.01 10,246,616.17
January 25, 2000....................................... 15,366,335.70 9,999,203.19
February 25, 2000...................................... 14,852,329.68 9,750,264.51
March 25, 2000......................................... 14,340,772.12 9,499,790.70
April 25, 2000......................................... 13,831,957.83 9,247,772.30
May 25, 2000........................................... 13,325,874.09 8,994,199.79
June 25, 2000.......................................... 12,822,508.23 8,739,063.59
July 25, 2000.......................................... 12,321,847.69 8,482,354.04
August 25, 2000........................................ 11,823,879.94 8,224,061.45
September 25, 2000..................................... 11,328,592.58 7,964,176.06
October 25, 2000....................................... 10,835,973.22 7,702,688.04
November 25, 2000...................................... 10,346,009.63 7,439,587.51
December 25, 2000...................................... 9,858,689.60 7,174,864.53
January 25, 2001....................................... 9,374,000.96 6,908,509.09
February 25, 2001...................................... 8,891,931.66 6,640,511.12
March 25, 2001......................................... 8,412,469.70 6,370,860.50
April 25, 2001......................................... 7,935,603.18 6,099,547.03
May 25, 2001........................................... 7,461,320.25 5,826,560.47
June 25, 2001.......................................... 6,989,609.14 5,551,890.49
July 25, 2001.......................................... 6,520,458.16 5,275,526.71
August 25, 2001........................................ 6,053,855.69 4,997,458.68
September 25, 2001..................................... 5,589,790.12 4,717,675.90
October 25, 2001....................................... 5,128,250.02 4,436,167.80
November 25, 2001...................................... 4,669,223.97 4,152,923.73
December 25, 2001...................................... 4,212,700.62 3,867,932.99
January 25, 2002....................................... 3,758,668.72 3,581,184.80
February 25, 2002...................................... 3,307,117.05 3,292,668.34
March 25, 2002......................................... 2,858,034.49 3,002,372.69
April 25, 2002......................................... 2,411,409.97 2,710,286.88
May 25, 2002........................................... 1,967,232.50 2,416,399.88
June 25, 2002.......................................... 1,525,491.15 2,120,700.57
July 25, 2002.......................................... 1,086,175.07 1,823,177.78
August 25, 2002........................................ 649,273.48 1,523,820.27
September 25, 2002..................................... 214,775.65 1,222,616.73
October 25, 2002....................................... 0.00 919,555.76
November 25, 2002...................................... 0.00 614,625.91
December 25, 2002...................................... 0.00 307,815.67
January 25, 2003 and thereafter........................ 0.00 0.00
</TABLE>
S-64
<PAGE>
APPENDIX B
TARGETED PRINCIPAL BALANCE TABLES
<TABLE>
<CAPTION>
COMPONENT CLASS COMPONENT CLASS COMBINED CLASS
DISTRIBUTION DATE A-1-2 A-3 A-9-2 A-11 A-12 & A-13
- ----------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Initial Balance.............. $ 52,000,000.00 $ 19,125,000.00 $ 16,050,172.00 $ 17,300,000.00 $85,421,102.00
October 25, 1997............. 52,320,666.67 18,989,529.77 15,936,482.04 17,177,457.00 84,816,029.26
November 25, 1997............ 52,643,310.78 18,833,662.09 15,805,674.04 17,036,462.96 84,119,852.05
December 25, 1997............ 52,967,944.53 18,657,451.19 15,657,793.50 16,877,066.96 83,332,812.62
January 25, 1998............. 53,294,580.19 18,460,963.31 15,492,896.02 16,699,328.91 82,455,206.81
February 25, 1998............ 53,623,230.10 18,244,290.36 15,311,058.73 16,503,331.93 81,487,445.10
March 25, 1998............... 53,953,906.68 18,007,549.91 15,112,380.31 16,289,182.40 80,430,052.70
April 25, 1998............... 54,286,622.44 17,750,885.21 14,896,980.96 16,057,009.89 79,283,669.36
May 25, 1998................. 54,621,389.95 17,474,465.06 14,665,002.35 15,806,967.09 78,049,049.02
June 25, 1998................ 54,958,221.85 17,178,483.68 14,416,607.47 15,539,229.69 76,727,059.19
July 25, 1998................ 55,297,130.88 16,863,160.53 14,151,980.49 15,253,996.19 75,318,680.02
August 25, 1998.............. 55,638,129.86 16,528,740.02 13,871,326.55 14,951,487.70 73,825,003.23
September 25, 1998........... 55,981,231.66 16,175,491.24 13,574,871.46 14,631,947.63 72,247,230.71
October 25, 1998............. 56,326,449.25 15,803,707.61 13,262,861.46 14,295,641.39 70,586,672.91
November 25, 1998............ 56,673,795.69 15,413,708.66 12,935,564.71 13,942,858.03 68,844,757.09
December 25, 1998............ 57,023,284.10 15,005,835.02 12,593,267.09 13,573,905.66 67,023,004.64
January 25, 1999............. 57,374,927.68 14,580,450.22 12,236,273.66 13,189,113.14 65,123,039.22
February 25, 1999............ 57,728,739.74 14,137,940.10 11,864,908.25 12,788,829.48 63,146,584.23
March 25, 1999............... 58,084,733.63 13,678,726.17 11,479,524.59 12,373,435.96 61,095,522.29
April 25, 1999............... 58,442,922.82 13,203,236.48 11,080,481.90 11,943,319.79 58,971,765.22
May 25, 1999................. 58,803,320.85 12,711,938.87 10,668,172.82 11,498,904.18 56,777,402.70
June 25, 1999................ 59,165,941.33 12,205,330.80 10,243,014.83 11,040,639.10 54,514,656.57
July 25, 1999................ 59,530,797.96 11,683,920.58 9,805,434.51 10,568,984.37 52,185,797.22
August 25, 1999.............. 59,897,904.55 11,364,492.70 9,537,362.75 10,280,037.84 50,759,084.45
September 25, 1999........... 60,267,274.96 11,038,091.09 9,263,438.46 9,984,783.05 49,301,223.77
October 25, 1999............. 60,638,923.16 10,705,209.90 8,984,076.35 9,683,666.99 47,814,422.30
November 25, 1999............ 61,012,863.18 10,366,749.85 8,700,032.32 9,377,504.44 46,302,703.08
December 25, 1999............ 61,389,109.17 10,024,052.39 8,412,432.16 9,067,508.83 44,772,057.61
January 25, 2000............. 61,767,675.35 9,679,002.23 8,122,857.55 8,755,385.03 43,230,903.89
February 25, 2000............ 62,148,576.01 9,335,955.27 7,834,964.07 8,445,073.26 41,698,697.36
March 25, 2000............... 62,531,825.56 8,998,557.14 7,551,811.24 8,139,871.30 40,191,721.18
April 25, 2000............... 62,917,438.49 8,666,928.05 7,273,499.92 7,839,887.86 38,710,512.17
May 25, 2000................. 63,305,429.36 8,340,971.64 6,999,949.25 7,545,035.78 37,254,639.94
June 25, 2000................ 63,695,812.84 8,020,592.84 6,731,079.46 7,255,229.08 35,823,679.96
July 25, 2000................ 64,088,603.69 7,705,697.92 6,466,811.87 6,970,382.95 34,417,213.49
August 25, 2000.............. 64,483,816.74 7,396,194.40 6,207,068.88 6,690,413.76 33,034,827.52
September 25, 2000........... 64,881,466.95 7,091,991.08 5,951,773.94 6,415,238.99 31,676,114.67
October 25, 2000............. 65,281,569.33 6,792,997.98 5,700,851.56 6,144,777.26 30,340,673.13
November 25, 2000............ 65,684,139.00 6,499,126.39 5,454,227.26 5,878,948.31 29,028,106.56
December 25, 2000............ 66,089,191.19 6,210,288.76 5,211,827.60 5,617,672.97 27,738,024.04
January 25, 2001............. 66,496,741.21 5,926,398.77 4,973,580.11 5,360,873.14 26,470,039.95
February 25, 2001............ 66,906,804.44 5,647,371.27 4,739,413.34 5,108,471.79 25,223,773.97
March 25, 2001............... 67,319,396.40 5,373,122.25 4,509,256.80 4,860,392.94 23,998,850.91
April 25, 2001............... 67,734,532.68 5,103,568.87 4,283,040.95 4,616,561.64 22,794,900.74
May 25, 2001................. 68,152,228.97 4,838,629.39 4,060,697.20 4,376,903.97 21,611,558.43
June 25, 2001................ 68,572,501.04 4,578,223.22 3,842,157.92 4,141,347.02 20,448,463.93
July 25, 2001................ 68,995,364.80 4,322,270.83 3,627,356.36 3,909,818.84 19,305,262.10
August 25, 2001.............. 69,420,836.22 4,070,693.80 3,416,226.70 3,682,248.51 18,181,602.62
</TABLE>
S-65
<PAGE>
TARGETED PRINCIPAL BALANCE TABLES
<TABLE>
<CAPTION>
COMPONENT CLASS COMPONENT CLASS COMBINED CLASS
DISTRIBUTION DATE A-1-2 A-3 A-9-2 A-11 A-12 & A-13
- ----------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
September 25, 2001........... $ 69,848,931.37 $ 3,823,414.75 $ 3,208,704.02 $ 3,458,566.02 $17,077,139.92
October 25, 2001............. 70,279,666.45 3,580,357.36 3,004,724.26 3,238,702.35 15,991,533.14
November 25, 2001............ 70,713,057.73 3,341,446.37 2,804,224.26 3,022,589.39 14,924,446.06
December 25, 2001............ 71,149,121.58 3,106,607.50 2,607,141.68 2,810,159.99 13,875,546.99
January 25, 2002............. 71,587,874.50 2,875,767.51 2,413,415.07 2,601,347.87 12,844,508.76
February 25, 2002............ 72,029,333.06 2,648,854.15 2,222,983.77 2,396,087.67 11,831,008.65
March 25, 2002............... 72,473,513.95 2,425,796.13 2,035,787.98 2,194,314.93 10,834,728.28
April 25, 2002............... 72,920,433.95 2,206,523.14 1,851,768.67 1,995,966.03 9,855,353.62
May 25, 2002................. 73,370,109.96 1,990,965.82 1,670,867.65 1,800,978.23 8,892,574.88
June 25, 2002................ 73,822,558.97 1,779,055.75 1,493,027.50 1,609,289.65 7,946,086.43
July 25, 2002................ 74,277,798.08 1,570,725.44 1,318,191.55 1,420,839.22 7,015,586.83
August 25, 2002.............. 74,735,844.51 1,365,908.30 1,146,303.95 1,235,566.72 6,100,778.66
September 25, 2002........... 75,196,715.55 1,164,538.64 977,309.56 1,053,412.73 5,201,368.56
October 25, 2002............. 75,660,428.63 994,066.13 834,244.83 899,207.53 4,439,959.42
November 25, 2002............ 76,127,001.27 674,647.71 566,181.00 610,269.56 3,013,288.91
December 25, 2002............ 76,596,451.11 322,071.13 270,290.04 291,337.54 1,438,518.72
January 25, 2003............. 76,878,083.00 0.00 0.00 0.00 0.00
February 25, 2003............ 74,869,173.55 0.00 0.00 0.00 0.00
March 25, 2003............... 72,891,488.16 0.00 0.00 0.00 0.00
April 25, 2003............... 70,944,580.95 0.00 0.00 0.00 0.00
May 25, 2003................. 69,028,012.13 0.00 0.00 0.00 0.00
June 25, 2003................ 67,141,347.90 0.00 0.00 0.00 0.00
July 25, 2003................ 65,284,160.34 0.00 0.00 0.00 0.00
August 25, 2003.............. 63,456,027.42 0.00 0.00 0.00 0.00
September 25, 2003........... 61,656,532.80 0.00 0.00 0.00 0.00
October 25, 2003............. 59,985,928.07 0.00 0.00 0.00 0.00
November 25, 2003............ 58,341,967.95 0.00 0.00 0.00 0.00
December 25, 2003............ 56,724,260.57 0.00 0.00 0.00 0.00
January 25, 2004............. 55,132,419.45 0.00 0.00 0.00 0.00
February 25, 2004............ 53,566,063.43 0.00 0.00 0.00 0.00
March 25, 2004............... 52,024,816.59 0.00 0.00 0.00 0.00
April 25, 2004............... 50,508,308.19 0.00 0.00 0.00 0.00
May 25, 2004................. 49,016,172.61 0.00 0.00 0.00 0.00
June 25, 2004................ 47,548,049.25 0.00 0.00 0.00 0.00
July 25, 2004................ 46,103,582.48 0.00 0.00 0.00 0.00
August 25, 2004.............. 44,682,421.57 0.00 0.00 0.00 0.00
September 25, 2004........... 43,284,220.62 0.00 0.00 0.00 0.00
October 25, 2004............. 42,094,640.75 0.00 0.00 0.00 0.00
November 25, 2004............ 40,924,374.03 0.00 0.00 0.00 0.00
December 25, 2004............ 39,773,118.91 0.00 0.00 0.00 0.00
January 25, 2005............. 38,640,578.14 0.00 0.00 0.00 0.00
February 25, 2005............ 37,526,458.71 0.00 0.00 0.00 0.00
March 25, 2005............... 36,430,471.79 0.00 0.00 0.00 0.00
April 25, 2005............... 35,352,332.64 0.00 0.00 0.00 0.00
May 25, 2005................. 34,291,760.60 0.00 0.00 0.00 0.00
June 25, 2005................ 33,248,479.00 0.00 0.00 0.00 0.00
July 25, 2005................ 32,222,215.13 0.00 0.00 0.00 0.00
August 25, 2005.............. 31,212,700.15 0.00 0.00 0.00 0.00
September 25, 2005........... 30,219,669.06 0.00 0.00 0.00 0.00
October 25, 2005............. 29,408,967.64 0.00 0.00 0.00 0.00
</TABLE>
S-66
<PAGE>
TARGETED PRINCIPAL BALANCE TABLES
<TABLE>
<CAPTION>
COMPONENT CLASS COMPONENT CLASS COMBINED CLASS
DISTRIBUTION DATE A-1-2 A-3 A-9-2 A-11 A-12 & A-13
- ----------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
November 25, 2005............ $ 28,610,644.48 $ 0.00 $ 0.00 $ 0.00 $ 0.00
December 25, 2005............ 27,824,498.57 0.00 0.00 0.00 0.00
January 25, 2006............. 27,050,331.81 0.00 0.00 0.00 0.00
February 25, 2006............ 26,287,949.04 0.00 0.00 0.00 0.00
March 25, 2006............... 25,537,157.93 0.00 0.00 0.00 0.00
April 25, 2006............... 24,797,768.98 0.00 0.00 0.00 0.00
May 25, 2006................. 24,069,595.48 0.00 0.00 0.00 0.00
June 25, 2006................ 23,352,453.44 0.00 0.00 0.00 0.00
July 25, 2006................ 22,646,161.56 0.00 0.00 0.00 0.00
August 25, 2006.............. 21,950,541.22 0.00 0.00 0.00 0.00
September 25, 2006........... 21,265,416.41 0.00 0.00 0.00 0.00
October 25, 2006............. 20,733,961.37 0.00 0.00 0.00 0.00
November 25, 2006............ 20,208,750.68 0.00 0.00 0.00 0.00
December 25, 2006............ 19,689,690.68 0.00 0.00 0.00 0.00
January 25, 2007............. 19,176,688.91 0.00 0.00 0.00 0.00
February 25, 2007............ 18,669,654.14 0.00 0.00 0.00 0.00
March 25, 2007............... 18,168,496.35 0.00 0.00 0.00 0.00
April 25, 2007............... 17,673,126.67 0.00 0.00 0.00 0.00
May 25, 2007................. 17,183,457.41 0.00 0.00 0.00 0.00
June 25, 2007................ 16,699,402.01 0.00 0.00 0.00 0.00
July 25, 2007................ 16,220,875.06 0.00 0.00 0.00 0.00
August 25, 2007.............. 15,747,792.24 0.00 0.00 0.00 0.00
September 25, 2007........... 15,280,070.35 0.00 0.00 0.00 0.00
October 25, 2007............. 14,817,627.27 0.00 0.00 0.00 0.00
November 25, 2007............ 14,360,381.94 0.00 0.00 0.00 0.00
December 25, 2007............ 13,908,254.35 0.00 0.00 0.00 0.00
January 25, 2008............. 13,461,165.56 0.00 0.00 0.00 0.00
February 25, 2008............ 13,019,037.61 0.00 0.00 0.00 0.00
March 25, 2008............... 12,581,793.58 0.00 0.00 0.00 0.00
April 25, 2008............... 12,149,357.55 0.00 0.00 0.00 0.00
May 25, 2008................. 11,721,654.57 0.00 0.00 0.00 0.00
June 25, 2008................ 11,298,610.66 0.00 0.00 0.00 0.00
July 25, 2008................ 10,880,152.80 0.00 0.00 0.00 0.00
August 25, 2008.............. 10,466,208.91 0.00 0.00 0.00 0.00
September 25, 2008........... 10,056,707.85 0.00 0.00 0.00 0.00
October 25, 2008............. 9,651,579.38 0.00 0.00 0.00 0.00
November 25, 2008............ 9,250,754.17 0.00 0.00 0.00 0.00
December 25, 2008............ 8,854,163.80 0.00 0.00 0.00 0.00
January 25, 2009............. 8,461,740.69 0.00 0.00 0.00 0.00
February 25, 2009............ 8,073,418.17 0.00 0.00 0.00 0.00
March 25, 2009............... 7,689,130.39 0.00 0.00 0.00 0.00
April 25, 2009............... 7,308,812.36 0.00 0.00 0.00 0.00
May 25, 2009................. 6,932,399.92 0.00 0.00 0.00 0.00
June 25, 2009................ 6,559,829.72 0.00 0.00 0.00 0.00
July 25, 2009................ 6,191,039.24 0.00 0.00 0.00 0.00
August 25, 2009.............. 5,825,966.73 0.00 0.00 0.00 0.00
September 25, 2009........... 5,464,551.24 0.00 0.00 0.00 0.00
October 25, 2009............. 5,106,732.60 0.00 0.00 0.00 0.00
November 25, 2009............ 4,752,451.38 0.00 0.00 0.00 0.00
December 25, 2009............ 4,401,648.92 0.00 0.00 0.00 0.00
</TABLE>
S-67
<PAGE>
TARGETED PRINCIPAL BALANCE TABLES
<TABLE>
<CAPTION>
COMPONENT CLASS COMPONENT CLASS COMBINED CLASS
DISTRIBUTION DATE A-1-2 A-3 A-9-2 A-11 A-12 & A-13
- ----------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
January 25, 2010............. $ 4,054,267.32 $ 0.00 $ 0.00 $ 0.00 $ 0.00
February 25, 2010............ 3,710,249.37 0.00 0.00 0.00 0.00
March 25, 2010............... 3,369,538.62 0.00 0.00 0.00 0.00
April 25, 2010............... 3,032,079.31 0.00 0.00 0.00 0.00
May 25, 2010................. 2,697,816.39 0.00 0.00 0.00 0.00
June 25, 2010................ 2,366,695.49 0.00 0.00 0.00 0.00
July 25, 2010................ 2,038,662.95 0.00 0.00 0.00 0.00
August 25, 2010.............. 1,713,665.74 0.00 0.00 0.00 0.00
September 25, 2010........... 1,391,651.54 0.00 0.00 0.00 0.00
October 25, 2010............. 1,072,568.64 0.00 0.00 0.00 0.00
November 25, 2010............ 756,366.01 0.00 0.00 0.00 0.00
December 25, 2010............ 442,993.23 0.00 0.00 0.00 0.00
January 25, 2011............. 132,400.52 0.00 0.00 0.00 0.00
February 25, 2011 and
thereafter................. 0.00 0.00 0.00 0.00 0.00
</TABLE>
S-68
<PAGE>
APPENDIX C+
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS PERCENTAGES OF THE BASIC PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-2
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------
<CAPTION>
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial Percentage...................... 100% 100% 100% 100% 100%
September 25, 1998...................... 100 100 100 100 100
September 25, 1999...................... 99 88 88 88 88
September 25, 2000...................... 89 10 10 10 10
September 25, 2001...................... 79 0 0 0 0
September 25, 2002...................... 68 0 0 0 0
September 25, 2003...................... 56 0 0 0 0
September 25, 2004...................... 43 0 0 0 0
September 25, 2005...................... 29 0 0 0 0
September 25, 2006...................... 14 0 0 0 0
September 25, 2007...................... 0 0 0 0 0
September 25, 2008...................... 0 0 0 0 0
September 25, 2009...................... 0 0 0 0 0
September 25, 2010...................... 0 0 0 0 0
September 25, 2011...................... 0 0 0 0 0
September 25, 2012...................... 0 0 0 0 0
September 25, 2013...................... 0 0 0 0 0
September 25, 2014...................... 0 0 0 0 0
September 25, 2015...................... 0 0 0 0 0
September 25, 2016...................... 0 0 0 0 0
September 25, 2017...................... 0 0 0 0 0
September 25, 2018...................... 0 0 0 0 0
September 25, 2019...................... 0 0 0 0 0
September 25, 2020...................... 0 0 0 0 0
September 25, 2021...................... 0 0 0 0 0
September 25, 2022...................... 0 0 0 0 0
September 25, 2023...................... 0 0 0 0 0
September 25, 2024...................... 0 0 0 0 0
September 25, 2025...................... 0 0 0 0 0
September 25, 2026...................... 0 0 0 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 6.3 2.5 2.5 2.5 2.5
<CAPTION>
CLASS A-3
<S> <C> <C> <C> <C> <C>
--------------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial Percentage...................... 100% 100% 100% 100% 100 %
September 25, 1998...................... 95 91 85 79 76
September 25, 1999...................... 90 78 58 36 25
September 25, 2000...................... 87 75 37 0 0
September 25, 2001...................... 83 71 20 0 0
September 25, 2002...................... 79 66 6 0 0
September 25, 2003...................... 74 51 0 0 0
September 25, 2004...................... 69 36 0 0 0
September 25, 2005...................... 64 22 0 0 0
September 25, 2006...................... 58 8 0 0 0
September 25, 2007...................... 52 0 0 0 0
September 25, 2008...................... 45 0 0 0 0
September 25, 2009...................... 38 0 0 0 0
September 25, 2010...................... 30 0 0 0 0
September 25, 2011...................... 22 0 0 0 0
September 25, 2012...................... 13 0 0 0 0
September 25, 2013...................... 4 0 0 0 0
September 25, 2014...................... 0 0 0 0 0
September 25, 2015...................... 0 0 0 0 0
September 25, 2016...................... 0 0 0 0 0
September 25, 2017...................... 0 0 0 0 0
September 25, 2018...................... 0 0 0 0 0
September 25, 2019...................... 0 0 0 0 0
September 25, 2020...................... 0 0 0 0 0
September 25, 2021...................... 0 0 0 0 0
September 25, 2022...................... 0 0 0 0 0
September 25, 2023...................... 0 0 0 0 0
September 25, 2024...................... 0 0 0 0 0
September 25, 2025...................... 0 0 0 0 0
September 25, 2026...................... 0 0 0 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 9.5 5.5 2.6 1.7 1.5
<CAPTION>
CLASS A-4
--------------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- --------------------------------------------------
Initial Percentage...................... 100% 100% 100% 100% 100%
September 25, 1998...................... 108 108 108 0 0
September 25, 1999...................... 116 116 116 0 0
September 25, 2000...................... 125 125 125 0 0
September 25, 2001...................... 134 134 134 0 0
September 25, 2002...................... 145 145 145 0 0
September 25, 2003...................... 156 156 156 0 0
September 25, 2004...................... 168 168 168 0 0
September 25, 2005...................... 180 180 180 0 0
September 25, 2006...................... 194 194 194 0 0
September 25, 2007...................... 209 209 209 0 0
September 25, 2008...................... 225 225 225 0 0
September 25, 2009...................... 242 242 242 0 0
September 25, 2010...................... 261 261 261 0 0
September 25, 2011...................... 281 281 237 0 0
September 25, 2012...................... 302 302 195 0 0
September 25, 2013...................... 326 326 160 0 0
September 25, 2014...................... 350 350 130 0 0
September 25, 2015...................... 377 377 106 0 0
September 25, 2016...................... 406 406 85 0 0
September 25, 2017...................... 437 437 68 0 0
September 25, 2018...................... 471 471 54 0 0
September 25, 2019...................... 507 507 42 0 0
September 25, 2020...................... 546 515 32 0 0
September 25, 2021...................... 587 429 24 0 0
September 25, 2022...................... 632 347 18 0 0
September 25, 2023...................... 681 269 12 0 0
September 25, 2024...................... 733 194 8 0 0
September 25, 2025...................... 753 122 5 0 0
September 25, 2026...................... 352 54 2 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 28.9 26.1 17.9 0.3 0.3
<CAPTION>
CLASS A-5, A-6 & A-14
--------------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- --------------------------------------------------
Initial Percentage...................... 100% 100% 100% 100% 100%
September 25, 1998...................... 99 99 99 99 99
September 25, 1999...................... 98 98 98 98 98
September 25, 2000...................... 97 97 97 97 97
September 25, 2001...................... 96 96 96 96 96
September 25, 2002...................... 95 95 95 95 62
September 25, 2003...................... 94 92 89 62 33
September 25, 2004...................... 93 89 83 39 16
September 25, 2005...................... 91 84 74 25 8
September 25, 2006...................... 90 79 64 16 4
September 25, 2007...................... 88 73 53 11 2
September 25, 2008...................... 86 67 44 8 2
September 25, 2009...................... 84 61 37 5 1
September 25, 2010...................... 82 56 30 4 1
September 25, 2011...................... 79 51 25 2 *
September 25, 2012...................... 77 47 21 2 *
September 25, 2013...................... 74 42 17 1 *
September 25, 2014...................... 71 38 14 1 *
September 25, 2015...................... 68 34 11 * *
September 25, 2016...................... 64 30 9 * *
September 25, 2017...................... 60 27 7 * *
September 25, 2018...................... 56 24 6 * *
September 25, 2019...................... 52 20 4 * *
September 25, 2020...................... 47 17 3 * *
September 25, 2021...................... 41 14 3 * *
September 25, 2022...................... 36 12 2 * *
September 25, 2023...................... 29 9 1 * *
September 25, 2024...................... 23 6 1 * *
September 25, 2025...................... 15 4 * * *
September 25, 2026...................... 7 2 * * *
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 20.5 15.2 11.4 7.1 5.7
</TABLE>
- ----------------------------------
+ This table has been prepared based on the assumptions described herein under
"Yield and Prepayment Considerations--General" (including the assumptions
regarding the characteristics and performance of the Mortgage Loans which
differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
* Indicates an amount above zero and less than 0.5% of original principal
balance outstanding.
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
S-69
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS PERCENTAGES OF THE BASIC PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-7
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------
<CAPTION>
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial Percentage...................... 100% 100% 100% 100% 100%
September 25, 1998...................... 100 100 100 100 100
September 25, 1999...................... 100 100 100 100 100
September 25, 2000...................... 100 100 100 100 100
September 25, 2001...................... 100 0 0 0 0
September 25, 2002...................... 100 0 0 0 0
September 25, 2003...................... 100 0 0 0 0
September 25, 2004...................... 100 0 0 0 0
September 25, 2005...................... 100 0 0 0 0
September 25, 2006...................... 100 0 0 0 0
September 25, 2007...................... 95 0 0 0 0
September 25, 2008...................... 65 0 0 0 0
September 25, 2009...................... 31 0 0 0 0
September 25, 2010...................... 0 0 0 0 0
September 25, 2011...................... 0 0 0 0 0
September 25, 2012...................... 0 0 0 0 0
September 25, 2013...................... 0 0 0 0 0
September 25, 2014...................... 0 0 0 0 0
September 25, 2015...................... 0 0 0 0 0
September 25, 2016...................... 0 0 0 0 0
September 25, 2017...................... 0 0 0 0 0
September 25, 2018...................... 0 0 0 0 0
September 25, 2019...................... 0 0 0 0 0
September 25, 2020...................... 0 0 0 0 0
September 25, 2021...................... 0 0 0 0 0
September 25, 2022...................... 0 0 0 0 0
September 25, 2023...................... 0 0 0 0 0
September 25, 2024...................... 0 0 0 0 0
September 25, 2025...................... 0 0 0 0 0
September 25, 2026...................... 0 0 0 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 11.4 3.5 3.5 3.5 3.5
<CAPTION>
CLASS A-8
<S> <C> <C> <C> <C> <C>
--------------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial Percentage...................... 100% 100% 100% 100% 100 %
September 25, 1998...................... 100 100 100 100 100
September 25, 1999...................... 100 100 100 100 100
September 25, 2000...................... 100 100 100 100 100
September 25, 2001...................... 100 92 92 92 49
September 25, 2002...................... 100 4 4 4 0
September 25, 2003...................... 100 0 0 0 0
September 25, 2004...................... 100 0 0 0 0
September 25, 2005...................... 100 0 0 0 0
September 25, 2006...................... 100 0 0 0 0
September 25, 2007...................... 100 0 0 0 0
September 25, 2008...................... 100 0 0 0 0
September 25, 2009...................... 100 0 0 0 0
September 25, 2010...................... 96 0 0 0 0
September 25, 2011...................... 67 0 0 0 0
September 25, 2012...................... 35 0 0 0 0
September 25, 2013...................... 1 0 0 0 0
September 25, 2014...................... 0 0 0 0 0
September 25, 2015...................... 0 0 0 0 0
September 25, 2016...................... 0 0 0 0 0
September 25, 2017...................... 0 0 0 0 0
September 25, 2018...................... 0 0 0 0 0
September 25, 2019...................... 0 0 0 0 0
September 25, 2020...................... 0 0 0 0 0
September 25, 2021...................... 0 0 0 0 0
September 25, 2022...................... 0 0 0 0 0
September 25, 2023...................... 0 0 0 0 0
September 25, 2024...................... 0 0 0 0 0
September 25, 2025...................... 0 0 0 0 0
September 25, 2026...................... 0 0 0 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 14.5 4.5 4.5 4.5 4.0
<CAPTION>
CLASS A-9
--------------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- --------------------------------------------------
Initial Percentage...................... 100% 100% 100% 100% 100%
September 25, 1998...................... 98 96 93 90 89
September 25, 1999...................... 95 87 78 67 62
September 25, 2000...................... 91 68 50 33 33
September 25, 2001...................... 87 49 26 16 9
September 25, 2002...................... 83 32 3 1 0
September 25, 2003...................... 78 24 0 0 0
September 25, 2004...................... 73 17 0 0 0
September 25, 2005...................... 67 10 0 0 0
September 25, 2006...................... 61 4 0 0 0
September 25, 2007...................... 54 0 0 0 0
September 25, 2008...................... 47 0 0 0 0
September 25, 2009...................... 40 0 0 0 0
September 25, 2010...................... 31 0 0 0 0
September 25, 2011...................... 22 0 0 0 0
September 25, 2012...................... 12 0 0 0 0
September 25, 2013...................... 2 0 0 0 0
September 25, 2014...................... 0 0 0 0 0
September 25, 2015...................... 0 0 0 0 0
September 25, 2016...................... 0 0 0 0 0
September 25, 2017...................... 0 0 0 0 0
September 25, 2018...................... 0 0 0 0 0
September 25, 2019...................... 0 0 0 0 0
September 25, 2020...................... 0 0 0 0 0
September 25, 2021...................... 0 0 0 0 0
September 25, 2022...................... 0 0 0 0 0
September 25, 2023...................... 0 0 0 0 0
September 25, 2024...................... 0 0 0 0 0
September 25, 2025...................... 0 0 0 0 0
September 25, 2026...................... 0 0 0 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 9.9 4.4 3.0 2.6 2.4
<CAPTION>
CLASS A-11
--------------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ----------------------------------------
Initial Percentage...................... 100% 100% 100% 100% 100%
September 25, 1998...................... 95 91 85 79 76
September 25, 1999...................... 90 78 58 36 25
September 25, 2000...................... 87 75 37 0 0
September 25, 2001...................... 83 71 20 0 0
September 25, 2002...................... 79 66 6 0 0
September 25, 2003...................... 74 51 0 0 0
September 25, 2004...................... 69 36 0 0 0
September 25, 2005...................... 64 22 0 0 0
September 25, 2006...................... 58 8 0 0 0
September 25, 2007...................... 52 0 0 0 0
September 25, 2008...................... 45 0 0 0 0
September 25, 2009...................... 38 0 0 0 0
September 25, 2010...................... 30 0 0 0 0
September 25, 2011...................... 22 0 0 0 0
September 25, 2012...................... 13 0 0 0 0
September 25, 2013...................... 4 0 0 0 0
September 25, 2014...................... 0 0 0 0 0
September 25, 2015...................... 0 0 0 0 0
September 25, 2016...................... 0 0 0 0 0
September 25, 2017...................... 0 0 0 0 0
September 25, 2018...................... 0 0 0 0 0
September 25, 2019...................... 0 0 0 0 0
September 25, 2020...................... 0 0 0 0 0
September 25, 2021...................... 0 0 0 0 0
September 25, 2022...................... 0 0 0 0 0
September 25, 2023...................... 0 0 0 0 0
September 25, 2024...................... 0 0 0 0 0
September 25, 2025...................... 0 0 0 0 0
September 25, 2026...................... 0 0 0 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 9.5 5.5 2.6 1.7 1.5
</TABLE>
- ----------------------------------
* Indicates an amount above zero and less than 0.5% of original principal
balance outstanding.
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
S-70
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS PERCENTAGES OF THE BASIC PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-12
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------
<CAPTION>
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial Percentage...................... 100% 100% 100% 100% 100%
September 25, 1998...................... 100 94 86 79 74
September 25, 1999...................... 100 84 57 29 15
September 25, 2000...................... 99 84 36 0 0
September 25, 2001...................... 99 84 19 0 0
September 25, 2002...................... 99 83 6 0 0
September 25, 2003...................... 95 66 0 0 0
September 25, 2004...................... 88 46 0 0 0
September 25, 2005...................... 82 28 0 0 0
September 25, 2006...................... 74 10 0 0 0
September 25, 2007...................... 66 0 0 0 0
September 25, 2008...................... 58 0 0 0 0
September 25, 2009...................... 49 0 0 0 0
September 25, 2010...................... 39 0 0 0 0
September 25, 2011...................... 28 0 0 0 0
September 25, 2012...................... 17 0 0 0 0
September 25, 2013...................... 5 0 0 0 0
September 25, 2014...................... 0 0 0 0 0
September 25, 2015...................... 0 0 0 0 0
September 25, 2016...................... 0 0 0 0 0
September 25, 2017...................... 0 0 0 0 0
September 25, 2018...................... 0 0 0 0 0
September 25, 2019...................... 0 0 0 0 0
September 25, 2020...................... 0 0 0 0 0
September 25, 2021...................... 0 0 0 0 0
September 25, 2022...................... 0 0 0 0 0
September 25, 2023...................... 0 0 0 0 0
September 25, 2024...................... 0 0 0 0 0
September 25, 2025...................... 0 0 0 0 0
September 25, 2026...................... 0 0 0 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 11.5 6.3 2.6 1.6 1.4
<CAPTION>
CLASS A-13
<S> <C> <C> <C> <C> <C>
--------------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
Initial Percentage...................... 100% 100% 100% 100% 100 %
September 25, 1998...................... 79 79 79 79 79
September 25, 1999...................... 58 58 58 58 58
September 25, 2000...................... 42 42 42 0 0
September 25, 2001...................... 25 25 25 0 0
September 25, 2002...................... 7 7 7 0 0
September 25, 2003...................... 0 0 0 0 0
September 25, 2004...................... 0 0 0 0 0
September 25, 2005...................... 0 0 0 0 0
September 25, 2006...................... 0 0 0 0 0
September 25, 2007...................... 0 0 0 0 0
September 25, 2008...................... 0 0 0 0 0
September 25, 2009...................... 0 0 0 0 0
September 25, 2010...................... 0 0 0 0 0
September 25, 2011...................... 0 0 0 0 0
September 25, 2012...................... 0 0 0 0 0
September 25, 2013...................... 0 0 0 0 0
September 25, 2014...................... 0 0 0 0 0
September 25, 2015...................... 0 0 0 0 0
September 25, 2016...................... 0 0 0 0 0
September 25, 2017...................... 0 0 0 0 0
September 25, 2018...................... 0 0 0 0 0
September 25, 2019...................... 0 0 0 0 0
September 25, 2020...................... 0 0 0 0 0
September 25, 2021...................... 0 0 0 0 0
September 25, 2022...................... 0 0 0 0 0
September 25, 2023...................... 0 0 0 0 0
September 25, 2024...................... 0 0 0 0 0
September 25, 2025...................... 0 0 0 0 0
September 25, 2026...................... 0 0 0 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 2.6 2.6 2.6 2.0 1.8
<CAPTION>
CLASS B-1, B-2 & B-3
--------------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- --------------------------------------------------
Initial Percentage...................... 100% 100% 100% 100% 100%
September 25, 1998...................... 99 99 99 99 99
September 25, 1999...................... 98 98 98 98 98
September 25, 2000...................... 97 97 97 97 97
September 25, 2001...................... 96 96 96 96 96
September 25, 2002...................... 95 95 95 95 95
September 25, 2003...................... 94 92 89 84 82
September 25, 2004...................... 93 89 83 72 68
September 25, 2005...................... 91 84 74 58 51
September 25, 2006...................... 90 79 64 43 35
September 25, 2007...................... 88 73 53 29 22
September 25, 2008...................... 86 67 44 20 14
September 25, 2009...................... 84 61 37 14 9
September 25, 2010...................... 82 56 30 9 5
September 25, 2011...................... 79 51 25 6 3
September 25, 2012...................... 77 47 21 4 2
September 25, 2013...................... 74 42 17 3 1
September 25, 2014...................... 71 38 14 2 1
September 25, 2015...................... 68 34 11 1 *
September 25, 2016...................... 64 30 9 1 *
September 25, 2017...................... 60 27 7 1 *
September 25, 2018...................... 56 24 6 * *
September 25, 2019...................... 52 20 4 * *
September 25, 2020...................... 47 17 3 * *
September 25, 2021...................... 41 14 3 * *
September 25, 2022...................... 36 12 2 * *
September 25, 2023...................... 29 9 1 * *
September 25, 2024...................... 23 6 1 * *
September 25, 2025...................... 15 4 * * *
September 25, 2026...................... 7 2 * * *
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 20.5 15.2 11.4 8.9 8.3
<CAPTION>
CLASS R & R-1
--------------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- ---------------------------------------- --------------------------------------------------
Initial Percentage...................... 100% 100% 100% 100% 100%
September 25, 1998...................... 0 0 0 0 0
September 25, 1999...................... 0 0 0 0 0
September 25, 2000...................... 0 0 0 0 0
September 25, 2001...................... 0 0 0 0 0
September 25, 2002...................... 0 0 0 0 0
September 25, 2003...................... 0 0 0 0 0
September 25, 2004...................... 0 0 0 0 0
September 25, 2005...................... 0 0 0 0 0
September 25, 2006...................... 0 0 0 0 0
September 25, 2007...................... 0 0 0 0 0
September 25, 2008...................... 0 0 0 0 0
September 25, 2009...................... 0 0 0 0 0
September 25, 2010...................... 0 0 0 0 0
September 25, 2011...................... 0 0 0 0 0
September 25, 2012...................... 0 0 0 0 0
September 25, 2013...................... 0 0 0 0 0
September 25, 2014...................... 0 0 0 0 0
September 25, 2015...................... 0 0 0 0 0
September 25, 2016...................... 0 0 0 0 0
September 25, 2017...................... 0 0 0 0 0
September 25, 2018...................... 0 0 0 0 0
September 25, 2019...................... 0 0 0 0 0
September 25, 2020...................... 0 0 0 0 0
September 25, 2021...................... 0 0 0 0 0
September 25, 2022...................... 0 0 0 0 0
September 25, 2023...................... 0 0 0 0 0
September 25, 2024...................... 0 0 0 0 0
September 25, 2025...................... 0 0 0 0 0
September 25, 2026...................... 0 0 0 0 0
September 25, 2027...................... 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0
Weighted Average Life (Years)(1)........ 0.1 0.1 0.1 0.1 0.1
</TABLE>
- ----------------------------------
* Indicates an amount above zero and less than 0.5% of original principal
balance outstanding.
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed principal distribution on such Class
of Certificates by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results, and
(iii) dividing the sum by the total amount of principal distributed on such
Class of Certificates.
S-71
<PAGE>
PROSPECTUS
PNC MORTGAGE
SECURITIES CORP.
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
-------------------
THESE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN PNC MORTGAGE
SECURITIES CORP. OR ANY OF ITS AFFILIATES, INCLUDING PNC BANK CORP. NEITHER
THESE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY
ANY AGENCY OR INSTRUMENTALITY OF THE UNITED STATES.
-------------------
PNC MORTGAGE SECURITIES CORP. (THE "COMPANY") MAY SELL FROM TIME TO TIME UP
TO $3,000,000,000 AGGREGATE AMOUNT OF CERTIFICATES (THE "CERTIFICATES")
EVIDENCING UNDIVIDED INTERESTS IN ONE OR MORE TRUSTS (EACH, A "TRUST FUND") TO
BE CREATED BY THE COMPANY FROM TIME TO TIME.
THE CERTIFICATES WILL BE ISSUABLE IN SERIES (EACH, A "SERIES"), EACH OF
WHICH WILL REPRESENT UNDIVIDED INTERESTS IN A SINGLE TRUST FUND, UNLESS
OTHERWISE INDICATED IN THE APPLICABLE PROSPECTUS SUPPLEMENT. THE PROPERTY OF
EACH TRUST FUND WILL CONSIST EITHER OF A POOL OF MORTGAGE LOANS (A "MORTGAGE
POOL") SECURED BY ONE-TO FOUR-FAMILY RESIDENTIAL PROPERTIES OR MULTI-FAMILY
RESIDENTIAL PROPERTIES (THE "MORTGAGE LOANS") WHICH MORTGAGE LOANS, IF SO
SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, MAY INCLUDE COOPERATIVE
APARTMENT LOANS ("COOPERATIVE LOANS"), AND RELATED PROPERTY AND INTERESTS,
CONVEYED TO THE TRUST FUND BY THE COMPANY, OR OF CERTIFICATES WHICH IN TURN
EVIDENCE OWNERSHIP OF A MORTGAGE POOL AND RELATED PROPERTY. UNLESS OTHERWISE
INDICATED IN THE RELATED PROSPECTUS SUPPLEMENT, EACH POOL WILL CONSIST ENTIRELY
OF FIXED-RATE FIRST-LIEN MORTGAGE LOANS OR ENTIRELY OF ADJUSTABLE-RATE
FIRST-LIEN MORTGAGE LOANS ACQUIRED BY THE COMPANY FROM ONE OR MORE QUALIFIED
SELLERS. INFORMATION REGARDING EACH SERIES OF CERTIFICATES, INCLUDING THE RATE
OF INTEREST BORNE BY THE CERTIFICATES (THE "REMITTANCE RATE") FOR SUCH SERIES,
AS WELL AS INFORMATION REGARDING THE SIZE, COMPOSITION AND OTHER CHARACTERISTICS
OF THE POOL RELATING TO SUCH SERIES, WILL BE FURNISHED IN A PROSPECTUS
SUPPLEMENT AT THE TIME SUCH SERIES IS OFFERED. IF INDICATED IN THE APPLICABLE
PROSPECTUS SUPPLEMENT, CERTIFICATES OF A SERIES MAY BE DIVIDED INTO SEVERAL
CLASSES (EACH, A "CLASS"), WHICH EACH MAY BEAR DIFFERENT RATES OF INTEREST, AND
THE RIGHTS OF THE HOLDERS OF CERTAIN CLASSES MAY BE SUBORDINATED TO THOSE OF
OTHER CLASSES, AS SPECIFIED IN THE APPLICABLE PROSPECTUS SUPPLEMENT.
THE COMPANY WILL, WITH RESPECT TO EACH SERIES OF CERTIFICATES, ELECT TO HAVE
THE RELATED MORTGAGE POOL TREATED AS A REAL ESTATE MORTGAGE INVESTMENT CONDUIT
(A "REMIC") UNDER APPLICABLE PROVISIONS OF THE INTERNAL REVENUE CODE. SEE
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES".
EXCEPT FOR CERTAIN REPRESENTATIONS AND WARRANTIES, AND EXCEPT AS OTHERWISE
STATED IN THE RELATED PROSPECTUS SUPPLEMENT, THE COMPANY'S SOLE OBLIGATIONS WITH
RESPECT TO A SERIES OF THE CERTIFICATES ARE ITS CONTRACTUAL SERVICING AND/OR
ADMINISTRATIVE RESPONSIBILITIES AND ITS OBLIGATION (UNLESS OTHERWISE SPECIFIED
IN THE APPLICABLE PROSPECTUS SUPPLEMENT), IN THE EVENT OF PAYMENT DELINQUENCIES
ON MORTGAGE LOANS, TO MAKE CASH ADVANCES WITH RESPECT THERETO IF IT DEEMS SUCH
ADVANCES TO BE RECOVERABLE FROM THE PROCEEDS OF ANY APPLICABLE CREDIT
ENHANCEMENT INSTRUMENTS, LIQUIDATION PROCEEDS OR OTHERWISE.
SEE "RISK FACTORS" IMMEDIATELY FOLLOWING "SUMMARY OF PROSPECTUS" HEREIN FOR
A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE PURCHASING
CERTIFICATES OF ANY SERIES.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE NOR HAS ANY
SUCH COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
OFFERS OF THE CERTIFICATES MAY BE MADE THROUGH ONE OR MORE DIFFERENT
METHODS, INCLUDING OFFERINGS THROUGH UNDERWRITERS, AS MORE FULLY DESCRIBED UNDER
"METHODS OF DISTRIBUTION". THE CERTIFICATES FOR EACH MORTGAGE POOL ARE OFFERED
WHEN, AS AND IF ISSUED, SUBJECT TO PRIOR SALE OR WITHDRAWAL, CANCELLATION OR
MODIFICATION OF THE OFFER WITHOUT NOTICE.
THIS PROSPECTUS MAY ALSO BE USED IN CONNECTION WITH RESALES OF CERTIFICATES
BY CERTAIN PURCHASERS THEREOF, INCLUDING DEALERS, WHO ARE OR MAY BE DEEMED TO BE
"UNDERWRITERS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933. SEE "METHODS OF
DISTRIBUTION" HEREIN. RE-OFFERS AND SALES OF CERTIFICATES BY PURCHASERS THEREOF
ARE EXPECTED TO BE MADE AT THEN PREVAILING MARKET PRICES, ALTHOUGH THERE CAN BE
NO ASSURANCE THAT A SECONDARY MARKET FOR ANY SERIES OF CERTIFICATES WILL
DEVELOP.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF CERTIFICATES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
SEPTEMBER 18, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- -------------------------------------------------------------------------- ----
<S> <C>
Summary of Prospectus..................................................... 3
Risk Factors.............................................................. 9
The Mortgage Pools........................................................ 10
Use of Proceeds........................................................... 14
Yield Considerations...................................................... 14
Maturity, Average Life and Prepayment Assumptions......................... 16
The Company............................................................... 17
Description of Certificates............................................... 20
Primary Insurance, FHA Mortgage Insurance, VA Mortgage Guaranty, Hazard
Insurance; Claims Thereunder............................................. 40
Description of Credit Enhancements........................................ 44
Certain Legal Aspects of the Mortgage Loans............................... 52
ERISA Considerations...................................................... 60
Certain Federal Income Tax Consequences................................... 62
Methods of Distribution................................................... 78
Transferability of Certificates........................................... 79
Legal Matters............................................................. 79
Financial Information..................................................... 79
Additional Information.................................................... 80
Glossary.................................................................. 81
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH SUPPLEMENT TO THIS PROSPECTUS, ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES COVERED BY SUCH
SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE
REQUIRED TO DELIVER SUCH SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF SECURITIES COVERED BY SUCH SUPPLEMENT AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND EACH SUPPLEMENT
TO THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CERTIFICATES
OFFERED HEREBY, NOR AN OFFER OF THE CERTIFICATES TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Company with respect to a Series pursuant to
Section 13(a), Section 13(c), Section 14 or Section 15(d) of the Securities
Exchange Act of 1934, prior to the termination of an offering of Certificates
evidencing interests therein. Upon request, the Company will provide or cause to
be provided without charge to each person to whom this Prospectus is delivered
in connection with the offering of one or more Classes of Certificates, a list
identifying all filings with respect to a Series pursuant to Section 13(a),
Section 13(c), Section 14 or Section 15(d) of the Securities Exchange Act of
1934, since the Company's last fiscal year covered by its annual report on Form
10-K, if any, and a copy of any or all documents or reports incorporated herein
by reference, in each case to the extent such documents or reports relate to one
or more such Classes of such Certificates, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Company should be directed to: PNC Mortgage
Securities Corp., 75 North Fairway Dr., Vernon Hills, IL 60061, telephone number
(847) 549-6500, Attn: Legal Department.
2
<PAGE>
SUMMARY OF PROSPECTUS
THE FOLLOWING IS A SUMMARY OF CERTAIN PERTINENT INFORMATION AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN
THIS PROSPECTUS, AND BY REFERENCE TO INFORMATION WITH RESPECT TO EACH MORTGAGE
POOL AND SERIES OF CERTIFICATES CONTAINED IN THE SUPPLEMENT TO THIS PROSPECTUS
TO BE PREPARED IN CONNECTION WITH SUCH SERIES.
<TABLE>
<S> <C>
Title of Certificates....... Mortgage Pass-Through Certificates, issuable in
Series and in one or more Classes of each Series
(the "Certificates").
Depositor................... PNC Mortgage Securities Corp. (the "Company"), an
indirect subsidiary of PNC Bank Corp.
Description of
Certificates.............. Each Certificate will represent an undivided
interest in one of a number of trusts to be
created by the Company from time to time. The
property of each trust fund (a "Trust Fund") will
consist either of a pool (a "Mortgage Pool") of
mortgage loans secured by one-to four-family
residential properties or multi-family residential
properties (the "Mortgage Loans") which Mortgage
Loans, if so specified in the related Prospectus
Supplement, may include cooperative apartment
loans ("Cooperative Loans"), and related property
and interests, conveyed to such Trust Fund by the
Company, or of certificates which in turn
represent ownership of a Mortgage Pool and related
property and interests. Unless otherwise specified
in the applicable Prospectus Supplement, each
Certificate will represent an interest in all the
principal and in interest up to a specified rate
on the Mortgage Loans in such Mortgage Pool. If so
specified in the Prospectus Supplement applicable
to any Series, Certificates may be issued in
several Classes, which may pay interest at
different rates, may represent different
allocations of the right to receive principal and
interest, and certain of which may be subordinated
to others. Any such Class of Certificates may
provide for payments of principal only or interest
only or for disproportionate payments of principal
and interest. See "Description of Certificates".
The related Prospectus Supplement or Current
Report on Form 8-K described below will set forth
the actual undivided interest in a Mortgage Pool,
or entitlement to principal and/or interest,
represented by each Certificate (and, if
applicable, describe the manner in which such
undivided interest may change from time to time).
The Certificates will be offered in fully
registered form only. If specified in the
applicable Prospectus Supplement, one or more
Classes of Certificates for any Series may be
transferable only on the books of The Depository
Trust Company or another depository identified in
such Prospectus Supplement. The Certificates of a
particular Series or Class may or may not be rated
by one or more nationally recognized rating
organizations. Neither the Certificates, the
underlying Mortgage Loans nor certificates will be
guaranteed by the Company, PNC Bank Corp. or any
other affiliate of the Company and, unless
otherwise specified in the applicable Prospectus
Supplement, neither the Certificates, the
underlying Mortgage Loans nor certificates will be
insured or guaranteed by any governmental agency.
Additional
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
information about the Mortgage Pool relating to a
Series of Certificates may be set forth in a
Current Report on Form 8-K that will be filed with
the Securities and Exchange Commission within 15
days after the issuance of such Certificates. If
so indicated in the applicable Prospectus
Supplement, a Series of Certificates may include
one or more Classes of Certificates (which may be
sold in one or more private offerings or may be
offered pursuant to this Prospectus) representing
subordinated interests in the Mortgage Pool,
undivided interests in a portion of the interest
paid on the Mortgage Loans in the related Mortgage
Pool or such other interests as may be described
therein.
Sellers..................... Mortgage Loans will be purchased from qualified
originators or entities that have purchased or
otherwise acquired the Mortgage Loans from
qualified originators ("Sellers"), as described
herein.
Servicing and
Administration............ Generally, the Company will be responsible for the
servicing and administration of the Mortgage Loans
(in such capacity, the "Master Servicer") and the
Sellers will perform certain servicing functions
with respect to the Mortgage Loans (in such
capacity, "Seller/Servicers"). If so specified in
the applicable Prospectus Supplement, however, (i)
the servicing of the Mortgage Loans will be
performed by the Seller which sold the Mortgage
Loans to the Company for inclusion in the Trust
Fund, or by a qualified servicer selected by the
Company (either entity acting in such capacity,
the "Servicer"), (ii) there will not be a Master
Servicer and (iii) the Company will calculate
amounts distributable to the Certificateholders,
prepare tax returns on behalf of the Trust Fund
and provide certain other administrative services
specified in the Pooling Agreement (in such
capacity, the "Certificate Administrator").
Interest.................... Except as otherwise specified in the applicable
Prospectus Supplement, interest payments will be
passed through on the 25th day (or if such day is
not a business day, the business day immediately
following such 25th day) of each month or such
other date as specified in the applicable
Prospectus Supplement (the "Distribution Date") at
the interest rate (the "Remittance Rate")
applicable to each Class of Certificates,
commencing with the month following the month of
initial issuance of such Certificates. See
"Maturity, Average Life and Prepayment
Assumptions", "Yield Considerations" and
"Description of Certificates".
Principal (including
Principal Prepayments).... Except as otherwise specified in the applicable
Prospectus Supplement, principal payments will be
passed through on each Distribution Date,
commencing with the month following the month of
initial issuance of each Series of Certificates.
See "Maturity, Average Life and Prepayment
Assumptions", "Yield Considerations" and
"Description of Certificates".
Advances.................... With respect to Series of Certificates as to which
the Company will act as Master Servicer and except
as otherwise specified in
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
the applicable Prospectus Supplement, the Master
Servicer will be obligated to make advances of its
own funds in order to cover deficiencies in
amounts distributable to Certificateholders
resulting from Mortgagor delinquencies only, to
the extent the Master Servicer determines such
advances are recoverable from future payments or
collections on the Mortgage Loans, amounts
available as a result of any subordination feature
or from applicable credit enhancements. Similarly,
with respect to Series of Certificates as to which
the Company will not act as Master Servicer and
the servicing of the Mortgage Loans will be
performed by the Servicer, the Servicer, except as
otherwise specified in the applicable prospectus
supplement, will be obligated to make advances of
its own funds in order to cover deficiencies in
amounts distributable to Certificateholders only
to the extent the Servicer determines such
advances are recoverable from future payments or
collections on the Mortgage Loans, amounts
available as a result of any subordination in
right of payment of one or more Classes of
Certificates to such rights of holders of other
Classes of Certificates or from applicable credit
enhancements. See "Description of
Certificates--Advances".
The Mortgage Loans.......... Each Mortgage Pool will have an aggregate
principal balance of at least $5,000,000 and will
consist of one or more of the following types of
Mortgage Loans with various original terms:
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<S> <C> <C>
(1) fixed-rate, fully amortizing Mortgage Loans
providing for level monthly payments of
principal and interest;
(2) adjustable-rate Mortgage Loans ("ARMs" or
"ARM Loans"), which may include graduated
payment Mortgage Loans and other Mortgage
Loans providing for negative amortization;
(3) Mortgage Loans, with either fixed or
adjustable rates, that do not provide for
level monthly payments of principal and
interest and/or do not provide for
amortization in full by their maturity
dates;
(4) fixed-rate Mortgage Loans that do not
provide for amortization in full by their
maturity dates and which may at the end of
their terms be converted by the Mortgagors
to fully-amortizing ARM Loans, provided that
certain conditions are met; and
(5) any other type of Mortgage Loan, as
described in the applicable Prospectus
Supplement.
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<TABLE>
<S> <C>
If provided for in the applicable Prospectus
Supplement, a Mortgage Pool may contain Mortgage
Loans subject to buy- down plans ("Buydown
Loans"). See "The Mortgage Pools".
Primary Insurance
Policies.................. To the extent specified in the applicable
Prospectus Supplement, each Mortgage Loan having a
loan-to-value ratio at origination and at the
applicable Cut-Off Date (as defined herein) above
80% (or another specified level) will be covered
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<TABLE>
<S> <C>
by a primary mortgage insurance policy (a "Primary
Insurance Policy") insuring against default by the
Mortgagor with respect to all or a specified
portion of the principal amount thereof, until the
principal balance of such Mortgage Loan is reduced
below 80% of the then current appraised value of
the Mortgaged Property or the principal balance of
the Mortgage Loan at origination, as applicable.
See "The Mortgage Pools" and "Primary Mortgage
Insurance, FHA Mortgage Insurance, VA Mortgage
Guaranty, Hazard Insurance; Claims Thereunder".
Credit Enhancements......... The Company or the Servicer, as applicable, may
obtain for certain Mortgage Pools a mortgage pool
insurance policy (a "Mortgage Pool Insurance
Policy"), limited in scope, covering defaults on
the Mortgage Loans in such Mortgage Pool that are
not covered as to their entire outstanding
principal balance by insurance coverage provided
by the Federal Housing Authority or guarantees
issued by the Department of Veterans Affairs.
The Company or the Servicer, as applicable, may
also obtain for certain Mortgage Pools a fraud
bond (a "Fraud Bond"), limited in scope, insuring
Certificateholders against losses on any Mortgage
Loan which result in an exclusion from, denial of,
or defense to coverage under a Primary Insurance
Policy or, if applicable, a Mortgage Pool
Insurance Policy, because of circumstances
involving fraudulent conduct or negligence by the
Seller, a Seller/Servicer, the Servicer or the
related mortgagor (the "Mortgagor").
In addition, the Company or the Servicer, as
applicable, may obtain for certain Mortgage Pools
a bankruptcy bond (a "Bankruptcy Bond"), limited
in scope, insuring against losses resulting from
the bankruptcy of a Mortgagor under a Mortgage
Loan contained in a Mortgage Pool.
All of the Mortgage Loans (other than Cooperative
Loans and Mortgage Loans secured by condominium
apartments) will be covered by standard hazard
insurance policies insuring against losses due to
various causes, including fire, lightning and
windstorm. For some Series of Certificates,
certain other physical risks which are not
otherwise insured against (including earthquakes
in some geographical regions, mud flows and
floods) will be covered by a special hazard
insurance policy (a "Special Hazard Insurance
Policy") to be obtained with respect to the
Mortgage Pool.
In lieu of obtaining one or more of the credit
enhancements described above, the Seller, the
Company or the Servicer, as applicable, may
establish a reserve fund (a "Reserve Fund") and/or
obtain a letter of credit (a "Letter of Credit"),
either of which would provide coverage
substantially similar to the credit enhancement or
enhancements it replaces. Any losses not covered
by any of these credit enhancements will not be
insured against and will therefore be borne by
Certificateholders for such Series. See "The
Mortgage Pools" and "Description of Credit
Enhancements".
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<TABLE>
<S> <C>
In addition to the credit enhancements described
above, the Company or the Servicer, as applicable,
may obtain or provide for other credit
enhancements for a Series of Certificates which
provide for coverage of certain risks of default
or losses, such as, but not limited to,
certificate insurance policies issued by insurers
acceptable to each rating agency rating the
Certificates, insuring to holders of the
Certificates the payment of amounts due in
accordance with the terms of the Certificates, or
other arrangements acceptable to each rating
agency rating the Certificates. Coverage of
certain risks of default or loss may also be
provided to a particular Class or Classes of
Certificates by the subordination in right of
payment of one or more Classes of Certificates of
the same Series to the right of holders of such
Class or Classes of Certificates to receive
payments.
The Prospectus Supplement for each Series will
indicate whether such Series or the Mortgage Loans
contained therein are covered by various credit
enhancements, indicating the nature, amount and
extent of such coverage.
Private Certificates and
Agency Certificates....... If specified in the related Prospectus Supplement,
a Trust Fund may include private mortgage
pass-through certificates ("Private Certificates")
or certificates issued by the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA") or the
Government National Mortgage Association ("GNMA")
(collectively, "Agency Certificates"). Any Private
Certificates or Agency Certificates will be
described in the related Prospectus Supplement.
Tax Status.................. For Federal income tax purposes, the
Certificateholders of a Series will be considered
to own "regular interests" or "residual interests"
in a REMIC. Holders of Certificates designated in
the applicable Prospectus Supplement as "regular
interests" will be treated as holders of debt of
the REMIC for federal income tax purposes. Such
Certificateholders must include in income interest
due and original issue discount on their
Certificates using the accrual method of
accounting, regardless of their usual methods of
accounting. Holders of Certificates designated in
the applicable Prospectus Supplement as "residual
interests" will be taxable on their allocable
share of the taxable income of the REMIC
regardless of the cash distributable on such
interests. See "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual
Certificates".
With certain exceptions described herein,
Certificates held by a "domestic building and loan
association" will be considered to represent
"loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of
the Internal Revenue Code of 1986, as amended (the
"Code"), and to represent "qualifying real
property loans" within the meaning of Section
593(d) of the Code.
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<TABLE>
<S> <C>
See "Certain Federal Income Tax Consequences".
Optional Termination........ For each Series of Certificates, the Company will
have the option to repurchase the related Mortgage
Loans or certificates, as the case may be, and
thereby effect the early retirement of such Series
at any time after the principal balances of the
Mortgage Loans or certificates aggregate less than
the percentage specified in the related Prospectus
Supplement of the aggregate principal balance of
the Mortgage Loans in such Mortgage Pool or the
certificates as of the first day of the month in
which such Certificates were issued or such other
day as may be specified in the applicable
Prospectus Supplement (the "Cut-Off Date"). The
amount distributable to Certificateholders in
connection with any such repurchase will also be
set forth in the applicable Prospectus Supplement.
Investment Considerations... Potential investors should be aware that (a) any
decline in the value of a property securing a
Mortgage Loan in a Mortgage Pool may result in a
loss to Certificateholders if the related
Mortgagor defaults and the loss is not covered by
the credit enhancements provided for such Mortgage
Loan or Mortgage Pool and (b) any hazard loss not
covered by the standard hazard insurance policy or
any applicable Special Hazard Insurance Policy or
comparable credit enhancement covering a defaulted
Mortgage Loan may result in a loss to
Certificateholders.
Prepayments of Mortgage Loans, or early
liquidations of Mortgage Loans by foreclosure or
otherwise (whether or not a loss is incurred) may,
in certain circumstances, increase or, in certain
circumstances, decrease Certificateholders' yield
on the Certificates. See "Yield Considerations"
and "Maturity, Average Life and Prepayment
Assumptions".
There is no assurance that a secondary market will
exist for any Series of the Certificates.
See "Risk Factors" herein.
ERISA Limitations........... A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the
Code (and any person which proposes to cause any
such plan to acquire Certificates) should
carefully review with its own legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code.
See "ERISA Considerations".
</TABLE>
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates:
LIMITED LIQUIDITY. There can be no assurance that a secondary market for
the Certificates of any Series will develop or, if it does develop, that it will
provide Certificateholders with liquidity of investment or that it will continue
for the life of the Certificates of any Series. The Prospectus Supplement for
any Series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates. However, no
underwriter will be obligated to do so and offerings may be effected hereunder
without participation by any underwriter. The Certificates will not be listed on
any securities exchange.
LIMITED OBLIGATIONS. The Certificates will not represent an interest in or
obligation of the Company, PNC Bank Corp. or any of their affiliates. The
obligations of the Company with respect to the Certificates or the Mortgage
Loans will be limited to any representations and warranties made by the Company
in, as well as any servicing and/or administrative obligations under, the
Pooling Agreement (as defined herein) for each Series of Certificates. Unless
otherwise specified in the applicable Prospectus Supplement, these obligations,
for Series of Certificates as to which the Company will act as Master Servicer,
will consist primarily of the obligation under certain circumstances to
repurchase Mortgage Loans as to which there has been a breach of representations
and warranties which materially and adversely affects the interests of the
Certificateholders in a Mortgage Loan or to cure such breach. In addition,
unless otherwise specified in the applicable Prospectus Supplement, the Master
Servicer will have a limited obligation to make certain advances (to the extent
not previously advanced by the Seller/Servicers) in the event of delinquencies
on the Mortgage Loans, but only to the extent deemed recoverable. Except as so
described in the related Prospectus Supplement, neither the Certificates, the
underlying Mortgage Loans nor Certificateholders will be guaranteed or insured
by any governmental agency or instrumentality, or by the Company or any of its
affiliates. Proceeds of the assets included in the related Trust Fund for each
Series of Certificates (including the Mortgage Loans and any form of credit
enhancement) will be the sole source of payments on the Certificates, and there
will be no recourse to the Company or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments provided
for under the Certificates.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. With respect
to each Series of Certificates, credit enhancement may be provided in limited
amounts to cover certain types of losses on the underlying Mortgage Loans.
Credit enhancement will be provided in one or more of the forms referred to
herein, including, but not limited to: subordination of other Classes of
Certificates of the same Series; a Letter of Credit; a Mortgage Pool Insurance
Policy; a Special Hazard Insurance Policy; a Fraud Bond; a Bankruptcy Bond; a
Reserve Fund; and any combination thereof. See "Description of Credit
Enhancements" herein. Regardless of the form of credit enhancement provided, the
amount of coverage will be limited in amount and in most cases will be subject
to periodic reduction in accordance with a schedule or formula. Furthermore,
such credit enhancements may provide only very limited coverage as to certain
types of losses, and may provide no coverage as to certain other types of
losses. All or a portion of the credit enhancement for any series of
Certificates will generally be permitted to be reduced, terminated or
substituted for, if each applicable rating agency indicates that the then
current rating thereof will not be adversely affected. See "Description of
Credit Enhancements".
RISKS OF THE MORTGAGE LOANS. An investment in securities such as the
Certificates which generally represent interests in mortgage loans may be
affected by, among other things, a decline in real estate values and changes in
the related Mortgagors' financial condition. No assurance can be given that the
values of the Mortgaged Properties (as defined herein) 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 such that the outstanding balances of the Mortgage
Loans, and any secondary financing on the Mortgaged Properties, in a particular
Mortgage Pool 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, in the case of the Mortgage Loans that are subject to negative
amortization, the principal balances of such Mortgage Loans could be increased
to amounts equal to or
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in excess of the values of the underlying Mortgaged Properties, thereby
increasing the likelihood of default. To the extent that such losses are not
covered by the applicable credit enhancement, holders of Certificates of the
Series evidencing interests in the related Mortgage Pool will bear all risk of
loss resulting from default by Mortgagors and will have to look primarily to the
value of the Mortgaged Properties for recovery of the outstanding principal and
unpaid interest on the defaulted Mortgage Loans. Certain of the types of loans
which may be included in the Mortgage Pools may involve additional uncertainties
not present in traditional types of loans. For example, certain of the Mortgage
Loans may provide for escalating or variable payments by the Mortgagor, as to
which the Mortgagor is generally qualified on the basis of the initial payment
amount. In some instances the Mortgagors' income may not be sufficient to enable
them to continue to make their loan payments as such payments increase and thus
the likelihood of default will increase. In addition to the foregoing, certain
geographic regions of the United States from time to time will experience weaker
regional economic conditions and housing markets and, consequently, will
experience higher rates of loss and delinquency on mortgage loans generally. The
Mortgage Loans underlying certain Series of Certificates may be concentrated in
these regions, and such concentration may present risk considerations in
addition to those generally present for similar mortgage-backed securities
without such concentration.
YIELD AND PREPAYMENT CONSIDERATIONS. The yield to maturity of the
Certificates of each Series will depend on the rate of principal payment
(including prepayments, liquidations due to defaults and repurchases) on the
Mortgage Loans and the price paid by Certificateholders. Such yield to maturity
may be adversely affected by a higher or lower than anticipated rate of
prepayments on the related Mortgage Loans. The yield to maturity on Certificates
entitling the holders thereof primarily or exclusively to payments of interest
on the Mortgage Loans will be extremely sensitive to the rate of prepayments on
the related Mortgage Loans. In addition, the yield on certain other types of
Classes of Certificates may be relatively more sensitive to the rate of
prepayment on the related Mortgage Loans than other Classes of Certificates.
Prepayments are influenced by a number of factors, including prevailing mortgage
market interest rates, local and regional economic conditions and homeowner
mobility. See "Yield Considerations" and "Maturity, Average Life and Prepayment
Assumptions".
THE MORTGAGE POOLS*
GENERAL
Unless otherwise indicated in the applicable Prospectus Supplement, each
Mortgage Pool will consist entirely of either fixed- or adjustable-rate mortgage
loans (the "Mortgage Loans") evidenced by promissory notes (the "Mortgage
Notes") secured by first mortgages, deeds of trust or security deeds (the
"Mortgages") on one- to four-family residential properties or multi-family
residential properties (the "Mortgaged Properties"). The types of Mortgaged
Properties securing the Mortgage Loans in each Mortgage Pool may include (a)
owner occupied, (i) attached or detached single-family residences, including
residences in planned unit developments, (ii) two- to four-family primary
residences and (iii) condominiums or other attached dwelling units, (b)
second/vacation homes and nonowner occupied residences, and (c) such other types
of homes or dwellings as are set forth in the related Prospectus Supplement. If
specified in the applicable Prospectus Supplement, a Mortgage Pool may contain
cooperative apartment loans ("Cooperative Loans") evidenced by promissory notes
("Cooperative Notes") secured by security interests in shares issued by private
cooperative housing corporations (each, a "Cooperative") and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the related buildings. As used herein, unless the
context indicates otherwise, "Mortgage Loans" includes Cooperative Loans,
"Mortgaged Properties" includes shares in the related Cooperative and the
related proprietary leases or occupancy agreements securing Cooperative Notes,
"Mortgage Notes" includes Cooperative Notes and "Mortgages" includes a security
agreement with respect to a Cooperative Note.
- --------------
* Whenever in this Prospectus the terms "Mortgage Pool", "Certificates" and
"Trust Fund" are used, those terms apply, unless the context indicates
otherwise, to one specific Mortgage Pool, to the Series of Certificates
representing undivided interests in the related Trust Fund and to the related
Trust Fund, respectively. Similarly, the term "Remittance Rate" will refer to
the rate of interest borne by the Certificates of one specific Series (or borne
by one Class of Certificates of one specific Series).
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The Mortgage Loans to be purchased by the Company for inclusion in a
Mortgage Pool will be screened and underwritten in accordance with the standards
set forth herein under "The Company-- Mortgage Purchase Program" and "--Credit,
Appraisal and Underwriting Standards". The Mortgage Loans in each Mortgage Pool
will be originated by or purchased from lending institutions which meet the
requirements set forth under "The Company--Mortgage Purchase Program" (such
institutions, "Sellers"). Generally, the Company will be responsible for the
servicing and administration of the Mortgage Loans and the Sellers will perform
certain servicing functions with respect to the Mortgage Loans (in such
capacity, "Seller/Servicers"), which term includes related servicing
corporations, agents and replacement servicers designated by the Company. If so
specified in the applicable Prospectus Supplement, however, (i) the servicing of
the Mortgage Loans will be performed by the Seller which sold the Mortgage Loans
to the Company for inclusion in the Trust Fund, or by a qualified servicer
selected by the Company (either entity acting in such capacity, the "Servicer"),
(ii) there will not be a Master Servicer and (iii) the Company will calculate
amounts distributable to the Certificateholders, prepare tax returns on behalf
of the Trust Fund and provide certain other administrative services specified in
the Pooling Agreement (in such capacity, the "Certificate Administrator"). The
Servicer and the Certificate Administrator may perform their respective
servicing and administrative responsibilities through agents or independent
contractors, but shall not thereby be released from any of their obligations
under the Pooling Agreement. See "Description of Certificates--Servicing". The
applicable Prospectus Supplement will set forth information respecting the
number and principal amount of Mortgage Loans which were originated for the
purpose of (a) purchasing and (b) refinancing the related Mortgaged Properties.
To the extent specified in the applicable Prospectus Supplement, Mortgage
Loans with loan-to-value ratios and/or principal balances exceeding certain
limits will be covered partially by Primary Insurance Policies. A Mortgage Pool
may include Mortgage Loans insured by the Federal Housing Administration ("FHA")
or guaranteed by the Department of Veterans Affairs ("VA"), which loans will be
covered by FHA insurance policies ("FHA Insurance Policies") and VA guaranties
("VA Guaranties"), respectively. Mortgage Loans guaranteed by the VA ("VA
Loans") may also be covered by supplemental Primary Insurance Policies. In
addition, if specified in the applicable Prospectus Supplement, the Company, the
Seller or the Servicer, as applicable, may obtain or establish one or more
credit enhancements for a Mortgage Pool. Any such credit enhancement will be
described in the applicable Prospectus Supplement. Such credit enhancements may
be limited to one or more Classes of Certificates and may include, but will not
necessarily be limited to, any of the following: a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a Fraud Bond, a Bankruptcy Bond, a
Letter of Credit, a Reserve Fund, a certificate insurance policy, or any
combination of the foregoing. Coverage of certain risks of default or loss may
also be provided to a particular Class or Classes of Certificates by the
subordination in right of payment of one or more Classes of Certificates of the
same Series to the right of holders of such Class or Classes of Certificates to
receive payments. See "Description of Credit Enhancements".
Unless otherwise specified in the related Prospectus Supplement for any
Series of Certificates, all Mortgage Loans will be of one or more of the
following types of Mortgage Loans of varying terms at origination:
(1) fully amortizing Mortgage Loans, each providing for interest (the
"Mortgage Interest Rate") at a fixed rate and level monthly payments of
principal and interest over the term of such Mortgage Loan;
(2) Mortgage Loans, each with an adjustable Mortgage Interest Rate,
which may include graduated payment Mortgage Loans and other Mortgage Loans
providing for negative amortization;
(3) Mortgage Loans with either fixed or adjustable Mortgage Interest
Rates, that do not provide for level monthly payments of principal and
interest and/or do not provide for amortization in full by their maturity
dates;
(4) fixed-rate Mortgage Loans that do not provide for amortization in
full by their maturity dates and which may at the end of their terms be
converted by the Mortgagors to fully amortizing adjustable-rate Mortgage
Loans, provided that certain conditions are met; and
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(5) any other type of Mortgage Loan described in the applicable
Prospectus Supplement.
If so specified in the related Prospectus Supplement for any Series of
Certificates, a Mortgage Pool may contain Buydown Loans which include provisions
whereby the Seller or a third party partially subsidizes the monthly payments of
the Mortgagor during the initial portion of the term of the Buydown Loan, the
difference to be made up from a fund (the "Buydown Fund") contributed by the
Seller or a 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. The applicable Prospectus
Supplement or Current Report on Form 8-K will contain information with respect
to any Buydown Loans, including information on the interest rate initially
payable by the Mortgagor, annual increases in the interest rate, the length of
the buydown period and the Buydown Fund. 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 of 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
correct, the possibility of defaults on Buydown Loans is increased.
The aggregate principal balances of the Mortgage Loans in each Mortgage Pool
on the date specified in the related Prospectus Supplement as the Cut-Off Date
will be at least $5,000,000. Unless otherwise specified in the Prospectus
Supplement of a particular Series, each Mortgage Loan at origination will have
an outstanding principal balance of not less than $30,000 nor more than
$1,000,000. With respect to each Mortgage Pool, unless otherwise specified in
the related Prospectus Supplement, all principal and interest payments on the
Mortgage Loans due prior to the Cut-Off Date will have been made.
For each Mortgage Pool, the related Prospectus Supplement will generally
contain specific information as of the Cut-Off Date regarding (i) the aggregate
principal balance of the Mortgage Loans; (ii) the range of Mortgage Interest
Rates or initial Mortgage Interest Rates borne by the Mortgage Loans; (iii) the
month and year in which the first monthly payments occur, and the latest
maturity of the Mortgage Loans; (iv) the largest and smallest principal balances
of the Mortgage Loans at origination; (v) the aggregate principal balance of all
Mortgage Loans having loan-to-value ratios at origination exceeding 80%; (vi)
the types of dwellings constituting the Mortgaged Properties securing the
Mortgage Loans; (vii) the percentage of the Mortgage Loans (by principal
balance) of nonowner occupied and of second and vacation properties; (viii) the
geographic distribution of the Mortgage Loans, prepared on a state-by-state
basis for states containing 5% or more of the Mortgage Pool; and (ix) the number
and aggregate principal balance of Buydown Loans.
Specific information with respect to the Mortgage Loans in a particular
Mortgage Pool and the applicable credit enhancements which is not included in
the related Prospectus Supplement will generally be included in a Current Report
on Form 8-K which will be available to purchasers of the Certificates at or
before the time of initial issuance of the related Series of Certificates, and
which will be filed with the Securities and Exchange Commission (the
"Commission") within 15 days thereafter.
Generally, the Company will act as master servicer (the "Master Servicer")
and will be responsible for administering and servicing the Mortgage Loans in
each Mortgage Pool. The Master Servicer has entered or will enter into a
contract with each Seller/Servicer to perform, as an independent contractor,
certain servicing functions for the Master Servicer subject to its supervision
and may enter into a contract with an independent entity to perform
administration functions for the Mortgage Pools, subject to the Master
Servicer's supervision. Unless otherwise specified in the applicable Prospectus
Supplement, the Master Servicer will reserve the right to remove the Seller/
Servicer of any Mortgage Loan at any time if the Master Servicer considers such
removal to be in the best interests of Certificateholders. In such event, the
Master Servicer would continue to be responsible for servicing such Mortgage
Loan and intends to designate a replacement Seller/Servicer (which may include
the Company or an affiliate of the Company). The Master Servicer may perform its
administrative and servicing responsibilities through agents or independent
contractors, but shall not thereby be released from any of its responsibilities
under the Pooling Agreement. The Master Servicer will receive a fee (the "Master
Servicing Fee") for its services. The Seller/Servicers will perform certain
servicing functions for the Company pursuant to servicing contracts (the
"Servicing Contracts") with the Master Servicer and will receive a fee for
acting as the primary servicer of the
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related Mortgage Loans (the "Servicing Fee"). The fees to the Master Servicer
and the Seller/ Servicers will be paid from the difference between the Mortgage
Interest Rates on each Mortgage Loan and the Remittance Rate with respect to
such Mortgage Loan.
If so specified in the applicable Prospectus Supplement, the Company will
not act as Master Servicer for a particular Series of Certificates. In such
event, (i) the servicing of the Mortgage Loans will be performed by the Servicer
specified in the applicable Prospectus Supplement, (ii) there will not be a
Master Servicer, and (iii) the Certificate Administrator will calculate amounts
distributable to the Certificateholders, prepare tax returns on behalf of the
Trust Fund and provide certain other administrative services specified in the
Pooling Agreement. The Servicer and the Certificate Administrator may perform
their respective servicing and administrative responsibilities through agents or
independent contractors, but shall not thereby be released from any of their
respective responsibilities under the Pooling Agreement. With respect to such
Series of Certificates, the Servicer will receive the Servicing Fee and the
Certificate Administrator will receive a fee for its services (the "Certificate
Administrator Fee"), each of which will be paid from the difference between the
Mortgage Interest Rate on each Mortgage Loan and the Remittance Rate with
respect to such Mortgage Loan.
Unless otherwise specified in the applicable Prospectus Supplement, the
Certificates of each Series will represent undivided interests in a Trust Fund
consisting of the Mortgage Loans included in the Mortgage Pool for that Series
and related property. Certain Series will be enhanced by mortgage loan insurance
or other forms of credit enhancement, in each case as more fully described
herein under the captions "Description of Certificates" and "Description of
Credit Enhancements" and/or in the related Prospectus Supplement. When each
Series of Certificates is issued, the Company will cause the Mortgage Loans in
the Mortgage Pool for that Series to be assigned to an independent bank or trust
company as trustee (the "Trustee") for the benefit of the holders of
Certificates of that Series, and the Master Servicer or the Servicer will be
responsible for servicing the Mortgage Loans pursuant to a separate pooling and
servicing agreement ("Pooling Agreement") for the Series.
The Company's assignment of the Mortgage Loans to the Trustee will be
without recourse, and the Company's obligations with respect to the Mortgage
Loans will, unless otherwise indicated in the Prospectus Supplement for a Series
of Certificates, be limited to any representations and warranties made by it in,
as well as its contractual obligations under, the Pooling Agreement for each
Series. These obligations consist primarily of the obligation to administer and,
if applicable, service the Mortgage Loans and, with respect to Series of
Certificates as to which the Company will act as Master Servicer and unless
otherwise stated in the Prospectus Supplement for such Series, in the event of
delinquencies in payments on the Mortgage Loans in any Mortgage Pool, to advance
cash ("Advances") in the amounts described herein under "Description of
Certificates--Advances", to the extent such Advances are not made by the
Seller/Servicers. Any such Advances by the Master Servicer will be limited to
amounts which, in the judgment of the Master Servicer, ultimately will be
reimbursable with respect to such Mortgage Pool from Mortgagor payments or under
any applicable Mortgage Pool Insurance Policy, any applicable Special Hazard
Insurance Policy, any Primary Insurance Policy, FHA Insurance Policy or VA
Guaranty issued with respect to a Mortgage Loan, any applicable Letter of
Credit, Reserve Fund or any other applicable policy of insurance, any
subordination feature described herein or the proceeds of liquidation of a
Mortgage Loan. See "Description of Credit Enhancements". Unless otherwise
specified in the applicable Prospectus Supplement, each Seller/Servicer will be
obligated, in the event of delinquencies on the Mortgage Loans serviced by it in
any Mortgage Pool, to make Advances limited to amounts which, in its judgment,
after consultation with the Master Servicer, ultimately will be reimbursable
from the sources stated above. If so specified in the applicable Prospectus
Supplement, neither the Master Servicer nor the Seller/Servicers will be
obligated to make Advances with respect to Mortgage Loans delinquent longer than
the time period specified in such Prospectus Supplement. See "Description of
Certificates--Advances" and "Description of Credit Enhancements". The Master
Servicer is obligated to remit to Certificateholders of a Series all amounts
relating to the Mortgage Loans to the extent such amounts have been collected or
advanced by the Seller/Servicers or advanced by the Master Servicer and are due
Certificateholders pursuant to the terms of the Pooling Agreement for such
Series. With respect to Series of Certificates as to which the Company will not
act as Master Servicer and the servicing of the Mortgage Loans will be performed
by the Servicer, unless otherwise stated in the applicable Prospectus
Supplement, the Servicer will be obligated to make Advances in
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the amounts described herein under "Description of Certificates--Advances",
limited to amounts which, in the judgment of the Servicer, ultimately will be
reimbursable with respect to such Mortgage Pool from any of the sources stated
above.
CONVERSION OF MORTGAGE LOANS
The Prospectus Supplement for certain Series of Certificates representing
undivided interests in a Trust Fund consisting of adjustable-rate Mortgage Loans
may provide that some or all of the Mortgage Loans in the related Mortgage Pool
may have a conversion feature. Unless otherwise specified in the related
Prospectus Supplement, each such Mortgage Loan may be converted at the
Mortgagor's option at any time during a specified initial period to a fixed-rate
Mortgage Loan, subject to the Seller/Servicer's or the Servicer's determination
that the Mortgagor has met certain payment history requirements and the payment
of a conversion fee ("Conversion Fee") to the Seller/Servicer or the Servicer,
as applicable. Unless otherwise specified in the applicable Prospectus
Supplement, upon any such conversion, the Master Servicer, or the Seller with
respect to Series of Certificates as to which the Company will not act as Master
Servicer, will repurchase the Mortgage Loan from the Mortgage Pool at its then
outstanding principal balance, plus interest at the Mortgage Interest Rate on
such Mortgage Loan to the date of repurchase. The amounts distributable to
Certificateholders of different Classes, if applicable, upon such repurchase,
and the portion of the Conversion Fee to be passed through to
Certificateholders, if any, will be set forth in the Prospectus Supplement for
each such Series of Certificates.
USE OF PROCEEDS
All of the net proceeds to be received from the sale of each Series of the
Certificates will be used by the Company to purchase the Mortgage Loans related
to that Series or to return to the Company the amounts previously used to effect
such purchases, the costs of carrying the Mortgage Loans until sale of the
Certificates and other expenses connected with pooling the Mortgage Loans and
issuing the Certificates, or for general corporate purposes. The Company expects
to issue Certificates in Series from time to time as part of its continuing
program of acquiring Mortgage Loans and selling Certificates. See "The
Company--Mortgage Purchase Program".
YIELD CONSIDERATIONS
GENERAL
The yield to maturity on any Certificate will depend on the purchase price
paid by the Certificateholder, the effective interest rate of the Certificate
and the weighted average life of the Mortgage Loans underlying the Certificate.
See "Maturity, Average Life and Prepayment Assumptions" for a discussion of
weighted average life. Any prepayment of a Mortgage Loan or liquidation of a
Mortgage Loan (by foreclosure proceedings or by virtue of the purchase of a
Mortgage Loan in advance of its stated maturity or otherwise) will have the
effect of passing through to Certificateholders amounts of principal which would
otherwise be passed through in amortized increments over the remaining term of
such Mortgage Loan. The effect of such prepayments on the yield to maturity to
Certificateholders depends on several factors. For example, if the Certificates
are purchased above par (I.E., for more than 100% of the outstanding principal
balance of the Mortgage Loans they represent), such prepayments will tend to
decrease the yield to maturity. If the Certificates were purchased at a discount
(I.E., for less than 100% of such outstanding principal balance), such
prepayments will tend to increase the yield to maturity. See "Certain Legal
Aspects of the Mortgage Loans--Enforceability of Certain Provisions" for a
description of certain provisions of each Mortgage Loan and statutory,
regulatory and judicial developments that may affect the prepayment experience
and maturity assumptions on the Mortgage Loans. See also "Description of
Certificates-- Termination" for a description of the repurchase of the Mortgage
Loans in any Mortgage Pool when the aggregate outstanding principal balance
thereof is less than a specified percentage of the aggregate outstanding
principal balance of the Mortgage Loans in such Mortgage Pool on the related
Cut-Off Date.
The timing of changes in the rate of principal payments on or repurchases of
the Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. In general, the earlier a
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prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield to maturity of principal payments and
repurchases occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of a Series of
Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
EFFECTIVE INTEREST RATE
Unless otherwise specified in the applicable Prospectus Supplement, each
monthly interest payment on a Mortgage Loan is calculated as 1/12 of the
applicable Mortgage Interest Rate multiplied by the unpaid principal balance
outstanding on the first day of the month after application of principal
payments made on such date. Unless otherwise specified in the applicable
Prospectus Supplement, the Remittance Rate for each Class of Certificates will
be calculated on the basis of the "Pass-Through Rate" for the related Mortgage
Loans. With respect to a Series of Certificates as to which the Company will act
as Master Servicer, the "Pass-Through Rate" for any Mortgage Loan will equal the
related Mortgage Interest Rate less the sum of the Servicing Fee and the Master
Servicing Fee for such Mortgage Loan. With respect to a Series of Certificates
as to which the Company will not act as Master Servicer, the "Pass-Through Rate"
for any Mortgage Loan will equal the related Mortgage Interest Rate less the sum
of the Servicing Fee and the Certificate Administrator Fee for such Mortgage
Loan.
As described in the applicable Prospectus Supplement, in certain events, if
the amounts available for distribution in respect of interest are not sufficient
to cover the total of all accrued and unpaid interest at the Pass-Through Rate,
the available amount will be distributed to the Certificateholders pro rata in
accordance with their respective interests or in an order of priority described
in the applicable Prospectus Supplement.
For the sale of Certificates under this Prospectus, the Company may
establish one or more Mortgage Pools having a variable, as opposed to a fixed,
Pass-Through Rate. A Mortgage Pool with a variable Pass-Through Rate may be
composed of Mortgage Loans that have adjustable Mortgage Interest Rates, or of
Mortgage Loans with fixed Mortgage Interest Rates if the amount to be passed
through is determined on a Mortgage Loan-by-Mortgage Loan basis as the Mortgage
Interest Rate minus specified fees for servicing and administrative
compensation, which may include any of the Servicing Fee, the Master Servicing
Fee and the Certificate Administrator Fee, for each such Mortgage Loan, as set
forth in the Prospectus Supplement, or as otherwise determined as described in
the applicable Prospectus Supplement. Because the Mortgage Interest Rates may
vary in such a Mortgage Pool, and the servicing and administrative compensation
generally will be fixed, the Pass-Through Rate will be affected by
disproportionate principal prepayments among Mortgage Loans bearing different
Mortgage Interest Rates and, consequently, the yield to maturity
Certificateholders will be affected. The characteristics of any such
variable-rate Mortgage Pools will be described in the applicable Prospectus
Supplement. Although Mortgage Interest Rates in a fixed Pass-Through Rate
Mortgage Pool may vary from Mortgage Loan to Mortgage Loan, disproportionate
principal prepayments among the Mortgage Loans bearing different Mortgage
Interest Rates will not affect the return to Certificateholders.
For any Series of Certificates, the effective yield to maturity to
Certificateholders generally will be slightly lower than the yield to maturity
otherwise produced by the applicable Pass-Through Rate because, while interest
will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest to Certificateholders at the applicable
Pass-Through Rate generally will be made on a later day, which, unless otherwise
specified in the applicable Prospectus Supplement, will be the 25th day (or, if
such day is not a business day, the next succeeding business day) of the month
following the month of accrual.
When a prepayment in full (a "Payoff") is made by a Mortgagor on a Mortgage
Loan during a month, the Mortgagor is charged interest on the days in the month
actually elapsed up to the date of the Payoff at the daily interest rate
(determined by dividing the Mortgage Interest Rate by 365, or 360 in the case of
Payoffs received on a date on which the monthly payment for such Mortgage Loan
is due (a "Due Date")) which is applied to the principal amount of the Mortgage
Loan so prepaid. Similarly, when a Mortgage Loan is liquidated under a Mortgage
Pool Insurance Policy during a month, the pool insurer will pay interest on the
Mortgage Loan only to the date the claim is paid. Also, when a partial
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principal prepayment (a "Curtailment") is made on a Mortgage Loan together with
the scheduled Monthly Payment for a month on or after the related Due Date, the
Mortgagor does not pay interest on the prepaid amount, and therefore
Certificateholders will not receive any interest on such prepaid amount.
Unless otherwise specified in the applicable Prospectus Supplement, to the
extent that Compensating Interest (as defined below) is not paid, the effect of
a Payoff or such a liquidation will be to reduce slightly the amount of interest
passed through on the next Distribution Date, because interest on the principal
amount of the Mortgage Loan so prepaid was paid only to the date of such Payoff
or liquidation and not to the end of the month of prepayment. Unless otherwise
specified in the applicable Prospectus Supplement, the following will apply:
Payoffs received during the period from the first day of a calendar month
through the 14th day of such month will be passed through, without Compensating
Interest and without interest accrued from the first day of such month to the
date of the Payoff, on the Distribution Date in such month, and Payoffs received
during the period from the 15th day of a calendar month through the last day of
such month will be passed through, with Compensating Interest and with interest
at the applicable Pass-Through Rate attributable to interest paid through the
date of the Payoff by the Mortgagors on the Distribution Date in the following
month. Proceeds of Mortgage Loans liquidated under a Mortgage Pool Insurance
Policy during a month will be passed through, with Compensating Interest and
interest at the applicable Pass-Through Rate attributable to interest paid by
the pool insurer under an applicable Mortgage Pool Insurance Policy, on the
Distribution Date in the following month.
Unless otherwise specified in the applicable Prospectus Supplement, the
following will apply: "Compensating Interest" will consist of a full month's
payment of interest at the applicable Pass-Through Rate on a Mortgage Loan for
which a Payoff is made or which is liquidated, less the interest at the
applicable Pass-Through Rate attributable to interest paid by the Mortgagor or
by the pool insurer under an applicable Mortgage Pool Insurance Policy through
the date of Payoff. Compensating Interest on liquidated Mortgage Loans will be
passed through to Certificateholders, together with any interest at the
applicable Pass-Through Rate attributable to interest paid by the pool insurer
under any applicable Mortgage Pool Insurance Policy to the date of liquidation
on the Distribution Date of the month following liquidation. Compensating
Interest on Payoffs will be paid on a Distribution Date only with respect to
Payoffs received during the period from the 15th day of the preceding calendar
month through the last day of such preceding month. The applicable Pooling and
Servicing Agreement will specify any limitations on the extent of or source of
funds available for payments of Compensating Interest.
MATURITY, AVERAGE LIFE AND PREPAYMENT ASSUMPTIONS
The Mortgage Loans at origination will have varying maturities as more fully
described in the applicable Prospectus Supplement. The Company expects that most
such Mortgage Loans will have maturities at origination of either 10 to 15 years
or 20 to 30 years and that such Mortgage Loans may be prepaid in full or in part
at any time, generally without penalty. The prepayment experience will affect
the lives of the Certificates. The Company anticipates that a substantial number
of Mortgage Loans will be paid in full prior to their scheduled maturity.
A number of factors, including homeowner mobility, economic conditions,
enforceability of "due-on-sale" clauses, assumability of the Mortgage Loans,
mortgage market interest rates and the general availability of mortgage funds
affect prepayment experience. Generally, each Mortgage executed in connection
with a fixed-rate Mortgage Loan, except for FHA-insured or VA-guaranteed
Mortgage Loans, will contain "due-on-sale" provisions permitting the holder of
the Mortgage Note to accelerate the maturity of the Mortgage Loan upon
conveyance by the Mortgagor of the underlying Mortgaged Property. With respect
to Series of Certificates as to which the Company will act as Master Servicer,
the Master Servicer will agree that it or the applicable Seller/Servicer will
enforce any "due-on-sale" clause contained in any such Mortgage to the extent it
has knowledge of the conveyance or proposed conveyance of the underlying
Mortgaged Property and reasonably believes that it is entitled to do so under
applicable law; provided, however, that neither the Master Servicer nor the
Seller/Servicer will take any action in relation to the enforcement of any
"due-on-sale" provision which would impair or threaten to impair any recovery
under any related Primary Insurance Policy or Mortgage Pool Insurance Policy.
With respect to Series of Certificates as to which the Company will not act as
Master
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Servicer, the Servicer will agree to enforce any "due-on-sale" clause in the
instances and to the extent described in the preceding sentence. However, a
Mortgage Pool may contain fixed-rate Mortgage Loans which will allow a
subsequent owner of a Mortgaged Property, if credit underwriting standards are
met, to assume such fixed-rate Mortgage Loan without enforcement of any
"due-on-sale" clause. With respect to Mortgage Loans bearing adjustable Mortgage
Interest Rates, unless otherwise specified in the related Prospectus Supplement,
the related Mortgages will generally provide that such Mortgage Loans are
assumable by creditworthy subsequent owners without enforcement of any "due-
on-sale" clause. An assumption of a Mortgage Loan may have the effect of
increasing the life of such Mortgage Loan.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
will be repaid to the Certificateholders. The weighted average life of the
Certificates will be influenced by the rate at which principal on the Mortgage
Loans in the Mortgage Pool is paid, which may be in the form of (i) scheduled
amortization or (ii) Curtailments and Payoffs (collectively "Principal
Prepayments"). Based upon published information, the rate of prepayments on
fixed- and adjustable-rate conventional one-to four-family mortgage loans has
fluctuated significantly in recent years. The Company believes such fluctuation
is due to a number of factors, including those discussed above, and that such
factors will also affect the prepayment experience on the Mortgage Loans in any
Mortgage Pool. Accordingly, the Company cannot predict what future prepayment
experience will be or what the resulting weighted average life might be.
However, principal prepayments on mortgage loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus and in each
Prospectus Supplement, unless otherwise indicated therein (the "Basic Prepayment
Assumption" or "BPA"), represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of new Mortgage
Loans. The BPA assumes prepayment rates of 0.2% per annum of the then
outstanding principal balance of such Mortgage Loans in the first month of the
life of the Mortgage Loans and an additional 0.2% per annum in each month
thereafter until the 30th month. Beginning in the 30th month and in each month
thereafter during the life of the Mortgage Loans, such prepayment model assumes
a constant prepayment rate of 6.0% per annum. Varying prepayment assumptions are
often expressed as percentages of the BPA (E.G., at 150% of the BPA, assumed
prepayments during the first month of a pool would be 0.3% per annum, each month
thereafter the rate of prepayments would increase by 0.3% per annum, and in the
30th and succeeding months the rate would be 9% per annum). The Prospectus
Supplement or Current Report on Form 8-K for each Series of Certificates may
contain a table setting forth the projected weighted average life of each Class
of Certificates of such Series and the percentage of the original principal
amounts or notional principal amounts of each such Class that would be
outstanding on specified Distribution Dates for such Series, based on the
assumptions set forth with respect to the BPA deemed appropriate by the Company
and specified therein.
THE COMPANY
The Company, a Delaware corporation, is a wholly-owned indirect subsidiary
of PNC Bank Corp., a bank holding company. The Company was organized for the
purpose of providing mortgage lending institutions, including affiliated
institutions, with greater financing and lending flexibility by purchasing
mortgage loans from such institutions and issuing mortgage-backed securities.
The Company's principal executive offices are located at 75 North Fairway Drive,
Vernon Hills, Illinois 60061, telephone (847) 549-6500.
MORTGAGE PURCHASE PROGRAM
Set forth below is a description of the principal aspects of the Company's
purchase program for Mortgage Loans eligible for inclusion in a Mortgage Pool.
The Company will represent and warrant to the Trustee that each Mortgage Pool
will consist of Mortgage Loans purchased from one or more institutions
("Sellers") which are (i) state-chartered or federally-chartered savings and
loan associations, banks or similar financial institutions whose deposits or
accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") or,
if specified in the applicable Prospectus Supplement or Current Report on Form
8-K, substantially similar deposit insurance approved by any applicable rating
agency, (ii) approved as mortgagees by the FHA ("FHA-Approved Mortgagees"),
(iii) approved by the Federal National Mortgage Association ("FNMA") as
mortgagees ("FNMA-
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Approved Mortgagees") or by the Federal Home Loan Mortgage Corporation ("FHLMC")
as mortgagees ("FHLMC-Approved Mortgagees"), or any successor entity to either,
(iv) assignees of FHA-Approved Mortgagees, FNMA-Approved Mortgagees or
FHLMC-Approved Mortgagees, (v) the FDIC or the Resolution Trust Corporation,
(vi) entities which have purchased Mortgage Loans from institutions described in
clauses (i)-(v) above or (vii) such other entities as may be described in the
applicable Prospectus Supplement. The institutions described in clauses (i)-(v)
of the preceding sentence will collectively be referred to herein as "Lenders".
The Company has approved (or will approve) individual institutions as eligible
Lenders by applying certain criteria, including the Lender's depth of mortgage
origination experience, servicing experience and financial stability. In
general, each Lender must have experience in originating and servicing
conventional residential mortgages and must have a net worth acceptable to the
Company. Each Lender is required to use the services of qualified underwriters,
appraisers and attorneys. Other factors evaluated by the Company in approving
Lenders include delinquency and foreclosure ratio performances.
LOAN STANDARDS
The Mortgage Loans to be included in each Mortgage Pool will be loans with
fixed or adjustable rates of interest secured by first mortgages, deeds of trust
or security deeds on residential properties with original principal balances
which did not exceed 95% of the value of the Mortgaged Properties, unless such
loans are FHA-insured or VA-guaranteed. Generally, each Mortgage Loan having a
loan-to-value ratio at origination and as of the Cut-Off Date in excess of 80%
or which is secured by a second or vacation home will be covered by a Primary
Insurance Policy, FHA Insurance Policy or VA Guaranty insuring against default
all or a specified portion of the principal amount thereof. See "Primary
Insurance, FHA Mortgage Insurance, VA Mortgage Guaranty, Hazard Insurance;
Claims Thereunder". Each mortgage insurer must be a Qualified Insurer (defined
herein to mean a mortgage guaranty insurance company which is duly qualified as
such under the laws of each state in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact a mortgage guaranty
insurance business and to write the insurance provided by the Primary Insurance
Policy or the Mortgage Pool Insurance Policy, as the case may be, and which is
approved as an insurer by FHLMC, FNMA or any successor entity to either, and by
the Company).
The Mortgage Loans to be included in each Mortgage Pool will be "one- to
four-family" mortgage loans, which means permanent loans (as opposed to
construction or land development loans) secured by Mortgages on non-farm
properties, including attached or detached single-family or second/vacation
homes, two-to four-family primary residences and condominiums or other attached
dwelling units, including individual condominiums, row houses, townhouses and
other separate dwelling units even when located in buildings containing five or
more such units. Each Mortgage Loan must be secured by an owner occupied primary
residence or second/vacation home, or by a nonowner occupied residence. The
Mortgaged Property may not be a mobile home.
CREDIT, APPRAISAL AND UNDERWRITING STANDARDS
The Mortgage Loans to be included in each Mortgage Pool will be subject to
the various credit, appraisal and underwriting standards described herein. The
Company's credit, appraisal and underwriting standards with respect to certain
Mortgage Loans will generally conform to those published in the Company's
Selling Guide (together with the Company's Servicing Guide, the "Guide", as
modified from time to time). The credit, appraisal and underwriting standards as
set forth in the Guide are continuously revised based on opportunities and
prevailing conditions in the residential mortgage market and the market for the
Company's mortgage pass-through certificates. The Mortgage Loans may be
underwritten by the Company or by designated third parties.
In addition, the Company may purchase Mortgage Loans which do not conform to
the underwriting standards set forth in the Guide. Such Mortgage Loans may be
purchased in negotiated transactions from Sellers who will represent that the
Mortgage Loans have been originated in accordance with credit, appraisal and
underwriting standards agreed to by the Company. The Company will generally
review only a limited portion of the Mortgage Loans in any delivery of such
Mortgage Loans for conformity with the applicable credit, appraisal and
underwriting standards. Certain other Mortgage Loans will be purchased from
Sellers who will represent that the Mortgage Loans were originated pursuant to
credit, appraisal and underwriting standards determined by a
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mortgage insurance company acceptable to the Company. The Company will accept a
certification from such insurance company as to a Mortgage Loan's insurability
in a mortgage pool as of the date of certification as evidence that such
Mortgage Loan conforms to applicable underwriting standards. Such certifications
will likely have been issued before the purchase of the Mortgage Loans by the
Company. The Company will perform only random quality assurance reviews on
Mortgage Loans delivered with such certifications.
The credit, appraisal and underwriting standards utilized in negotiated
transactions and the credit, appraisal and underwriting standards of insurance
companies issuing certificates may vary substantially from the credit, appraisal
and underwriting standards set forth in the Guide. All of the credit, appraisal
and underwriting standards will provide an underwriter with sufficient
information to evaluate the borrower's repayment ability and the adequacy of the
Mortgaged Property as collateral. Due to the variety of underwriting standards
and review procedures that may be applicable to the Mortgage Loans included in
any Mortgage Pool, the related Prospectus Supplement will not distinguish among
the various credit, appraisal and underwriting standards applicable to the
Mortgage Loans nor describe any review for compliance with applicable credit,
appraisal and underwriting standards performed by the Company. Moreover, there
can be no assurance that every Mortgage Loan was originated in conformity with
the applicable credit, appraisal and underwriting standards in all material
respects, or that the quality or performance of Mortgage Loans underwritten
pursuant to varying standards as described above will be equivalent under all
circumstances.
The Company's underwriting standards are intended to evaluate the
prospective Mortgagor's credit standing and repayment ability, and the value and
adequacy of the proposed Mortgaged Property as collateral. In the loan
application process, prospective Mortgagors will be required to provide
information regarding such factors as their assets, liabilities, income, credit
history, employment history and other related items. Each prospective Mortgagor
will also provide an authorization to apply for a credit report which summarizes
the Mortgagor's credit history. With respect to establishing the prospective
Mortgagor's ability to make timely payments, the Company will require evidence
regarding the Mortgagor's employment and income, and of the amount of deposits
made to financial institutions where the Mortgagor maintains demand or savings
accounts. In some instances, Mortgage Loans which were originated under a
Limited Documentation Origination Program may be sold to the Company. For a
mortgage loan originated under a Limited Documentation Origination Program to
qualify for purchase by the Company, the prospective mortgagor must have a good
credit history and be financially capable of making a larger cash down payment,
in a purchase, or be willing to finance less of the appraised value, in a
refinancing, than would otherwise be required by the Company. Currently, the
Company's underwriting standards provide that only mortgage loans with certain
loan-to-value ratios will qualify for purchase. If the mortgage loan qualifies,
the Company waives some of its documentation requirements and eliminates
verification of income and employment for the prospective mortgagor.
The Company's underwriting standards generally follow guidelines acceptable
to FNMA and FHLMC. In determining the adequacy of the property as collateral, an
independent appraisal is made of each property considered for financing. The
appraiser is required to inspect the property and verify that it is in good
condition and that construction, if new, has been completed. The appraisal is
based on the appraiser's judgment of values, giving appropriate weight to both
the market value of comparable homes and the cost of replacing the property.
Certain states where the Mortgaged Properties may be located are
"anti-deficiency" states where, in general, lenders providing credit on one- to
four-family properties must look solely to the property for repayment in the
event of foreclosure. See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders." The
Company's underwriting standards in all states (including anti-deficiency
states) require that the underwriting officers be satisfied that the value of
the property being financed, as indicated by the independent appraisal,
currently supports and is anticipated to support in the future the outstanding
loan balance, and provides sufficient value to mitigate the effects of adverse
shifts in real estate values.
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SELLER WARRANTIES AND INDEMNIFICATION OF THE COMPANY
With respect to Series of Certificates as to which the Company will act as
Master Servicer, each Seller generally will make representations and warranties
with respect to Mortgage Loans sold by it to the Company for inclusion in the
Trust Fund which the Company deems sufficient to permit it to make its
representations and warranties in respect of such Mortgage Loans to the Trustee
and the Certificateholders under the Pooling Agreement. See "Description of
Certificates--Representations and Warranties" below. Each Seller will also make
certain other representations and warranties regarding Mortgage Loans sold by
it. Upon the breach of any representation or warranty made by a Seller that
materially and adversely affects the interests of the Certificateholder in a
Mortgage Loan (other than those breaches which have been cured), the Company may
require the Seller to repurchase the related Mortgage Loan. In addition, each
Seller will agree to indemnify the Company against any loss or liability
incurred by the Company on account of any breach of any representation or
warranty made by the Seller, any failure to disclose any matter that makes any
such representation and warranty misleading, or any inaccuracy in information
furnished by the Seller to the Company, including any information set forth in
this Prospectus or in any Prospectus Supplement. See "Description of
Certificates--Assignment of Mortgage Loans" and "--Representations and
Warranties".
With respect to Series of Certificates as to which the Company will not act
as Master Servicer, the Seller which sold the Mortgage Loans to the Company for
inclusion in the Trust Fund will make representations and warranties to the
Company with respect to such Mortgage Loans, and the Company will assign such
representations and warranties to the Trustee and the Certificateholders under
the Pooling Agreement. Upon the breach of any representation or warranty made by
such Seller that materially and adversely affects the interests of the
Certificateholder in a Mortgage Loan (other than those breaches which have been
cured), the Seller will be required to repurchase the related Mortgage Loan. See
"Description of Certificates--Assignment of Mortgage Loans" and
"--Representations and Warranties".
RELATIONSHIPS WITH AFFILIATES
PNC Mortgage Corp. of America, an affiliate of the Company, may be a Seller,
a Seller/Servicer or a Servicer. Two of the Company's directors are also
directors of PNC Mortgage Corp. of America.
DESCRIPTION OF CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate Pooling
Agreement. With respect to Series of Certificates as to which the Company will
act as Master Servicer, the Pooling Agreement will be between the Company, as
Depositor and Master Servicer, and the Trustee named in the Prospectus
Supplement, and the Mortgage Loans will be serviced by Seller/Servicers pursuant
to selling and servicing contracts ("Selling and Servicing Contracts") between
the Company and such Seller/Servicers, or will be serviced by servicers pursuant
to servicing arrangements approved by the Company. With respect to Series of
Certificates as to which the Company will not act as Master Servicer, the
Pooling Agreement will be among the Company, as Depositor and Certificate
Administrator, the Servicer and the Trustee named in the Prospectus Supplement.
A form of Pooling Agreement and a form of the Selling and Servicing Contract are
filed as exhibits to the Registration Statement of which this Prospectus is a
part. The following discussion summarizes certain provisions expected to be
contained in each Pooling Agreement which governs the Trust Funds consisting
principally of one- to-four family residential properties. The applicable
Prospectus Supplement will describe material features of the related Pooling
Agreement, which may differ from the features described below. The following
summary and the summary contained in a Prospectus Supplement do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Pooling Agreement for each particular Series
and of the applicable Selling and Servicing Contracts or similar contracts.
GENERAL
The Certificates of each Series will represent undivided interests in the
Trust Fund created pursuant to the Pooling Agreement for such Series. The Trust
Fund for each Series will consist, to the extent provided in the Pooling
Agreement, of (i) such Mortgage Loans as from time to time are subject
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to the Pooling Agreement (exclusive of any related Retained Yield (described
below), except as otherwise specified in the related Prospectus Supplement),
(ii) such assets as from time to time are held in the Certificate Account
(described below) and the Custodial Accounts for P&I (described below) related
to such Mortgage Loans (exclusive of any Retained Yield, except as otherwise
specified in the related Prospectus Supplement), (iii) property acquired by
foreclosure of Mortgage Loans or deed in lieu of foreclosure, (iv) any
combination, as specified in the related Prospectus Supplement, of a Letter of
Credit, Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
Bankruptcy Bond, Fraud Bond, Reserve Fund or other type of credit enhancement as
described under "Description of Credit Enhancements", (v) the Private
Certificates and Agency Certificates, if any, described in the applicable
Prospectus Supplement, and (vi) such other assets or rights as are described in
the applicable Prospectus Supplement. If so specified in the applicable
Prospectus Supplement, Certificates of a given Series may be issued in several
Classes, which may pay interest at different rates, may represent different
allocations of the right to receive principal and interest, and certain of which
may be subordinated to others. Any such Class of Certificates may also provide
for payments of principal only or interest only or for disproportionate payments
of principal and interest. Subordinated Classes of a given Series of
Certificates may or may not be offered by the same Prospectus Supplement as the
senior Classes of such Series.
The Certificates will be freely transferable and exchangeable for
Certificates of the same Series and Class at the office set forth in such
Certificates, provided, however, that certain Classes of Certificates may be
subject to transfer restrictions set forth in such Certificates and described in
the applicable Prospectus Supplement. A reasonable service charge may be imposed
for any registration of exchange or transfer of Certificates, and the Company
may require payment of a sum sufficient to cover any tax or other governmental
charge. If specified in the applicable Prospectus Supplement, one or more
Classes of Certificates for any Series may be transferable only on the books of
The Depository Trust Company or another depository identified in such Prospectus
Supplement.
Unless otherwise indicated in the applicable Prospectus Supplement,
beginning with the month following the month in which the Cut-Off Date occurs
for a Series of Certificates, distributions of principal and interest (or, where
applicable, principal only or interest only) on each Class of Certificates will
be made either by the Trustee, the Master Servicer or the Certificate
Administrator, as applicable, acting on behalf of the Trustee or a paying agent
appointed by the Trustee (the "Paying Agent") on the 25th day (or if such 25th
day is not a business day, the business day immediately following such 25th day)
of each calendar month (the "Distribution Date") 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 in which the Distribution Date occurs (the
"Record Date"). Distributions for each Series will be made by wire transfer in
immediately available funds for the account of, or by check mailed to, each
Certificateholder of record; provided, however, that, unless otherwise specified
in the related Prospectus Supplement, the final distribution in retirement of
the Certificates for each Class of a Series will be made only upon presentation
and surrender of the Certificates at the office or agency of the Company or the
Trustee specified in the notice to Certificateholders of such final
distribution.
ASSIGNMENT OF MORTGAGE LOANS
The Company will cause the Mortgage Loans to be assigned to the Trustee,
together with all principal and interest on the Mortgage Loans other than
principal and interest due on or before the Cut-Off Date. The Company will
expressly reserve its or a Seller's rights in and to any Retained Yield, which
accordingly will not constitute part of the Trust Fund. In addition, the
applicable Prospectus Supplement may specify that the Seller will retain the
right to a specified portion of either principal or interest, or both. The
Trustee will, concurrently with such assignment, authenticate and deliver the
Certificates or cause the Certificates to be authenticated and delivered to the
Company or its designated agent in exchange for the Trust Fund. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Pooling
Agreement for the related Series. Unless otherwise specified in the related
Prospectus Supplement, such schedule will include information as of the close of
business on the Cut-Off Date as to the principal balance of each Mortgage Loan,
the Mortgage Interest Rate
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and the maturity of each Mortgage Note, the Seller/Servicer's or the Servicer's
Servicing Fee, whether a Primary Insurance Policy has been obtained for each
Mortgage Loan and the then-current scheduled monthly payment of principal and
interest for each Mortgage Loan.
In addition, the Company will, as to each Mortgage Loan, deliver or cause to
be delivered to the Trustee the Mortgage Note, an assignment to the Trustee of
the Mortgage in a form for recording or filing as may be appropriate in the
state where the Mortgaged Property is located, the original recorded Mortgage
with evidence of recording or filing indicated thereon, a copy of the title
insurance policy or other evidence of title and evidence of any Primary
Insurance Policy, FHA Insurance Policy or VA Guaranty for such Mortgage Loan, if
applicable; or, in the case of each Cooperative Loan, the related Cooperative
Note, the original security agreement, the proprietary lease or occupancy
agreement, the related stock certificate and related blank stock powers, and a
copy of the original filed financing statement together with assignments thereof
from the applicable Seller to the Trustee in a form sufficient for filing. In
certain instances where original documents respecting a Mortgage Loan may not be
available prior to execution of the Pooling Agreement, the Company will deliver
such documents to the Trustee within 270 days thereafter. Notwithstanding the
foregoing, a Trust Fund may include Mortgage Loans where the original Mortgage
Note is not delivered to the Trustee if the Company delivers to the Trustee or
the custodian a copy or a duplicate original of the Mortgage Note, together with
an affidavit certifying that the original thereof has been lost or destroyed.
With respect to such Mortgage Loans, the Trustee (or its nominee) may not be
able to enforce the Mortgage Note against the related borrower. The Company will
agree to repurchase or substitute for such a Mortgage Loan in certain
circumstances (see "Description of Certificates--Representations and
Warranties").
In instances where, due to a delay on the part of the title insurer, a copy
of the title insurance policy for a particular Mortgage Loan cannot be delivered
to the Trustee prior to or concurrently with the execution of the Pooling
Agreement, the Company will provide a copy of such title insurance policy to the
Trustee within 90 days after the Company's receipt of the original recorded
Mortgage, any intervening recorded assignments or other documents necessary to
issue such title insurance policy.
The Trustee will review the mortgage documents within 45 days of receipt
thereof to ascertain that all required documents have been properly executed and
received. The Trustee will hold such documents for each Series in trust for the
benefit of Certificateholders of such Series. With respect to Series of
Certificates as to which the Company will act as Master Servicer, if any
document is found by the Trustee not to have been properly executed or received
or to be unrelated to the Mortgage Loans identified in the Pooling Agreement,
and the Company cannot cure such defect, the Company will substitute a new
mortgage loan meeting the conditions set forth in the Pooling Agreement (see
"--Substitution of Mortgage Loans" below) or repurchase the related Mortgage
Loan from the Trustee at a price equal to 100% of the outstanding principal
balance of such Mortgage Loan, plus accrued interest thereon at the applicable
Pass-Through Rate through the last day of the month of such repurchase. With
respect to Series of Certificates as to which the Company will not act as Master
Servicer, if a defect of the type described in the preceding sentence is
discovered by the Trustee and cannot be cured by the Seller, the Seller will
substitute a new mortgage loan or repurchase the related Mortgage Loan from the
Trustee upon the terms described in the preceding sentence. The purchase price
of any Mortgage Loan so repurchased will be passed through to Certificateholders
as liquidation proceeds in accordance with the procedures specified under
"--Distributions on Certificates". This substitution or repurchase obligation
constitutes the sole remedy available to the Certificateholders or the Trustee
for such a defect in a constituent document.
An assignment of each Mortgage Loan to the Trustee will be recorded or filed
except in states where, in the written opinion of counsel admitted to practice
in such state acceptable to the Company and the Trustee, such filing or
recording is not required to protect the Trustee's interest in the Mortgage Loan
against sale, further assignment, satisfaction or discharge by the Seller, the
Seller/ Servicers, the Servicer, the Company or the Master Servicer.
Buydown Funds provided by the Sellers or other parties for any Buydown Loans
included in a Mortgage Pool may be deposited on the date of settlement of the
sale of the Certificates to the original purchasers thereof (the "Closing Date")
into either (a) a separate account (the "Buydown Fund Account") maintained (i)
with the Trustee or another financial institution approved by the Master
Servicer, (ii) within FDIC insured accounts (or other insured accounts
acceptable to the rating agency
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or agencies) held and monitored by a Servicer or (iii) in a separate non-trust
account without FDIC or other insurance in an institution having the highest
unsecured long-term debt rating by the rating agency or agencies (or such other
institution acceptable to the rating agency or agencies) or (b) held in a
Custodial Account for P&I or a Custodial Account for Reserves and monitored by a
Servicer. Since Buydown Funds may be funded at either the par values of future
payment subsidies or funded in an amount less than the par values of future
payment subsidies and determined by discounting such par values in accordance
with interest accruing on such values, Buydown Fund Accounts may be non-
interest-bearing or may bear interest. In no event will the amount held in any
Buydown Fund Account exceed the level of deposit insurance covering such
account. Accordingly, more than one such account may be established.
SUBSTITUTION OF MORTGAGE LOANS
With respect to Series of Certificates as to which the Company will act as
Master Servicer, the Company may substitute an eligible mortgage loan for a
defective Mortgage Loan in lieu of repurchasing such defective Mortgage Loan or
the related Mortgaged Property (a) within three months after the Closing Date
for the related Series of Certificates, and (b) within two years after such
Closing Date, if the related Mortgage Loan is a "defective obligation" within
the meaning of Section 860G(a)(4)(A)(ii) of the Code. Any mortgage loan, to be
eligible for substitution, must fit within the general description of the
Mortgage Loans set forth herein and in the related Prospectus Supplement. With
respect to Series of Certificates as to which the Company will not act as Master
Servicer, the Seller or the Servicer, as specified in the related Prospectus
Supplement, may substitute an eligible mortgage loan for a defective Mortgage
Loan in lieu of repurchasing such defective Mortgage Loan or the related
Mortgaged Property in the circumstances and to the extent described in the two
preceding sentences. See "The Mortgage Pools".
REPRESENTATIONS AND WARRANTIES
In the Pooling Agreement for each Series of Certificates as to which the
Company will act as Master Servicer, unless otherwise stated in the applicable
Prospectus Supplement, the Company will represent and warrant to the Trustee,
among other things, that (i) the information set forth in the schedule of
Mortgage Loans is true and correct in all material respects; (ii) except in the
case of Cooperative Loans, a lender's title policy (or other satisfactory
evidence of title) was issued on the date of the origination of each Mortgage
Loan and each such policy or other evidence of title is valid and remains in
full force and effect; (iii) if a Primary Insurance Policy, FHA Insurance Policy
or VA Guaranty is required with respect to such Mortgage Loan, such policy or
guaranty is valid and remains in full force and effect as of the Closing Date;
(iv) as of the Closing Date, the Company had good title to the Mortgage Loans
and the Mortgage Notes are subject to no offsets, defenses or counterclaims,
except to the extent that the buydown agreement for a Buydown Loan forgives
certain indebtedness of a Mortgagor; (v) except in the case of Cooperative
Loans, as of the Closing Date, each Mortgage is a valid first lien on an
unencumbered estate in fee simple or leasehold interest in the Mortgaged
Property (subject only to (a) liens for current real property taxes and special
assessments, (b) covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of recording of such
Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally or specifically reflected in the mortgage
originator's appraisal, (c) exceptions set forth in the title insurance policy
covering such Mortgaged Property and (d) other matters to which like properties
are commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage); (vi) as of the Closing Date,
each Mortgaged Property is free of damage and is in good repair, except for
ordinary wear and tear; (vii) as of the time each Mortgage Loan was originated,
the Mortgage Loan complies with all applicable state and federal laws, including
usury, equal credit opportunity, disclosure and recording laws; (viii) as of the
Closing Date, there are no delinquent tax or assessment liens against any
Mortgaged Property; and (ix) unless otherwise specified in the related
Prospectus Supplement, each Mortgage Loan was originated and will be serviced by
(a) an institution which is a member of the Federal Reserve System or the
deposits of which are insured by the FDIC, (b) an institution which is a member
of the Federal Home Loan Bank System, (c) an institution which is a FHA-Approved
Mortgagee, (d) an institution which is a FNMA-Approved Mortgagee, or (e) an
institution which is a FHLMC-Approved Mortgagee. The applicable Prospectus
Supplement and Pooling Agreement may set forth additional
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representations and warranties of the Company. In addition, with respect to any
Mortgage Loan as to which the Company delivers to the Trustee or the custodian
an affidavit certifying that the original Mortgage Note has been lost or
destroyed, if such Mortgage Loan subsequently is in default and the enforcement
thereof or of the related Mortgage is materially adversely affected by the
absence of the original Mortgage Note, the Company will be obligated to
repurchase or substitute for such Mortgage Loan in the manner described below.
However, the Company will not be required to repurchase or substitute for any
Mortgage Loan as described above if the circumstances giving rise to such
requirement also constitute fraud in the origination of the related Mortgage
Loan.
If the Mortgage Loans include Cooperative Loans, representations and
warranties with respect to title insurance or hazard insurance will not be
given. Generally, a Cooperative itself is responsible for the maintenance of
hazard insurance for property owned by such Cooperative, and the borrowers
(tenant-stockholders) of such Cooperative do not maintain hazard insurance on
their individual dwelling units. Title insurance is not obtained for Cooperative
Loans because such loans are not secured by real property. See "Certain Legal
Aspects of the Mortgage Loans--Cooperative Loans".
With respect to Series of Certificates as to which the Company will not act
as Master Servicer, the Seller which sold the Mortgage Loans to the Company for
inclusion in the Trust Fund will make representations and warranties to the
Company with respect to such Mortgage Loans substantially similar to those
indicated in the second preceding paragraph, and the Company will assign such
representations and warranties to the Trustee and the Certificateholders under
the Pooling Agreement. The applicable Prospectus Supplement and Pooling
Agreement may set forth additional representations and warranties of the Seller
and/or the Company.
In the event of the discovery by the Company or the Servicer of a breach of
any representation or warranty which materially and adversely affects the
interest of the Certificateholders in the related Mortgage Loan, or the receipt
of notice of such a breach from the Trustee, the Company or the Seller, as the
case may be, will cure the breach, substitute a new mortgage loan for such
Mortgage Loan or repurchase such Mortgage Loan, or any Mortgaged Property
acquired with respect thereto, on the terms set forth above under "--Assignment
of Mortgage Loans". The proceeds of any such repurchase will be passed through
to Certificateholders as liquidation proceeds. This substitution or repurchase
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for any such breach.
Under the Pooling Agreement, the Master Servicer, or the Servicer with
respect to Series of Certificates for which the Company will not act as Master
Servicer, will have the right, but not the obligation, to purchase any Mortgage
Loan from the applicable Mortgage Pool in the event that such Mortgage Loan
becomes 90 days or more delinquent; provided, that the aggregate purchase price
of the Mortgage Loans so repurchased (as set forth in the Pooling Agreement)
shall not exceed one-half of one percent (0.50%) of the aggregate Principal
Balance of all Mortgage Loans as of the Cut-Off Date.
SERVICING
With respect to Series of Certificates as to which the Company will act as
Master Servicer, pursuant to the Pooling Agreement the Master Servicer will be
responsible for servicing and administering the Mortgage Loans, but will be
permitted to contract with the Seller/Servicer from whom each Mortgage Loan was
purchased, or another eligible servicing institution, to perform such functions
under the supervision of the Master Servicer as more fully described below.
In the contract pursuant to which each Seller/Servicer will perform its
servicing duties, which contract will generally be the Selling and Servicing
Contract, each Seller/Servicer will agree, subject to the general supervision of
the Master Servicer or its agent, to perform diligently all services and duties
customary to the servicing of mortgage loans. The Master Servicer or its agent
will monitor each Seller/Servicer's performance and, unless otherwise specified
in the applicable Prospectus Supplement, the Master Servicer will have the right
to remove and substitute a replacement Seller/ Servicer at any time if it
considers such removal to be in the best interest of Certificateholders. The
duties performed by the Seller/Servicers include collection and remittance of
principal and interest payments, administration of mortgage escrow accounts,
collection of insurance claims and, if necessary, foreclosure. In the event a
Selling and Servicing Contract is terminated by the Company for any reason, the
Master Servicer may procure a substitute Seller/Servicer, which may be an
affiliate of
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the Master Servicer. During the period necessary to effect the execution and
implementation of a contract with such substitute Seller/Servicer, all duties
and responsibilities of the Seller/Servicer under the terminated Selling and
Servicing Contract will be performed by the Master Servicer. In such event, the
Master Servicer will be entitled to retain the same Servicing Fee as was paid to
the Seller/ Servicer under such terminated Selling and Servicing Contract.
With respect to Series of Certificates as to which the Company will not act
as Master Servicer, pursuant to the Pooling Agreement the servicing of the
Mortgage Loans will be performed by the Servicer, and the Company (as
Certificate Administrator) will calculate amounts distributable to the
Certificateholders, prepare tax returns on behalf of the Trust Fund and provide
certain other administrative services specified in the Pooling Agreement. The
Servicer will generally perform the same services and duties as a
Seller/Servicer under a Selling and Servicing Agreement, as well as certain
services of the Master Servicer described herein. The Trustee or its agent will
monitor the Servicer's performance and, unless otherwise specified in the
applicable Prospectus Supplement, the Trustee will have the right to remove and
substitute a replacement servicer, which may be the Company or an affiliate of
the Company, to assume the servicing obligations of the Servicer at any time if
it considers such removal to be in the best interests of Certificateholders.
During the period necessary to effect the execution and implementation of a
contract with such substitute servicer, certain duties and responsibilities of
the Servicer under the Pooling Agreement will be performed by the Trustee. In
such event, the Trustee will be entitled to retain the same Servicing Fee as was
to be paid the Servicer under the Pooling Agreement. The obligation of the
Trustee or a replacement servicer to perform the servicing duties of the
Servicer will not, however, require such party to cure any defect with respect
to any Mortgage Loan, or substitute a new mortgage loan for or repurchase a
Mortgage Loan as to which there has been a breach of a representation or
warranty made by the Seller or to cure any breach of a servicing covenant made
by the former Servicer.
With respect to Series of Certificates as to which the Company will act as
Master Servicer, each Seller/Servicer will retain as its Servicing Fee a portion
of the interest payable on each Mortgage Loan serviced by it. The Servicing Fee
will be established by the Company either as a fixed rate or as a rate
calculated as the difference between interest at the Mortgage Interest Rate and
interest at the rate required to be passed through to the Master Servicer (the
"Net Rate"). Unless otherwise set forth in the applicable Prospectus Supplement,
the Servicing Fee will be no less than 0.25% per annum for each individual
Mortgage Loan serviced. In addition, unless otherwise set forth in the
Prospectus Supplement, the Seller/Servicer will retain late charges, assumption
fees and similar charges to the extent collected from Mortgagors. The Company
expects that such fees and charges will be negligible in amount. Unless
otherwise provided in the applicable Prospectus Supplement, the Master Servicer
will retain as its Master Servicing Fee an amount which will be calculated as a
per annum percentage for each Mortgage Loan plus an amount calculated to
reimburse the Master Servicer for the expenses required to be borne by it,
which, unless otherwise set forth in the applicable Prospectus Supplement, will
include the Trustee's fees and premiums on or other expenses relating to any
Mortgage Pool Insurance Policy and/or other credit enhancements.
With respect to Series of Certificates as to which the Company will not act
as Master Servicer, the Servicer will receive a Servicing Fee, as established in
the applicable Pooling Agreement, which, unless otherwise indicated in the
applicable Prospectus Supplement, will be no less than 0.25% per annum for each
individual Mortgage Loan serviced and the Certificate Administrator will retain
as its Certificate Administrator Fee an amount which will be calculated as a per
annum percentage for each Mortgage Loan plus an amount calculated to reimburse
the Certificate Administrator for payment by it of the Trustee's fees.
RETAINED YIELD
For certain Series, the Company or a Seller may retain a portion of the
interest payable on each Mortgage Loan (the "Retained Yield"). The Retained
Yield will either be set as a fixed rate or will be calculated by subtracting
the Master Servicing Fee and the Remittance Rate from the Net Rate or, if
applicable, by subtracting the Servicing Fee, the Certificate Administrator Fee
and the Remittance Rate from interest at the Mortgage Interest Rate. Unless
otherwise specified in the applicable
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Prospectus Supplement, any such Retained Yield and any earnings from
reinvestments thereof will not be part of the Trust Fund. The Company or the
Seller, as the case may be, may at its option transfer to a third party all or a
portion of the Retained Yield for a Series of Certificates.
PAYMENTS ON MORTGAGE LOANS; CUSTODIAL ACCOUNTS FOR P&I,
INVESTMENT ACCOUNT, CERTIFICATE ACCOUNT AND RESERVE
ACCOUNT
With respect to Series of Certificates as to which the Company will act as
Master Servicer, pursuant to the Servicing Contract each Seller/Servicer will
agree to establish and maintain for the Master Servicer a special custodial
account for principal and interest (the "Custodial Account for P&I"), into which
it will deposit on a daily basis (unless otherwise specified in the applicable
Prospectus Supplement) the following payments and collections received
subsequent to the Cut-Off Date (other than payments due on or before the Cut-Off
Date) with respect to the Mortgage Loans serviced by it:
(i) All payments on account of principal and interest, including
Principal Prepayments;
(ii) All net proceeds received in connection with the liquidation of
defaulted Mortgage Loans, by foreclosure or otherwise (hereinafter referred
to as "Liquidation Proceeds"), or under any applicable credit enhancements
or title, hazard or other insurance policy covering any Mortgage Loan, other
than proceeds to be applied to the restoration or repair of the related
Mortgaged Property (hereinafter referred to as "Insurance Proceeds");
(iii) Any Advances of such Seller/Servicer's funds (such Advances to be
deposited prior to the Withdrawal Date, as defined below); and
(iv) All proceeds of any Mortgage Loans or property acquired in respect
thereof repurchased as required for defects in documentation, breach of
representations or warranties, or otherwise.
Each Seller/Servicer has the option of either (i) depositing gross interest
collections in the Custodial Account for P&I, subject to withdrawal of its
related Servicing Fees, or (ii) deducting its Servicing Fees from gross interest
collections prior to deposit in such account.
On the Withdrawal Date or, with the Master Servicer's approval, on a daily
basis, each Seller/ Servicer may withdraw the following amounts from its
Custodial Account for P&I:
(i) Amounts received on particular Mortgage Loans as late payments of
principal or interest and respecting which the Seller/Servicer has made an
unreimbursed Advance;
(ii) Amounts to reimburse the Seller/Servicer for Advances the Master
Servicer has determined to be otherwise nonrecoverable; and
(iii) Amounts in respect of Servicing Fees previously deposited.
The Company will require that deposits in each Custodial Account for P&I be
held (a) in a trust account in the corporate trust department of the Trustee or
another financial institution approved by the Master Servicer such that the
rights of the Master Servicer, the Trustee and the Certificateholders will be
fully protected against the claims of any creditors of the Servicer and of any
creditors or depositors of the institution in which such account is maintained,
(b) in FDIC insured accounts (or other accounts with comparable insurance
coverage acceptable to the rating agency or agencies) created, maintained and
monitored by a Servicer or (c) in a separate non-trust account without FDIC or
other insurance in an institution having an unsecured long-term debt rating of
at least one of the two highest unsecured long-term debt ratings of the rating
agency or agencies (or such other institution acceptable to the rating agency or
agencies). If a Custodial Account for P&I is insured by the FDIC and at any time
the amount in such account exceeds the limits of insurance on such account, the
Seller/Servicer shall be required to withdraw such excess from such account and
remit it to the Master Servicer for deposit in the Investment Account described
below.
With respect to Series of Certificates as to which the Company will act as
Master Servicer and unless otherwise specified in the related Prospectus
Supplement, not later than the 20th day of each
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month (or the preceding business day if such 20th day is not a business day)
(the "Withdrawal Date"), the Master Servicer will withdraw or direct the
withdrawal from any funds in the Custodial Account for P&I maintained by each
Seller/Servicer an amount representing:
(i) Scheduled installments of principal and interest on the Mortgage
Loans received or advanced by the Seller/Servicer which were due on the
first day of the current month, net of Servicing Fees due the
Seller/Servicer and less any amounts to be withdrawn later by the Master
Servicer from any applicable Buydown Fund Account;
(ii) Proceeds of liquidations of Mortgage Loans received by the
Seller/Servicer in the immediately preceding calendar month, with interest
to the date of liquidation, net of Servicing Fees due the Seller/Servicer
and less any amounts to be withdrawn later by the Master Servicer from any
applicable Buydown Fund Account;
(iii) Principal due to Payoffs received during the period from the 15th
of the immediately preceding calendar month through the 14th of such
calendar month; in each case with interest at the applicable Pass-Through
Rate attributable to interest paid by the Mortgagor through the date of the
Payoff (provided, however, that in the case of Payoffs received between the
first day and the 14th day of any month, interest accrued from the first day
of such month to the date of such Payoff will not be paid to the
Certificateholders), less any amounts to be withdrawn later by the Master
Servicer from any applicable Buydown Fund Account; and
(iv) Curtailments received by the Seller/Servicer on such Mortgage Loans
in the immediately preceding calendar month.
All amounts withdrawn from the Custodial Accounts for P&I, together with any
Insurance Proceeds or Liquidation Proceeds (including any amounts paid in
respect of repurchase obligations on defective Mortgage Loans or otherwise) not
otherwise applied by Seller/Servicers and amounts withdrawn from any Buydown
Fund Account, if applicable, shall be immediately deposited into the Investment
Account.
Under the Pooling Agreement for each Series of Certificates as to which the
Company will act as Master Servicer, the Master Servicer or the related
Seller/Servicer is permitted to make the following withdrawals from the Buydown
Fund Account or Custodial Account for P&I, as applicable:
(i) To deposit in the Investment Account the amount necessary in order
to supplement payments received on Buydown Loans;
(ii) In the event of a Payoff of any Buydown Loan, to apply the
remaining related Buydown Funds to reduce the required amount of such Payoff
(or, if the Mortgagor has made a Payoff equal in amount to the total unpaid
principal balance, to refund such remaining Buydown Funds to the person
entitled to receive such Buydown Funds);
(iii) In the event of foreclosure or liquidation of any Buydown Loan, to
deposit the remaining related Buydown Funds in the Investment Account; and
(iv) To clear and terminate the portion of any account representing
Buydown Funds.
Unless otherwise specified in the applicable Prospectus Supplement, the
Master Servicer may invest funds withdrawn from the Custodial Accounts for P&I
each month and remitted to the Master Servicer, as well as any Insurance
Proceeds, Liquidation Proceeds and Buydown Funds, for its own account and at its
own risk, for the period from the Withdrawal Date to the next Distribution Date,
or for such longer or shorter period as may be specified in the applicable
Prospectus Supplement (in each case, the "Investment Period"). Investment of
such funds shall be made through an account in the name of the Master Servicer
and the Trustee (the "Investment Account"), which shall be maintained in the
trust department of a bank acceptable to any applicable rating agency or
agencies for the Series of Certificates. The Investment Account may be a
commingled account with other similar accounts maintained by the Master Servicer
and invested for its own account; provided, that the maintenance of such a
commingled account has been approved by any applicable rating agency or agencies
for the Series of Certificates. Unless otherwise specified in the applicable
Prospectus Supplement, the investment of funds in the Investment Account shall
be limited to the investments described below.
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On the last day of the Investment Period, the Master Servicer will withdraw
from the Investment Account all funds due to be distributed to
Certificateholders, and shall deposit such funds, together with any Advances
required to be made by it, in the Certificate Account described below.
Unless otherwise specified in the applicable Prospectus Supplement, the
investment of funds in an Investment Account shall be limited to one or more of
the following investments ("Eligible Investments") which shall in no event
mature later than the next Distribution Date:
(i) Obligations of, or guaranteed as to principal and interest by, the
United States or any agency or instrumentality thereof, when such
obligations are backed by the full faith and credit of the United States;
(ii) Repurchase agreements on obligations of, or guaranteed as to
principal and interest by, the United States or any agency or
instrumentality thereof, when such obligations are backed by the full faith
and credit of the United States; provided that the unsecured obligations of
the party agreeing to repurchase such obligations are at the time assigned
such ratings as may be required by the applicable rating agency or agencies
for the Series of Certificates at the date of acquisition thereof;
(iii) Federal funds, certificates of deposit, time deposits and bankers'
acceptances of any bank or trust company incorporated under the laws of the
United States or any state thereof; provided that the debt obligations of
such bank or trust company (or, in the case of the principal bank in a bank
holding company system, debt obligations of the bank holding company) have
been assigned such ratings as may be required by the applicable rating
agency or rating agencies for the Series of Certificates at the date of
acquisition thereof;
(iv) Obligations of, or guaranteed by, any state of the United States or
the District of Columbia receiving the highest long-term debt ratings
available for such securities by the applicable rating agency or rating
agencies for the Series of Certificates;
(v) Commercial paper of any corporation incorporated under the laws of
the United States or any state thereof which on the date of acquisition has
been assigned such ratings as may be required by the applicable rating
agency or rating agencies for the Series of Certificates; or
(vi) Securities (other than stripped bonds or stripped coupons) bearing
interest or sold at a discount that are issued by any corporation
incorporated under the laws of the United States or any state thereof and
rated by each applicable rating agency or rating agencies for the Series of
Certificates in its highest long-term unsecured rating category; provided,
however, that securities issued by any such corporation will not be
investments to the extent that investment therein would cause the
outstanding principal amount of securities issued by such corporation that
are then held as part of the Investment Account or the Certificate Account
to exceed 20% of the aggregate principal amount of all Eligible Investments
then held in the Investment Account and the Certificate Account;
(vii) Units of taxable money market funds or mutual funds, which funds
have been rated by each applicable rating agency or rating agencies for the
Series of Certificates in its highest rating category or which have been
designated in writing by each such rating agency or rating agencies as
Eligible Investments with respect to this definition; or
(viii) such other investments bearing interest or sold at a discount the
investment in which will not, as evidenced by a letter from each applicable
rating agency or rating agencies for the Series of Certificates, result in
the downgrading or withdrawal of the rating or ratings assigned to the
Certificates by such rating agency or rating agencies.
Not later than the Distribution Date for a Series of Certificates as to
which the Company will act as Master Servicer, the Master Servicer will withdraw
from the Investment Account all amounts required to be distributed on such
Distribution Date and deposit such amounts into a separate non-interest-bearing
trust account (the "Certificate Account") in the corporate trust department of
the Trustee or another depository institution acceptable to the applicable
rating agency or rating agencies.
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Under the Pooling Agreement for each Series of Certificates as to which the
Company will act as Master Servicer, the Master Servicer will be authorized to
make the following withdrawals from the Certificate Account:
(i) To reimburse itself or the applicable Servicer for Advances made
pursuant to the Pooling Agreement or a Selling and Servicing Contract, the
Master Servicer's right to reimburse itself or such Servicer pursuant to
this paragraph (i) being limited to amounts received on particular Mortgage
Loans (including, for this purpose, Insurance Proceeds and Liquidation
Proceeds) which represent late recoveries of principal and/or interest
respecting which any such Advance was made;
(ii) To reimburse itself or the applicable Servicer for amounts expended
by or for the account of the Master Servicer pursuant to the Pooling
Agreement or amounts expended by such Servicer pursuant to the Selling and
Servicing Contracts in connection with the restoration of property damaged
by an Uninsured Cause (as defined in the Pooling Agreement) or in connection
with the liquidation of a Mortgage Loan;
(iii) To pay to itself the Master Servicing Fee, net of Compensating
Interest reduced by Payoff Earnings and Payoff Interest (each as defined
herein or in the Pooling Agreement), as to which no prior withdrawals from
funds deposited by the Master Servicer have been made;
(iv) To reimburse itself or the applicable Servicer for advances which
the Master Servicer has determined to be Nonrecoverable Advances;
(v) To pay to itself reinvestment earnings deposited or earned in the
Certificate Account (net of reinvestment losses) to which it is entitled and
to reimburse itself for expenses incurred by and reimbursable to it pursuant
to the Pooling Agreement;
(vi) To deposit amounts in the Investment Account representing amounts in
the Certificate Account not required to be on deposit therein at the time of
such withdrawal; and,
after making or providing for the above withdrawals,
(vii) To clear and terminate the Certificate Account upon liquidation of
all Mortgage Loans or other termination of the Trust Fund.
The Master Servicer may also establish with the Trustee for a Series of
Certificates a Reserve Account if required to assure timely distributions of
principal and interest, as a condition to obtaining a specified rating for such
Certificates or to provide for the expenses of the Trust Fund. Any such Reserve
Account so established will be described in the applicable Prospectus
Supplement.
With respect to Series of Certificates as to which the Company will not act
as Master Servicer, unless otherwise specified in the applicable Prospectus
Supplement, the Custodial Account for P&I, the Buydown Fund Account and the
Reserve Account will be established by the Servicer, and the required and
permitted deposits into and withdrawals from such accounts set forth above will
be made by the Servicer. The Servicer shall deposit any required Advances in the
Custodial Account for P&I on the Withdrawal Date. The withdrawal of funds and
their deposit into the Investment Account on the Withdrawal Date, as described
above, will also be effected by the Servicer. The Investment Account described
above will be established by the Certificate Administrator and the Trustee, and
investments of amounts therein in Eligible Investments will be directed by the
Certificate Administrator for its own account and at its own risk. The
Certificate Administrator will make the required withdrawal from the Investment
Account on the last day of the Investment Period for deposit in the Certificate
Account, as described above. Authorized withdrawals from the Certificate Account
for the purposes described above will be made by the Certificate Administrator.
Other than as set forth in this paragraph, unless the context otherwise
requires, references above to "Master Servicer" or "Seller/ Servicer", and to
"Master Servicing Fee" shall refer instead to "Servicer" and "Servicing Fee",
respectively.
DISTRIBUTIONS ON CERTIFICATES
On each Distribution Date commencing in the month following the month in
which the Cut-Off Date occurs (or such other time as may be set forth in the
applicable Prospectus Supplement), the
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Trustee, the Master Servicer or the Certificate Administrator, as applicable,
acting on behalf of the Trustee or the Paying Agent will withdraw from the
Certificate Account and distribute to Certificateholders of record on the
applicable Record Date, and to holders of residual interests, if any, who are
entitled to receive such distributions pursuant to the terms of the applicable
Pooling Agreement, to the extent of their entitlement thereto, an amount in the
aggregate equal to the sum of:
(i) All scheduled payments of principal and interest at the Pass-Through
Rate either collected from the Mortgagors on the Mortgage Loans prior to the
related Determination Date (as defined below) or advanced by the Master
Servicer, the Servicer or the Seller/Servicers;
(ii) Scheduled amounts of Buydown Funds respecting Buydown Loans (not
withdrawn and remitted by the Servicer or the related Seller/Servicer, as
applicable);
(iii) All Curtailments received on the Mortgage Loans in the month prior
to the month in which the Distribution Date occurs (the "Distribution
Period");
(iv) All Insurance Proceeds or Liquidation Proceeds received during the
Distribution Period, together with interest at the applicable Pass-Through
Rate to the extent described herein under "Yield Considerations--Effective
Interest Rate"; and
(v) All Payoffs received during the period from the 15th day of the
immediately preceding calendar month through the 14th day of such calendar
month; in each case together with interest at the applicable Pass-Through
Rate to the extent described under "Yield Considerations-- Effective
Interest Rate" herein;
less the sum of:
(a) Previously unreimbursed Advances made by the Master Servicer, the
Seller/Servicers or the Servicer on Mortgage Loans which are considered by
the Master Servicer or the Servicer, as the case may be, as of the
Distribution Date to be nonrecoverable;
(b) Amounts expended by the Seller/Servicers, the Master Servicer or the
Servicer in connection with the preservation or restoration of property
securing Mortgage Loans which have been liquidated and related liquidation
expenses; and
(c) Amounts representing other expenses of the Master Servicer, the
Seller/Servicers or the Servicer, reimbursable pursuant to the Pooling
Agreement.
In addition, if the Master Servicer with respect to Series of Certificates
as to which the Company will act as Master Servicer, or the Servicer with
respect to Series of Certificates as to which the Company will not act as Master
Servicer, is obligated to do so under the applicable Pooling Agreement, the
Master Servicer or the Servicer, as the case may be, shall include with any such
distribution an Advance equal to principal payments and interest payments
(adjusted to the applicable Pass-Through Rate or Rates) due on the first day of
the month in which the Distribution Date occurs and not received as of the close
of business on the Withdrawal Date, subject to such Master Servicer's or
Servicer's determination that such payments are recoverable from future payments
or collections on the Mortgage Loans, any subordination feature or Insurance
Proceeds or Liquidation Proceeds. See "--Advances" below.
The method of allocating the amount withdrawn from the Certificate Account
on each Distribution Date to principal and interest (or, where applicable, to
principal only or interest only) on a particular Series of Certificates will be
described in the applicable Prospectus Supplement. Distributions of interest on
each Class of Certificates will be made prior to distributions of principal
thereon. Each Class of Certificates may have a different Remittance Rate, and
each Remittance Rate may be fixed, variable or adjustable. The applicable
Prospectus Supplement will specify the Remittance Rate for each Class, or in the
case of a variable or adjustable Remittance Rate, the initial Remittance Rate
and the method for determining the Remittance Rate.
On each Distribution Date for a Series of Certificates, the Trustee, the
Master Servicer or the Certificate Administrator, as applicable, on behalf of
the Trustee or the Paying Agent, as the case may be, will distribute to each
holder of record on the Record Date, an amount equal to the Percentage Interest
(as defined below) represented by the Certificate held by such holder multiplied
by the sum of
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the Class Principal Distribution Amount (as defined below) for such Class and,
if such Class is entitled to payments of interest on such Distribution Date, one
month's interest at the applicable Remittance Rate on the principal balance or
notional principal balance of such Class specified in the applicable Prospectus
Supplement, less (unless otherwise specified in the related Prospectus
Supplement) such Class's pro rata share of the sum of (i) the shortfalls in
collections of interest on Payoffs with respect to which distribution is to be
made on such Distribution Date, if any, (ii) the amount of any deferred interest
added to the principal balance of the Mortgage Loans and/or the outstanding
balance of the Certificates on the related Due Date, (iii) one month's interest
at the applicable Pass-Through Rate on the amount of any Curtailments received
on the Mortgage Loans in the month preceding the month of the distribution and
(iv) any other interest shortfalls (including, without limitation, shortfalls
arising out of application of the Soldiers' and Sailors' Relief Act or similar
legislation or regulations as in effect from time to time) allocable to
Certificateholders which are not covered by advances or applicable credit
enhancements, in each case in such amount as is allocated to such Class on the
basis set forth in the related Prospectus Supplement. The "Percentage Interest"
represented by a Certificate of a particular Class will be equal to the
percentage obtained by dividing the initial principal balance or notional amount
of such Certificate by the aggregate initial amount or notional amount of all
the Certificates of such Class. The "Class Principal Distribution Amount" for a
Class of Certificates for any Distribution Date will be the portion, if any, of
the Principal Distribution Amount (as defined in the related Prospectus
Supplement) allocable to such Class for such Distribution Date, as described in
the related Prospectus Supplement.
In the case of a Series of Certificates which includes two or more Classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof with respect to each such
Class shall be as provided in the related Prospectus Supplement. Distributions
in respect of principal of any Class of Certificates will be made on a pro rata
basis among all of the Certificates of such Class.
With respect to Series of Certificates as to which the Company will act as
Master Servicer and except as otherwise provided in the applicable Pooling
Agreement, not later than the tenth day preceding each Distribution Date (the
"Determination Date"), the Master Servicer will furnish to the Trustee (and to
any Certificateholder upon request) a statement setting forth the aggregate
amount to be distributed on such Distribution Date to each Class of
Certificates, on account of principal and/or interest, stated separately. With
respect to Series of Certificates as to which the Company will not act as Master
Servicer, the Certificate Administrator will provide the statements described in
the preceding sentence.
REPORTS TO CERTIFICATEHOLDERS
For each Series of Certificates, with each distribution to
Certificateholders from the Certificate Account, the Trustee, or the Master
Servicer or Certificate Administrator, as applicable, on behalf of the Trustee,
will forward to each Certificateholder a statement or statements with respect to
the related Trust Funds setting forth the information specifically described in
the related Pooling Agreement, which generally will include the following with
respect to such Series of Certificates:
(i) the beginning principal balance or notional principal balance
representing the ending balance from the prior statement;
(ii) the amount, if any, of such distribution principal;
(iii) the amount, if any, of such distribution allocable to interest on
the Mortgage Loans accrued at the applicable Pass-Through Rate on the
beginning principal balance or notional principal balance, and, with respect
to a Series of Certificates where one or more Classes of such Series are
subordinated in right of payment to one or more other Classes of such
Series, the amount, if any, of any shortfall in the amount of interest and
principal distributed;
(iv) the total amount distributed;
(v) the ending principal balance or notional principal balance after the
application in (ii) above; and
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(vi) the then applicable Pass-Through Rate or weighted average
Pass-Through Rate, calculated as of the close of business on the related
Determination Date.
Upon request, a Certificateholder may receive a monthly report which sets
forth (i) the amount of the distribution for such month allocable to Principal
Prepayments, miscellaneous post-liquidation collections and Conversion Fees,
(ii) Mortgage Loan delinquencies, indicating the number and aggregate principal
amount of Mortgage Loans delinquent one, two and three months, as well as the
book value of any Mortgaged Property acquired through foreclosure, deed in lieu
of foreclosure or other exercise of rights respecting the Trustee's security
interest in the Mortgage Loans, (iii) the amount of remaining coverage under any
applicable credit enhancements, stated separately, as of the close of business
on the applicable Determination Date and (iv) the sum of the Master Servicing
Fee and the aggregate Servicing Fees for the month.
In addition, by the date required by applicable tax law of each year, the
Master Servicer with respect to Series of Certificates as to which the Company
will act as Master Servicer, or the Certificate Administrator with respect to
Series of Certificates as to which the Company will not act as Master Servicer,
will furnish a report to each Certificateholder of record at any time during the
preceding calendar year as to the aggregate of amounts reported pursuant to (ii)
in the second preceding paragraph above, plus information with respect to the
amount of servicing compensation for the related Mortgage Pool, the value of any
property acquired by the Trustee through abandonment or foreclosure, deferred
interest added to the principal balance or the notional principal balance of
each Class of Certificates, as applicable, and such other customary information
as the Master Servicer or Certificate Administrator, as applicable, determines
to be necessary to enable Certificateholders to prepare their tax returns for
such calendar year or, in the event such person was a Certificateholder of
record during a portion of such calendar year, for the applicable portion of
such a year.
ADVANCES
With respect to Series of Certificates as to which the Company will act as
Master Servicer and unless otherwise stated in the applicable Prospectus
Supplement, the Master Servicer will be obligated under the Pooling Agreement to
make Advances (to the extent not previously advanced by the Seller/Servicers as
described below) in amounts sufficient to cover any deficiency between the funds
scheduled to be received on the Mortgage Loans during the Distribution Period,
and amounts withdrawn from the Custodial Accounts for P&I on each Withdrawal
Date during the Distribution Period and from any Buydown Fund Account; provided,
however, that the Master Servicer will be obligated to make such Advances only
to the extent any such Advance, in the judgment of the Master Servicer made on
the Determination Date, will be reimbursable from any applicable credit
enhancements, from Mortgagor payments or from Liquidation Proceeds or Insurance
Proceeds of the related Mortgage Loans. In connection with certain credit
enhancements, the Master Servicer may make other advances, such as to pay
insurance premiums, real estate property taxes, protection and preservation
taxes, sales expenses and foreclosure costs including court costs and reasonable
attorneys' fees in connection with a Mortgage Pool Insurance Policy, which shall
also constitute "Advances".
With respect to Series of Certificates as to which the Company will act as
Master Servicer and unless otherwise stated in the applicable Prospectus
Supplement, each Seller/Servicer will be obligated to advance on the Withdrawal
Date its own funds or funds from the Custodial Account for P&I maintained by it
equal to the amount of any deficiency between the amount in such Custodial
Account for P&I on the Withdrawal Date and the amount due to be remitted to the
Master Servicer on such date. Each Seller/Servicer will advance only funds which
the Master Servicer anticipates will be ultimately reimbursable from the sources
discussed above. To the extent the Seller/Servicers make such Advances, the
Master Servicer will be relieved of its obligation, if any, to make Advances
with respect to the Mortgage Loans respecting which such amounts were advanced.
If an Advance made by any Seller/Servicer later proves to be unrecoverable, the
Master Servicer will cause such Seller/ Servicer to be reimbursed from funds in
the Certificate Account.
With respect to Series of Certificates as to which the Company will not act
as Master Servicer and unless otherwise stated in the applicable Prospectus
Supplement, the Servicer will be obligated under the Pooling Agreement to
advance on the Withdrawal Date its own funds or funds from the Custodial
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Account for P&I equal to the amount of any deficiency between the amount in such
Custodial Account for P&I on the Withdrawal Date and the amount due to be
remitted to the Certificate Administrator on such date. The Servicer will be
obligated to make such Advances only to the extent any such Advance, in the
judgment of the Servicer made on the related Determination Date, will be
reimbursable from any applicable credit enhancements, from Mortgagor payments or
from Liquidation Proceeds or Insurance Proceeds of the related Mortgage Loans.
In connection with certain credit enhancements, the Master Servicer may make
other advances, such as to pay insurance premiums, real estate property taxes,
protection and preservation taxes, sales expenses and foreclosure costs
including court costs and reasonable attorneys' fees in connection with a
Mortgage Pool Insurance Policy, which shall also constitute "Advances".
COLLECTION AND OTHER SERVICING PROCEDURES
With respect to Series of Certificates as to which the Company will act as
Master Servicer, under the Selling and Servicing Contract each Seller/Servicer
agrees to make reasonable efforts to collect all payments called for under the
Mortgage Notes and will, consistent with the Selling and Servicing Contract, the
Pooling Agreement for any Series and any applicable credit enhancements, follow
such collection procedures as it follows or would follow with respect to
mortgage loans held for its own account which are comparable to the Mortgage
Loans. With respect to Series of Certificates as to which the Company will not
act as Master Servicer and the servicing of the Mortgage Loans will be performed
by the Servicer, the Pooling Agreement will require the Servicer to make the
same efforts to collect payments on the Mortgage Notes and follow the same
collection procedures as would be required of the Servicer if it were a
Seller/Servicer under a Selling and Servicing Contract. Consistent with the
above, each Seller/Servicer with respect to Series of Certificates as to which
the Company will act as Master Servicer, or the Servicer with respect to Series
of Certificates as to which the Company will not act as Master Servicer, may, in
its discretion, (i) waive any prepayment charge, assumption fee, late payment
charge or any other charge in connection with a Principal Prepayment on a
Mortgage Loan and (ii) only upon receiving authorization from the insurer on any
applicable Mortgage Pool Insurance Policy or Primary Insurance Policy, and with
respect to each Seller/Servicer, from the Master Servicer, arrange with a
Mortgagor a schedule for the liquidation of delinquencies running for no more
than 180 days after the first delinquent due date for payment on any Mortgage
Note. Such authorization shall be given by the Master Servicer or the Servicer
only upon determining that the coverage of such Mortgage Loan by any applicable
credit enhancement will not be affected. In the event of any such arrangement,
the Master Servicer's obligation to make Advances on the related Mortgage Loan,
if any, shall continue during the scheduled period to the extent such Advances
are not made by the Seller/Servicers.
With respect to Series of Certificates as to which the Company will act as
Master Servicer, the Selling and Servicing Contract with each Seller/Servicer
requires that such Seller/Servicer enforce "due-on-sale" clauses, where
applicable, with respect to the Mortgage Loans on the same basis as with loans
in its own portfolio, provided that such clause is not to be enforced if it is
unenforceable under applicable law or the terms of the related Mortgage Note or
if the coverage of any related credit enhancement would be adversely affected by
such enforcement. Subject to the above, if a Mortgaged Property has been or is
about to be conveyed by the Mortgagor, the Seller/Servicer or the Master
Servicer will be authorized to take or enter into an assumption agreement,
pursuant to which the Mortgagor remains liable under the Mortgage Note, from or
with the person to whom such Mortgaged Property has been or is about to be
conveyed. Any fees collected by a Seller/Servicer for entering into an
assumption agreement will be retained by it as additional servicing
compensation. With respect to Series of Certificates as to which the Company
will not act as Master Servicer and the servicing of the Mortgage Loans will be
performed by the Servicer, the Pooling Agreement will require the Servicer to
enforce any "due-on-sale" clause in the instances and to the extent described in
the first sentence of this paragraph, and the Servicer will be authorized to
take or enter into an assumption agreement and retain any fees collected for
entering into an assumption agreement as additional servicing compensation to
the same extent as a Seller/Servicer will be so authorized under a Selling and
Servicing Contract.
With respect to Series of Certificates as to which the Company will act as
Master Servicer, the Master Servicer may, or upon receiving authorization from
the Master Servicer, a Seller/Servicer may,
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in connection with any such conveyance and only upon assurance that the related
Mortgage Loan will continue to be covered by any applicable credit enhancement,
release the original Mortgagor from liability upon the Mortgage Note and
substitute the new Mortgagor as liable thereon. If required by law or the terms
of the related Mortgage Note, the Master Servicer may allow such release and
substitution without the consent of the provider of any applicable credit
enhancement. In connection with any such assumption or substitution, the
Mortgage Interest Rate borne by the related Mortgage Note may not be changed.
With respect to Series of Certificates as to which the Company will not act as
Master Servicer and the servicing of the Mortgage Loans will be performed by the
Servicer, the Servicer may in connection with any such conveyance release the
original Mortgager from liability upon the Mortgage Note and substitute a new
Mortgagor as liable thereon in the instances and to the extent described above
in this paragraph with respect to the Master Servicer.
With respect to Series of Certificates as to which the Company will act as
Master Servicer, under each Selling and Servicing Contract the Seller/Servicer
is required to establish and maintain a Custodial Account for Reserves into
which Mortgagors deposit amounts sufficient to pay taxes, assessments, hazard
insurance premiums or comparable items to the extent it is consistent with such
Seller/Servicer's normal practices to collect payments from Mortgagors to cover
tax and insurance expenses. Withdrawals from the Custodial Account for Reserves
maintained for Mortgagors may be made to effect timely payment of taxes,
assessments and hazard insurance premiums or comparable items, to reimburse the
Seller/Servicer out of related assessments for maintaining hazard insurance, to
refund to Mortgagors amounts determined to be overages, to pay interest to
Mortgagors on balances in the Custodial Account for Reserves, if required, to
repair or otherwise protect the Mortgaged Property and to clear and terminate
the Custodial Account for Reserves. Each Seller/ Servicer is solely responsible
for administration of the Custodial Account for Reserves and is expected to make
Advances to such account when a deficiency exists therein. With respect to
Series of Certificates as to which the Company will not act as Master Servicer
and the servicing of the Mortgage Loans will be performed by the Servicer, the
Servicer will be required to establish and maintain a Custodial Account for
Reserves and to make Advances to such account, and will be authorized to make
withdrawals from the Custodial Account for Reserves, in the instances and to the
extent a Seller/ Servicer would be so required and authorized under a Selling
and Servicing Contract.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to Series of Certificates as to which the Company will act as
Master Servicer, the Seller/Servicers' primary compensation for their servicing
activities will come from the payment to them or the retention by them, of an
amount equal to the Servicing Fee for each Mortgage Loan. The Master Servicer's
primary compensation for supervising the mortgage servicing and advancing
certain expenses of a Mortgage Pool will come from the payment to it, of an
amount equal to the Master Servicing Fee with respect to each Mortgage Loan in
such Mortgage Pool. The Master Servicing Fee and the Servicing Fee with respect
to each payment of interest received on a Mortgage Loan will equal one-twelfth
of the annual Master Servicing Fee or Servicing Fee annual percentage, as
applicable, set forth in the Pooling Agreement multiplied by the outstanding
principal balance of such Mortgage Loan during the month for which such amount
is computed. In addition to the Servicing Fee and Master Servicing Fee, the
Company or a Seller may retain as its Retained Yield the right to a portion of
the interest payable on each Mortgage Loan calculated by subtracting the
applicable Pass-Through Rate and related Servicing Fee and Master Servicing Fee
from the applicable Mortgage Interest Rate.
With respect to Series of Certificates as to which the Company will not act
as Master Servicer and the servicing of the Mortgage Loans will be performed by
the Servicer, the Servicer's primary compensation for its servicing activities
will come from the payment to it or its retention, with respect to each interest
payment on a Mortgage Loan, of an amount equal to the Servicing Fee for such
Mortgage Loan. The Servicing Fee with respect to each payment of interest
received on a Mortgage Loan will equal one-twelfth of the Servicing Fee annual
percentage set forth in the Pooling Agreement multiplied by the outstanding
principal balance of such Mortgage Loan during the month for which such amount
is computed. In addition to the Servicing Fee, the Company or a Seller may
retain as its
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Retained Yield the right to a portion of the interest payable on each Mortgage
Loan calculated by subtracting the related Servicing Fee, the Certificate
Administrator Fee and the Remittance Rate from the applicable Mortgage Interest
Rate.
With respect to Series of Certificates as to which the Company will not act
as Master Servicer and the servicing of the Mortgage Loans will be performed by
the Servicer, the Certificate Administrator's compensation for its
administrative services will come from the payment to it, with respect to each
interest payment on a Mortgage Loan, of an amount equal to the Certificate
Administrator Fee for such Mortgage Loan. The Certificate Administrator Fee with
respect to each payment of interest received on a Mortgage Loan will equal
one-twelfth of the annual Certificate Administrator Fee annual percentage set
forth in the Pooling Agreement multiplied by the outstanding principal balance
of such Mortgage Loan during the month for which such amount is computed,
subject to any minimum fee as will be set forth in the applicable Prospectus
Supplement.
As principal payments are made on each Mortgage Loan, the outstanding
principal balance of the Mortgage Loans will decline, and thus compensation to
the Seller/Servicers and the Master Servicer, or to the Servicer and the
Certificate Administrator with respect to Series of Certificates for which the
Company will not act as Master Servicer, and any Retained Yield will decrease as
the Mortgage Loans amortize (subject to any minimum levels of such compensation
set forth in the applicable Prospectus Supplement). Principal Prepayments and
liquidations of Mortgage Loans prior to maturity will also cause servicing
compensation to the Seller/Servicers and the Master Servicer, or to the Servicer
and the Certificate Administrator, as applicable, and any Retained Yield to
decrease (subject to any minimum levels of such compensation set forth in the
applicable Prospectus Supplement).
In addition to their primary compensation, the Seller/Servicers or the
Servicer, as applicable, will retain all prepayment fees, assumption fees and
late payment charges, to the extent collected from Mortgagors. The
Seller/Servicers' or the Servicer's income from such charges will depend upon
their origination and servicing policies.
With respect to Series of Certificates as to which the Company will act as
Master Servicer, the Master Servicer will pay all expenses incurred in
connection with its activities as Master Servicer (subject to limited
reimbursement as described below), which, unless otherwise specified in the
applicable Prospectus Supplement, will include payment of the fees and
disbursements of the Trustee, payment of premiums of any Mortgage Pool Insurance
Policy, Special Hazard Insurance Policy, certificate insurance policy, Fraud
Bond or Bankruptcy Bond or the costs of obtaining or maintaining any Letter of
Credit or Reserve Fund and payment of expenses incurred in connection with
distributions and reports to Certificateholders of each Series.
With respect to Series of Certificates as to which the Company will not act
as Master Servicer and the servicing of the Mortgage Loans will be performed by
the Servicer, the Servicer will pay certain expenses incurred in connection with
its activities as Servicer (subject to limited reimbursement as described
below), which, unless otherwise specified in the applicable Prospectus
Supplement, will include payment of premiums of any Mortgage Pool Insurance
Policy, Special Hazard Insurance Policy, certificate insurance policy, Fraud
Bond or Bankruptcy Bond or the costs of maintaining any Letter of Credit or
Reserve Fund. The Certificate Administrator will pay the fees and disbursements
of the Trustee.
As set forth in the preceding section, the Master Servicer and the
Seller/Servicers, or the Servicer, as applicable, are entitled to reimbursement
for certain expenses incurred by them in connection with the liquidation of
defaulted Mortgage Loans. Certificateholders of such Series will suffer no loss
by reason of such expenses to the extent claims are paid under any applicable
credit enhancements. In the event, however, that claims are not paid under such
policies or alternative coverages, or if coverage has been exhausted,
Certificateholders of such Series will suffer a loss to the extent that the
proceeds of liquidation of a defaulted Mortgage Loan, after reimbursement of the
Master Servicer's and the Seller/Servicer's expenses, or the Servicer's
expenses, as applicable, are less than the principal balance of such Mortgage
Loan. In addition, the Master Servicer and the Seller/Servicers, or the
Servicer, as applicable, are entitled to reimbursement of expenditures incurred
by them in connection with the restoration of a damaged Mortgaged Property, such
right of reimbursement being prior to the rights of Certificateholders to
receive any related Insurance Proceeds or Liquidation Proceeds.
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EVIDENCE AS TO COMPLIANCE
Except as may be specified in the applicable Prospectus Supplement, each
Pooling Agreement will provide that on or before April 30 of each year,
beginning on the first April 30 that is at least six months after the Cut-Off
Date, one or more firms of independent public accountants will furnish
statements to the Trustee to the effect that, in connection with such firm's
examination of the financial statements of the Master Servicer or the Servicer,
as applicable, as of the previous December 31, nothing came to such firm's
attention that indicated that the Master Servicer or the Servicer, as
applicable, was not in compliance with specified sections of the Pooling
Agreement, except for (i) such exceptions as such firm believes to be immaterial
and (ii) such other exceptions as are set forth in such statement.
Except as may be provided in the applicable Prospectus Supplement, each
Pooling Agreement will also provide for delivery to the Trustee of an annual
statement signed by an officer of the Master Servicer or the Servicer, as
applicable, to the effect that, based on a review of the Master Servicer's or
the Servicer's activities during the preceding calendar year, to the best of
such officer's knowledge the Master Servicer or the Servicer, as applicable, has
fulfilled its obligations under the Pooling Agreement throughout the preceding
year or, if there has been a default in the fulfillment of any such obligations,
specifying each such default and the nature and status thereof.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE
SERVICER, THE CERTIFICATE ADMINISTRATOR AND THE COMPANY
Except as may otherwise be specified in the applicable Prospectus
Supplement, the Pooling Agreement for each Series will provide that the Company
may not resign from its obligations and duties thereunder as Master Servicer or
Certificate Administrator, as applicable, or that the Servicer, where
applicable, may not resign from its obligations and duties thereunder, except
upon determination that its duties thereunder are no longer permissible under
applicable law. No such resignation will become effective until the Trustee or a
successor has assumed the Company's master servicing obligations and duties, or,
where applicable, the Servicer's obligations and duties, under such Pooling
Agreement.
The Pooling Agreement for each Series will provide that neither the Company
nor the Master Servicer, or that, where applicable, neither the Servicer nor the
Certificate Administrator, nor any director, officer, employee or agent of the
Company, the Master Servicer, the Servicer and the Certificate Administrator
(where applicable) (the "Indemnified Parties") will be under any liability to
the Trust Fund or the Certificateholders or the Trustee, any Seller/Servicer or
others for any action taken by any Indemnified Party, any Seller/Servicer or the
Trustee in good faith pursuant to the Pooling Agreement, or for errors in
judgment; provided, however, that neither the Company, the Master Servicer, the
Servicer nor the Certificate Administrator nor any such person will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties thereunder. The Pooling
Agreement relating to each such Series will further provide that any Indemnified
Party is entitled to indemnification by the Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Pooling Agreement or the Certificates, other than any
loss, liability or expense related to any specific Mortgage Loan or Mortgage
Loans (except any such loss, liability or expense otherwise reimbursable
pursuant to the Pooling Agreement) and any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, the Pooling Agreement for each
such Series will provide that neither the Company nor the Master Servicer or,
where applicable, neither the Servicer nor the Certificate Administrator, is
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to its responsibilities under the Pooling Agreement and which in
its opinion may involve it in any expense or liability. The Company or the
Master Servicer or, where applicable, the Servicer or the Certificate
Administrator, may, however, in its discretion, undertake any such action which
it may deem necessary or desirable with respect to the Pooling Agreement and the
rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting
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therefrom will be expenses, costs and liabilities of the Trust Fund, and the
Company or the Master Servicer or, where applicable, the Servicer or the
Certificate Administrator, will be entitled to be reimbursed therefor and to
charge the Certificate Account.
Any person into which the Master Servicer, the Servicer or the Certificate
Administrator may be merged, converted or consolidated, or any person resulting
from any merger, conversion or consolidation to which the Master Servicer, the
Servicer or the Certificate Administrator is a party, or any person succeeding
to the business of the Master Servicer, the Servicer or the Certificate
Administrator, will be the successor of the Master Servicer, the Servicer or the
Certificate Administrator, respectively, under the Pooling Agreement.
EVENTS OF DEFAULT
With respect to Series of Certificates as to which the Company will act as
Master Servicer, events of Default under the Pooling Agreement for each such
Series, unless otherwise specified in the applicable Prospectus Supplement, will
include, without limitation, (i) any failure by the Master Servicer to make a
required deposit to the Certificate Account or, if the Master Servicer is the
Paying Agent, to distribute to Certificateholders of any Class any required
payment which continues unremedied for ten days after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by the holders of Certificates for that Series
evidencing interests aggregating not less than 25% of the Trust Fund, as
determined in the manner set forth in such Pooling Agreement; (ii) any failure
on the part of the Master Servicer duly to observe or perform in any material
respects any other of the covenants or agreements on the part of the Master
Servicer contained in the Certificates for that Series or in such Pooling
Agreement which continues unremedied for 60 days after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by the holders of Certificates for that Series
evidencing interests aggregating not less than 25% of the Trust Fund, as
determined in the manner set forth in such Pooling Agreement; (iii) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by the Master Servicer
indicating insolvency, reorganization or inability to pay its obligations and
(iv) any failure of the Master Servicer to make any Advance (other than a
Nonrecoverable Advance) which continues unremedied at the opening of business on
the Distribution Date in respect of which such Advance was to have been made.
With respect to Series of Certificates as to which the Company will not act as
Master Servicer, the Events of Default under the Pooling Agreement for each such
Series, unless otherwise specified in the applicable Prospectus Supplement, will
be the same failures by or conditions of the Servicer or the Certificate
Administrator as will constitute Events of Default by the Master Servicer under
the Pooling Agreement for each Series of Certificates for which the Company will
act as Master Servicer, except that an Event of Default created by a failure of
the Master Servicer to make a required deposit to the Certificate Account
referred to in clause (i) of the immediately prior sentence will instead be the
failure of the Servicer to make a required deposit to the Investment Account on
the Withdrawal Date. Notwithstanding the foregoing, if an Event of Default
described in clause (iv) above occurs, the Trustee will, upon written notice to
the Master Servicer, immediately suspend all of the rights and obligations of
the Master Servicer thereafter arising under the Pooling Agreement and the
Trustee will act to carry out the duties of the Master Servicer, including the
obligation to make any Advance the nonpayment of which was an Event of Default
described in clause (iv) above. The Trustee will permit the Master Servicer to
resume its rights and obligations as Master Servicer under the Pooling Agreement
if the Master Servicer, within two Business Days following its suspension,
remits to the Trustee the amount of any Advance the nonpayment of which was an
Event of Default described in clause (iv) above. If an Event of Default as
described in clause (iv) above occurs more than two times in any twelve month
period, the Trustee will not be obligated to permit the Master Servicer to
resume its rights and obligations as Master Servicer under the Pooling
Agreement.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Pooling Agreement for any Series
remains unremedied, the Trustee or holders of Certificates for that Series
evidencing interests aggregating not less than 25% of the Trust Fund, as
determined in the manner set forth in such Pooling Agreement, may terminate all
of the rights and obligations of the Master Servicer, the Servicer or the
Certificate Administrator, as applicable, under such Pooling Agreement and in
and to the Trust Fund, whereupon
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the Trustee will succeed to all the responsibilities, duties and liabilities of
the Master Servicer, the Servicer or the Certificate Administrator, as
applicable, under such Pooling Agreement and will be entitled to similar
compensation arrangements and limitations on liability. In the event that the
Trustee is unwilling or unable so to act, it may appoint or petition a court of
competent jurisdiction for the appointment of a housing and home finance
institution with a net worth of at least $10,000,000 to act as successor to the
Master Servicer, the Servicer or the Certificate Administrator, as applicable,
under such Pooling Agreement. Pending any such appointment, the Trustee is
obligated to act in such capacity. In the event the Trustee acts as successor to
the Master Servicer or the Servicer, the Trustee will be obligated to make
Advances unless it is prohibited by law from doing so. The Trustee and such
successor may agree upon the compensation to be paid, which in no event may be
greater than the compensation to the Company, as initial Master Servicer, or
with respect to a Series of Certificates as to which the Company will not act as
Master Servicer, to the Servicer named in the applicable Prospectus Supplement
or the Certificate Administrator, as applicable, under such Pooling Agreement.
Subject to certain limitations, holders of Certificates for a Series evidencing
interests aggregating not less than 25% of the Trust Fund, as determined in the
manner set forth in the Pooling Agreement for that Series, may direct the action
of the Trustee in pursuing remedies and exercising powers under such Pooling
Agreement.
No Certificateholder of any Series will have any right under the applicable
Pooling Agreement to institute any proceeding with respect to such Pooling
Agreement unless such Certificateholder previously has given to the Trustee
written notice of default and unless the holders of Certificates for that Series
evidencing interests aggregating not less than 25% of the Trust Fund, as
determined in the manner set forth in such Pooling Agreement, have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity and the Trustee
for 60 days has neglected or refused to institute any such proceeding. However,
the Trustee is under no obligation to exercise any of the trusts or powers
vested in it by the Pooling Agreement for any Series or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
The Pooling Agreement for each Series may be amended by the Company and the
Trustee, with respect to Series of Certificates as to which the Company will act
as Master Servicer, and by the Company, the Servicer, the Certificate
Administrator and the Trustee with respect to Series of Certificates as to which
the Company will not act as Master Servicer, without the consent of any of the
Certificateholders covered by such Pooling Agreement, (i) to cure any ambiguity,
(ii) to correct or supplement any provision therein which may be inconsistent
with any other provision therein, (iii) to comply with any requirements imposed
by the Internal Revenue Code of 1986, as amended (the "Code") or any regulations
thereunder, including provisions to such extent as shall be necessary to
maintain the qualification of the Trust Fund as a REMIC or to avoid or minimize
the risk of imposition of any tax on the related Trust Fund, and (iv) to correct
the description of any property at any time included in the Trust Fund, or to
assure conveyance to the Trustee of any property included in the Trust Fund. The
Pooling Agreement for each Series may also be amended by the Company and the
Trustee, with respect to Series of Certificates as to which the Company will act
as Master Servicer, and by the Company, the Servicer, the Certificate
Administrator and the Trustee with respect to Series of Certificates as to which
the Company will not act as Master Servicer, with the consent of the holders of
Certificates for that Series evidencing interests aggregating not less than 66%
of the Trust Fund, as determined in the manner set forth in such Pooling
Agreement, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of such Pooling Agreement or of modifying
in any manner the rights of the holders of Certificates of that Series;
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, payments received on Mortgage Loans which are
required to be distributed in respect of any Certificate without the consent of
the holder of such Certificate, or (ii) reduce the aforesaid percentage of
Certificates, the holders of which are required to consent to any such amendment
without the consent of the holders of all Certificates of such Series then
outstanding.
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The Prospectus Supplement for a particular Series may describe other or
different provisions concerning conditions to the amendment of the related
Pooling Agreement.
LIST OF CERTIFICATEHOLDERS
With respect to Series of Certificates as to which the Company will act as
Master Servicer, upon written request of the Trustee, the Master Servicer will
provide to the Trustee within 30 days after the receipt of such request a list
of the names and addresses of all Certificateholders of record of a particular
Series or Class as of the most recent Record Date for payment of distributions
to Certificateholders of that Series or Class. Upon written request of three or
more Certificateholders of record of such a Series of Certificates, for purposes
of communicating with other Certificateholders with respect to their rights
under the Pooling Agreement for such Series, the Trustee will afford such
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee. If such list is as of a
date more than 90 days prior to the date of receipt of such Certificateholders'
request, the Trustee shall promptly request from the Master Servicer a current
list and will afford such requesting Certificateholders access to such list
promptly upon receipt. With respect to Series of Certificates as to which the
Company will not act as Master Servicer, the Company, as Certificate
Administrator, will provide the list of names and addresses of the
Certificateholders described above in the same manner as so described.
TERMINATION
The obligations created by the Pooling Agreement for each Series will
terminate upon the occurrence of both (i) the later of the maturity or other
liquidation of the last Mortgage Loan subject thereto and the disposition of all
property acquired upon foreclosure of any Mortgage Loan and (ii) the payment to
Certificateholders of each Class, if any, of that Series of all amounts held on
behalf of such Certificateholders and required to be paid to them pursuant to
such Pooling Agreement. The Pooling Agreement for each Series will permit, but
not require, the Company to repurchase from the Trust Fund for such Series all
remaining Mortgage Loans at a price equal to the unpaid principal amount thereof
or the Trust Fund's adjusted basis in the Mortgage Loans, as described in the
related Prospectus Supplement, in either case together with interest at the
applicable Mortgage Interest Rates (which will generally be passed through to
Certificateholders at the applicable Pass-Through Rates). The exercise of such
right will effect early retirement of the Certificates of such Series, but the
Company's right so to repurchase is subject to the aggregate principal balances
of the Mortgage Loans at the time of repurchase being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal amount
of the Mortgage Loans underlying the Certificates of such Series as of the
Cut-Off Date. In no event, however, will the trust created by any Pooling
Agreement continue beyond the expiration of 21 years from the death of the
survivor of the issue of the person named in such Pooling Agreement. For each
Series, the Trustee will give written notice of termination of the Pooling
Agreement to each Certificateholder, and the final distribution will be made
only upon surrender and cancellation of the Certificates at an office or agency
specified in the notice of termination.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The bank or trust company serving as Trustee may have
normal banking relationships with the Company and/or its affiliates. The Trustee
will have combined capital and surplus of not less than $50 million.
The Trustee under each Pooling Agreement may resign at any time, in which
event the Company will be obligated to appoint a successor Trustee. The Company
may also remove the Trustee if the Trustee ceases to be eligible to continue as
such under the applicable Pooling Agreement or if the capital and surplus of the
Trustee is reduced below $50 million. Upon becoming aware of such circumstances,
the Company will be obligated to appoint a successor Trustee for the related
Series. The Trustee may also be removed at any time by holders of Certificates
of a Series evidencing more than 50% of the aggregate undivided interests in the
related Trust Fund. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
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PRIMARY INSURANCE, FHA MORTGAGE INSURANCE, VA MORTGAGE
GUARANTY, HAZARD INSURANCE; CLAIMS THEREUNDER
As set forth below, a Mortgage Loan may be required to be covered by a
hazard insurance policy and either an FHA Insurance Policy, a VA Guaranty or a
Primary Insurance Policy. The following is only a brief description of such
coverage and does not purport to describe all of the characteristics of each
type of insurance. Such insurance is subject to underwriting and approval of
individual Mortgage Loans by the respective insurers and guarantors. In some
cases, however, the issuer of the insurance or guaranty may delegate
underwriting authority to the originator of the Mortgage Loan. The descriptions
of any insurance coverage in this Prospectus or any Prospectus Supplement do not
purport to be complete and are qualified in their entirety by reference to such
forms of policies, and to such statutes or regulations as may be applicable.
PRIMARY INSURANCE
Unless otherwise specified in the applicable Prospectus Supplement, each
Mortgage Loan with a loan-to-value ratio at origination and at the Cut-Off Date
greater than 80% will be covered by a Primary Insurance Policy providing
insurance coverage against default on such Mortgage Loan, in general, of up to
25% of the principal balance of such Mortgage Loan with maintenance requirements
in certain cases for the remaining term of such Mortgage Loan, but at least
until the loan-to-value ratio drops to 80%. Conversely, Mortgage Loans with
lower loan-to-value ratios (up to approximately 80%) may not be covered by any
Primary Insurance Policies. Applicable state laws may in some instances limit
the maximum coverage which may be obtained with respect to certain Mortgage
Loans. Any such policy will be issued by a Qualified Insurer.
While the terms and conditions of the Primary Insurance Policies will
differ, each Primary Insurance Policy will in general provide substantially the
following coverage. The amount of the loss as calculated under a Primary
Insurance Policy covering a Mortgage Loan (herein referred to as the "Loss")
will generally consist of the unpaid principal balance of such Mortgage Loan and
accrued and unpaid interest thereon and reimbursement of certain expenses, less
(i) rents or other payments collected or received by the insured (other than the
proceeds of hazard insurance) that are derived from the related Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore such Mortgaged Property and which have not been applied to the payment
of the Mortgage Loan, (iii) certain amounts expended by the insured but not
approved by the insurer, (iv) claim payments previously made on such Mortgage
Loan and (v) unpaid premiums and certain other amounts.
The issuer of a Primary Insurance Policy will generally be required to pay
either: (i) the insured percentage of the Loss; (ii) the entire amount of the
Loss, after receipt by the insurer of good and merchantable title to, and
possession of, the Mortgaged Property; or (iii) at the option of the insurer
under certain Primary Insurance Policies, the sum of the delinquent monthly
payments plus any advances made by the insured, both to the date of the claim
payment and, thereafter, monthly payments in the amount that would have become
due under the Mortgage Loan if it had not been discharged plus any advances made
by the insured until the earlier of (a) the date the Mortgage Loan would have
been discharged in full if the default had not occurred or (b) an approved sale.
As conditions precedent to the filing or payment of a claim under a Primary
Insurance Policy, in the event of default by the Mortgagor, the insured will
typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
insurer, real estate taxes, protection and preservation expenses and foreclosure
and related costs; (ii) in the event of any physical loss or damage to the
Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the insurer good and merchantable title
to, and possession of, the Mortgaged Property. If any Advance to be made
(including expenses to be paid) by the Master Servicer as a condition for
coverage of a loss by a Primary Insurance Policy is not so made by the Master
Servicer because the such Advance has been determined to be nonrecoverable, then
such loss will be allocated to the Certificateholders. See "Description of
Certificates--Advances".
For any Certificates offered hereunder, the Master Servicer will cause each
Servicer to maintain, or with respect to a Series of Certificates as to which
the Company will not act as Master Servicer, the
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Servicer will maintain, in full force and effect and to the extent coverage is
available a Primary Insurance Policy with regard to each Mortgage Loan for which
such coverage is required under the standard described above, provided that such
Primary Insurance Policy was in place as of the Cut-Off Date and the Company had
knowledge of such Primary Insurance Policy. With respect to Series of
Certificates as to which the Company will act as Master Servicer, in the event
that the Master Servicer learns that a Mortgage Loan had a loan-to-value ratio
at origination and as of the Cut-Off Date in excess of 80% and was not the
subject of a Primary Insurance Policy (and was not included in any exception to
such standard disclosed in the related Prospectus Supplement), then the Master
Servicer is required to use its reasonable efforts to obtain and maintain a
Primary Insurance Policy to the extent that such a policy is obtainable at a
reasonable price. With respect to Series of Certificates as to which the Company
will not act as Master Servicer, in the event the Servicer learns of the lack of
a Primary Insurance Policy described in the preceding sentence, the Servicer
shall notify the Trustee who shall require the Seller to obtain a Primary
Insurance Policy, repurchase the Mortgage Loan or substitute a mortgage loan for
the applicable Mortgage Loan. The Master Servicer or the Servicer, as
applicable, will not cancel or refuse to renew any such Primary 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 Agreement unless,
in the event that such Series of Certificates was rated at the time of issuance,
the replacement Primary Insurance Policy from such cancelled or non-renewed
policy is maintained with an insurer whose claims-paying ability is acceptable
to the rating agency or agencies that rated such Series of Certificates for
mortgage pass-through certificates having a rating equal to or better than the
then-current ratings of such series of Certificates.
Evidence of each Primary Insurance Policy will be provided to the Trustee
simultaneously with the transfer to the Trustee of the related Mortgage Loan.
With respect to Series of Certificates as to which the Company will act as
Master Servicer, under the Selling and Servicing Contract each Seller/ Servicer,
on behalf of itself, the Company, the Master Servicer, the Trustee and the
Certificateholders, will be required to present claims to the insurer under any
Primary Insurance Policy and take such reasonable steps as are necessary to
permit recovery thereunder with respect to defaulted Mortgage Loans. Amounts
collected by a Seller/Servicer under such Primary Insurance Policy shall be
deposited in the Custodial Account for P&I maintained by such Seller/Servicer on
behalf of the Company, the Master Servicer, the Trustee and the
Certificateholders. The Master Servicer will agree to cause each Seller/Servicer
not to cancel or refuse to renew any Primary Insurance Policy required to be
kept in force by the Pooling Agreement. With respect to Series of Certificates
as to which the Company will not act as Master Servicer, under the Pooling
Agreement the Servicer will agree not to cancel or refuse to renew any Primary
Insurance Policy and will be required to present claims to the insurer under any
such Primary Insurance Policy, take steps to permit recovery under any such
Primary Insurance Policy and deposit amounts collected thereunder in the
Custodial Account for P&I to the same extent as a Seller/Servicer will be so
required under a Selling and Servicing Contract.
See "Description of Credit Enhancements--The Fraud Bond" for a discussion of
the possible effect of fraudulent conduct or negligence by the Seller, the
Seller/Servicer or the Mortgagor with respect to a Mortgage Loan on the coverage
of a Primary Insurance Policy.
FHA MORTGAGE INSURANCE
The National Housing Act of 1934, as amended (the "Housing Act"), authorizes
various FHA mortgage insurance programs. Some of the Mortgage Loans may be
insured under either Section 203(b), Section 234 or Section 235 of the Housing
Act. Under Section 203(b), FHA insures mortgage loans of up to 30 years'
duration for the purchase of one- to four-family dwelling units. Mortgage loans
for the purchase of condominium units are insured by FHA under Section 234.
Loans insured under these programs must bear interest at a rate not exceeding
the maximum rate in effect at the time the loan is made, as established by the
United States Department of Housing and Urban Development ("HUD"), and may not
exceed specified percentages of the lesser of the appraised value of the
property and the sales price, less seller paid closing costs for the property,
up to certain specified maximums. In addition, FHA imposes initial investment
minimums and other requirements on mortgage loans insured under the Section
203(b) and Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee on
behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible, a
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mortgagor must be part of a family, must have income within the limits
prescribed by HUD at the time of initial occupancy, must occupy the property and
must meet requirements for recertification at least annually.
The regulations governing these programs provide that insurance benefits are
payable either (i) upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or (ii) upon assignment of the
defaulted mortgage loan to HUD. The FHA insurance that may be provided under
these programs upon conveyance of the home to HUD is equal to 100% of the
outstanding principal balance of the mortgage loan, plus accrued interest, as
described below, and certain additional costs and expenses. When entitlement to
insurance benefits results from assignment of the mortgage loan to HUD, the
insurance payment is computed as of the date of the assignment and includes the
unpaid principal amount of the mortgage loan plus mortgage interest accrued and
unpaid to the assignment date.
When entitlement to insurance benefits results from foreclosure (or other
acquisition of possession) and conveyance, the insurance payment is equal to the
unpaid principal amount of the mortgage loan, adjusted to reimburse the
mortgagee for certain tax, insurance and similar payments made by it and to
deduct certain amounts received or retained by the mortgagee after default, plus
reimbursement not to exceed two-thirds of the mortgagee's foreclosure costs.
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a veteran
(or, in certain instances, his or her spouse) to obtain a mortgage loan guaranty
by the VA covering mortgage financing of the purchase of a one-to four-family
dwelling unit to be occupied as the veteran's home at an interest rate not
exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of mortgage
loans with terms limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a certain
dollar limit established by the VA. The loan-to-value ratios allowed for
VA-guaranteed loans are set forth in the FNMA Seller's Guide. 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. Notwithstanding the dollar
and percentage limitations of the guaranty, a mortgagee will ordinarily suffer a
monetary loss only where the difference between the unsatisfied indebtedness and
the proceeds of a foreclosure sale of mortgaged premises is greater than the
original guaranty as adjusted. The VA may, at its option, and without regard to
the guaranty, make full payment to a mortgagee of the unsatisfied indebtedness
on a mortgage upon its assignment to the VA.
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Insurance Policy may be required
by the Company for VA loans in excess of certain amounts. The amount of any such
additional coverage will be set forth in the related Prospectus Supplement.
HAZARD INSURANCE
Unless otherwise specified in the applicable Prospectus Supplement, each
Seller/Servicer with respect to Series of Certificates as to which the Company
will act as Master Servicer, or the Servicer with respect to Series of
Certificates as to which the Company will not act as Master Servicer, will cause
to be maintained for each Mortgage Loan (other than Cooperative Loans and
Mortgage Loans secured by condominium apartments) that it services a hazard
insurance policy providing for no less than the coverage of the standard form of
fire insurance policy with extended coverage customary in the state in which the
Mortgaged Property is located. Such coverage will be in an amount not less than
the maximum insurable value of the Mortgaged Property or the original principal
balance of such Mortgage Loan, whichever is less. As set forth above, all
amounts collected by the Master Servicer or a Seller/Servicer, or the Servicer,
as applicable, 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 Seller/Servicer's or the Servicer's normal servicing
procedures) will be deposited in the Custodial Account for P&I. In the event
that the Master Servicer or the Seller/Servicer, or the
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Servicer, as applicable, maintains a blanket policy insuring against hazard
losses on all of the Mortgage Loans, it shall conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance. Such
blanket policy may contain a deductible clause, in which case the Master
Servicer or the Seller/Servicer, or the Servicer, as applicable, will deposit in
the Custodial Account for P&I or the Certificate Account all sums which would
have been deposited therein but for such clause. The Master Servicer and each of
the Seller/Servicers with respect to Series of Certificates as to which the
Company will act as Master Servicer, or the Servicer with respect to Series of
Certificates as to which the Company will not act as Master Servicer, are
required to maintain a fidelity bond and errors and omissions policy with
respect to officers and employees which provide coverage against losses which
may be sustained as a result of an officer's or employee's misappropriation of
funds or errors and omissions in failing to maintain insurance, subject to
certain limitations as to amount of coverage, deductible amounts, conditions,
exclusions and exceptions in such form and amount as specified in the Servicing
Contract or the Pooling Agreement, as applicable.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most such 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 certain cases, vandalism. The foregoing list is merely
indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. The Company may require Mortgaged Properties in certain locations
to be covered by policies of earthquake insurance, to the extent it is
reasonably available. When any improvement to a Mortgaged Property is located in
a designated flood area and in a community which participates in the National
Flood Insurance Program at the time of origination of the related Mortgage Loan,
and flood insurance is required and available, the Pooling Agreement requires
the Master Servicer, through the Seller/Servicer responsible for servicing such
Mortgage Loan, or the Servicer, as applicable, to cause the Mortgagor to acquire
and maintain such insurance.
The hazard insurance policies covering the Mortgaged Properties typically
contain a clause which, in effect, requires the insured at all times to carry
insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause provides that the insurer's liability in the
event of partial loss does not exceed the larger of (i) the replacement cost of
the improvements less physical depreciation, and (ii) such proportion of the
loss, without deduction for depreciation, as the amount of insurance carried
bears to the specified percentage of the full replacement cost of such
improvements.
Neither the Seller/Servicer with respect to Series of Certificates as to
which the Company will act as Master Servicer, or the Servicer with respect to
Series of Certificates as to which the Company will not act as Master Servicer,
will require that a hazard or flood insurance policy be maintained for any
Cooperative Loan or Mortgage Loan secured by a condominium apartment. With
respect to a 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 the Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Note do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of the damaged property, damage to such borrower's cooperative apartment or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Note. With respect to a Mortgage Loan secured by a
condominium apartment, the condominium owner's association for the related
building generally is responsible for maintenance of hazard insurance for such
building, and the condominium owners do not maintain individual hazard insurance
policies. To the extent that the owner of a Mortgage Loan secured by a
condominium apartment and the related condominium owner's association do not
maintain such insurance or do not maintain adequate coverage or any insurance
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proceeds are not applied to the restoration of the damaged property, damage to
such borrower's condominium apartment or the related building could
significantly reduce the value of the Mortgaged Property.
Since the amount of hazard insurance the Master Servicer or the
Seller/Servicers, or the Servicer, as applicable, will cause to be maintained on
the Mortgaged Properties declines as the principal balances owing on the related
Mortgage Loans decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property. See
"Description of Credit Enhancements-- Special Hazard Insurance" for a
description of the limited protection afforded by the Special Hazard Insurance
Policy, Letter of Credit or Reserve Fund, if any is obtained, against losses
occasioned by certain hazards which are otherwise uninsured against, as well as
against losses caused by the application of the clause described in the
preceding paragraph.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows and floods) or insufficient hazard insurance
proceeds could affect distributions to the Certificateholders.
DESCRIPTION OF CREDIT ENHANCEMENTS
To the extent provided in the applicable Prospectus Supplement, credit
enhancement for each Series of Certificates may be comprised of one or more of
the following components, each of which will have a dollar limit. Credit
enhancement components may include coverage with respect to losses that are (i)
attributable to the Mortgagor's failure to make any payment of principal or
interest as required under the Mortgage Note, but not including Special Hazard
Losses, Extraordinary Losses (as defined below) or other losses resulting from
damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
loss, a "Defaulted Mortgage Loss"); (ii) of a type generally covered by a
Special Hazard Insurance Policy (any such loss, a "Special Hazard Loss"); (iii)
attributable to certain actions which may be taken by a bankruptcy court in
connection with a Mortgage Loan, including a reduction by a bankruptcy court of
the principal balance of or the Mortgage Interest Rate on a Mortgage Loan or an
extension of its maturity (any such loss, a "Bankruptcy Loss"); (iv) incurred on
defaulted Mortgage Loans as to which there was fraudulent conduct or negligence
by either the Seller, the Seller/Servicer, the Servicer or the Mortgagor in
connection with such Mortgage Loans (any such loss, a "Fraud Loss"); and (v)
attributable to shortfalls in the payment of amounts due to one or more Classes
of Certificates. Losses occasioned by war, civil insurrection, certain
governmental actions, nuclear reaction, chemical contamination, errors in
design, faulty workmanship or materials or waste by the Mortgagor
("Extraordinary Losses") will not be covered. To the extent that the credit
enhancement for any Series of Certificates is exhausted, the Certificateholders
will bear all further risks of loss not otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, (i) coverage
with respect to Defaulted Mortgage Losses may be provided by one or more of a
Letter of Credit, Reserve Fund or a Mortgage Pool Insurance Policy, (ii)
coverage with respect to Special Hazard Losses may be provided by one or more of
a Letter of Credit, Reserve Fund or a Special Hazard Insurance Policy (any
instrument, to the extent providing such coverage, a "Special Hazard
Instrument"); (iii) coverage with respect to Bankruptcy Losses may be provided
by one or more of a Letter of Credit, Reserve Fund or Bankruptcy Bond (any
instrument, to the extent providing such coverage, a "Bankruptcy Instrument")
and (iv) coverage with respect to Fraud Losses may be provided by one or more of
a Letter of Credit, Reserve Fund or Fraud Bond (any instrument, to the extent
providing such coverage, a "Fraud Instrument"). In addition, if provided in the
applicable Prospectus Supplement, in lieu of or in addition to any or all of the
foregoing arrangements, credit enhancement may be in the form of subordination
of one or more Classes of Certificates to provide credit support to one or more
other Classes of Certificates.
The amounts and types of credit enhancement arrangements as well as the
provider thereof, if applicable, with respect to each Series of Certificates
will be set forth in the related Prospectus Supplement. To the extent provided
in the applicable Prospectus Supplement and the Pooling Agreement, the credit
enhancement arrangements may be periodically modified, reduced and
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substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. If specified in the applicable Prospectus
Supplement, credit support for a Series of Certificates may cover one or more
other series of certificates issued by the Company or others.
Unless otherwise specified in the applicable Prospectus Supplement, to the
extent permitted by any applicable rating agency and provided that the then
current ratings of the Certificates are maintained, coverage under any credit
enhancement may be cancelled or reduced.
The descriptions of any credit enhancement instruments included in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of governing documents, copies of which are available upon request.
MORTGAGE POOL INSURANCE
A Mortgage Pool Insurance Policy may be obtained for a particular Series of
Certificates. Any such policy will be obtained by the Company or the Servicer,
as applicable, from a Qualified Insurer for the Mortgage Pool, covering loss by
reason of the default in payments on any Mortgage Loans included therein that
are not covered as to their entire outstanding principal balances by Primary
Insurance, FHA Insurance or VA Guarantees. Each Mortgage Pool Insurance Policy
will cover all or a portion of those Mortgage Loans in a Mortgage Pool in an
amount to be specified in the applicable Prospectus Supplement or in the related
Current Report on Form 8-K. The term "Mortgage Pool Insurance Policy" wherever
used in this Prospectus or any Supplement shall refer to one or more such
Mortgage Pool Insurance Policies as the context may require. The identity of the
insurer or insurers and certain financial information with respect to the
insurer or insurers for each Mortgage Pool will be contained in the applicable
Prospectus Supplement or in the related Current Report on Form 8-K. The Trustee
will be the named insured under any Mortgage Pool Insurance Policy. A Mortgage
Pool Insurance Policy is not a blanket policy against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon the satisfaction of certain conditions precedent described below.
Any Mortgage Pool Insurance Policy will provide that no claim may be validly
presented thereunder unless (i) hazard insurance on the property securing the
defaulted Mortgage Loan has been kept in force and real estate taxes and other
protection and preservation expenses have been paid, (ii) if there has been
physical loss or damage to the Mortgaged Property, it has been restored to its
condition (reasonable wear and tear excepted) at the Cut-Off Date, (iii) any
required Primary Insurance Policy is in effect for the defaulted Mortgage Loan
and a claim thereunder has been submitted and settled, and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except permitted encumbrances. Assuming the satisfaction of these
conditions, the insurer will have the option to either (i) purchase the property
securing the defaulted Mortgage Loan at a price equal to the principal balance
thereof, plus accrued and unpaid interest at the Mortgage Interest Rate to the
date of purchase, less the amount of any loss paid under a Primary Insurance
Policy, if any, or (ii) pay the difference between the proceeds received from an
approved sale of the property and the principal balance of the defaulted
Mortgage Loan, plus accrued and unpaid interest at the Mortgage Interest Rate to
the date of payment of the claim, less the amount of such loss paid under a
Primary Insurance Policy, if any. In each case, the insurer will reimburse the
Master Servicer and the Seller/Servicer, or the Servicer with respect to Series
of Certificates for which the Company will not act as Master Servicer, for
certain expenses incurred by them.
An endorsement (an "Advance Claims Endorsement") may be issued to any
Mortgage Pool Insurance Policy which provides that the Insurer will make
advances of monthly principal and interest payments on Mortgage Loans as to
which the Seller/Servicer, or the Servicer with respect to Series of
Certificates for which the Company will not act as Master Servicer, has not
received a payment from the related Mortgagor and neither the Seller/Servicer
nor the Master Servicer, or the Servicer, as applicable, has advanced such
payment. The presence of such endorsement, if any, will be disclosed in the
Prospectus Supplement.
An endorsement may also be issued to any Mortgage Pool Insurance Policy
which provides that the insurer will pay claims presented under the Mortgage
Pool Insurance Policy although claims made against the applicable Primary
Insurance Policy have not been settled due to the insolvency,
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bankruptcy, receivership or assignment for the benefit of creditors of the
issuer of the Primary Insurance Policy. The presence of such endorsement, if
any, will be disclosed in the Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, to the
extent permitted by any applicable rating agency and provided that the then
current ratings of the Certificates are maintained, coverage under any Mortgage
Pool Insurance Policy may be cancelled or reduced.
The original amount of coverage under any Mortgage Pool Insurance Policy
will be reduced over the life of the Certificates by the aggregate dollar amount
of claims paid, less certain amounts realized by the insurer upon disposition of
foreclosed properties. The amount of claims paid includes certain expenses
incurred by the Master Servicer, or the Servicer with respect to Series of
Certificates for which the Company will not act as 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 thereunder will lapse
and any further losses will be borne by Certificateholders. In addition, in such
event, the Master Servicer or the Servicer, as applicable, will not be obligated
(unless sufficient recoveries from other sources are expected) to make any
further Advances, since such Advances would no longer be ultimately recoverable
under the Mortgage Pool Insurance Policy. See "Description of
Certificates--Advances".
Since the property subject to a defaulted Mortgage Loan must be restored to
its original condition prior to claiming against the insurer, no Mortgage Pool
Insurance Policy will provide coverage against hazard losses. As set forth under
"Primary Insurance, FHA Mortgage Insurance, VA Mortgage Guaranty, Hazard
Insurance; Claims Thereunder", the hazard insurance policies covering the
Mortgage Loans typically exclude from coverage physical damage resulting from a
number of causes, and even when the damage is covered, may afford recoveries
which are significantly less than the full replacement of such losses. Further,
any Special Hazard Insurance Policy which may be obtained does not cover all
risks, and such coverage will be limited in amount. See "--Special Hazard
Insurance" below. Certain hazard risks will, as a result, be uninsured against
and will therefore be borne by Certificateholders.
A Mortgage Pool Insurance Policy may include a provision permitting the
insurer to purchase defaulted Mortgage Loans from the Trust.
See "--The Fraud Bond" below for a discussion of the possible effect of
fraudulent conduct or negligence by the Seller, the Seller/Servicer, the
Servicer or the Mortgagor with respect to a Mortgage Loan on the coverage of a
Mortgage Pool Insurance Policy.
SUBORDINATION
If so specified in the applicable Prospectus Supplement, distributions with
respect to scheduled principal, Principal Prepayments, interest or any
combination thereof that otherwise would have been payable to one or more
Classes of Certificates of a Series (the "Subordinated Certificates") will
instead be payable to holders of one or more other Classes of such Series (the
"Senior Certificates") under the circumstances and to the extent specified in
the Prospectus Supplement. If specified in the applicable Prospectus Supplement,
delays in receipt of scheduled payments on the Mortgage Loans and losses on
defaulted Mortgage Loans will be borne first by the various Classes of
Subordinated Certificates and thereafter by the various Classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Mortgage Loans over the lives of the
Certificates or at any time, the aggregate losses in respect of defaulted
Mortgage Loans 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
applicable Prospectus Supplement. If the aggregate distribution with respect to
delinquent payments on the Mortgage Loans or aggregate losses in respect of such
Mortgage Loans were to exceed the total amounts payable and available for
distribution to holders of Subordinated Certificates or, if applicable, were to
exceed the specified maximum amount, holders of Senior Certificates could
experience losses on the Certificates.
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In addition to or in lieu of the foregoing, if so specified in the
applicable Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Certificates on any Distribution Date may
instead be deposited into one or more reserve accounts (the "Reserve Account")
established by the Trustee. If so specified in the applicable Prospectus
Supplement, such deposits may be made on each Distribution Date, on each
Distribution Date for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Certificates or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Account to required levels, in
each case as specified in the Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, amounts on deposit in the Reserve Account may
be released to the Company, the Servicer or the Seller, as applicable, or the
holders of any Class of Certificates at the times and under the circumstances
specified in the Prospectus Supplement.
If specified in the applicable Prospectus Supplement, various Classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other Classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between Classes of Senior Certificates and as between Classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the applicable Prospectus
Supplement. As between Classes of Subordinated Certificates, payments to holders
of Senior Certificates on account of delinquencies or losses and payments to any
Reserve Account will be allocated as specified in the Prospectus Supplement.
THE FRAUD BOND
Some or all of the Primary Insurance Policies covering Mortgage Loans in any
Mortgage Pool may contain an exclusion from coverage for Fraud Losses. To
provide limited protection to Certificateholders against losses in the event
that coverage relating to a Mortgage Loan which otherwise would have been
available under a Primary Insurance Policy is not ultimately available by reason
of such an exclusion, if so specified in the applicable Prospectus Supplement, a
Fraud Instrument may be obtained or established by the Company or the Servicer,
as applicable, for the Mortgage Pool. The type, coverage amount and term of any
such Fraud Instrument will be disclosed in the applicable Prospectus Supplement
or in the related Current Report on Form 8-K, and the coverage amount may be
cancelled or reduced during the life of the Mortgage Pool, provided that the
then current ratings of the Certificates will not be adversely affected thereby.
The Company or the Servicer, as applicable, may also replace the initial Fraud
Instrument with any other type of Fraud Instrument, provided that the then
current ratings of the Certificates will not be adversely affected thereby. The
identity of the issuer of any Fraud Bond or the Letter of Credit providing such
coverage and certain financial information with respect to such issuer will be
contained in the applicable Prospectus Supplement or related Current Report on
Form 8-K.
In addition, the Company understands that, regardless of whether exclusion
language such as that described above is included in the insurance documents, it
is the policy of some or all issuers of Primary Insurance Policies and of
Mortgage Pool Insurance Policies to deny coverage in circumstances involving
fraudulent conduct or negligence by either the Seller, the Seller/Servicer, the
Servicer or the Mortgagor. It is unclear whether any such denial would be upheld
by a court. Neither the repurchase obligation of the Company with respect to
Series of Certificates as to which the Company will act as Master Servicer, or
the Seller with respect to Series of Certificates as to which the Company will
not act as Master Servicer, nor any of the Fraud Instruments described above
would apply to any such denial of coverage unless, as described above, such
denial is based upon a specific exclusion relating to fraudulent conduct or
negligence which is included in a Primary Insurance Policy.
THE BANKRUPTCY BOND
The Prospectus Supplement for certain Series may specify that the Master
Servicer with respect to Series of Certificates as to which the Company will act
as Master Servicer, or the Servicer with
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respect to Series of Certificates as to which the Company will not act as Master
Servicer, has undertaken to pay to the Trustee for the benefit of
Certificateholders any portion of the principal balance of a Mortgage Loan which
becomes unsecured pursuant to a proceeding under Chapter 7, 11 or 13 of the
Federal Bankruptcy Code. If such obligation is undertaken, the Master Servicer
or the Servicer, as applicable, will also agree to pay to the Trustee for the
benefit of Certificateholders any shortfall in payment of principal and interest
resulting from the recasting of any originally scheduled monthly principal and
interest payment pursuant to a ruling under the Bankruptcy Code. These payment
obligations will be subject to the limitations specified in the applicable
Pooling Agreement. The Master Servicer or the Servicer, as applicable, will have
the option, in lieu of making such payments, to repurchase any Mortgage Loan
affected by bankruptcy court rulings. To insure the Master Servicer's or the
Servicer's obligation to make the payments described above, the Master Servicer
or the Servicer, as applicable, will obtain or establish a Bankruptcy Instrument
in an initial amount specified in the Prospectus Supplement or in the related
Current Report on Form 8-K. The Prospectus Supplement or Current Report on Form
8-K may also specify that, provided that the then current ratings of the
Certificates are maintained, coverage under any Bankruptcy Instrument may be
cancelled or reduced. The Master Servicer with respect to Series of Certificates
as to which the Company will act as Master Servicer, or the Servicer with
respect to Series of Certificates as to which the Company will not act as Master
Servicer, may also replace the initial method pursuant to which such coverage is
provided with either of the other two alternative methods, provided that the
then current ratings of the Certificates will not be adversely affected thereby.
SPECIAL HAZARD INSURANCE
A Special Hazard Insurance Instrument may be established or obtained by the
Company or the Servicer, as applicable, for certain Series. Any Special Hazard
Insurance Instrument will, subject to limitations described below, protect the
holders of the Certificates evidencing such Mortgage Pool from (i) loss by
reason of damage to properties subject to defaulted Mortgage Loans covered
thereby caused by certain hazards (including earthquakes in some geographic
areas, mud flows and floods) not insured against under customary standard forms
of fire and hazard insurance policies with extended coverage, and (ii) loss on
such loans caused by reason of the application of the co-insurance clause
typically contained in hazard insurance policies. The Master Servicer with
respect to Series of Certificates as to which the Company will act as Master
Servicer, or the Servicer with respect to Series of Certificates as to which the
Company will not act as Master Servicer, may also replace the initial method
pursuant to which such coverage is provided with either of the other two
alternative methods, provided that the then current ratings of the Certificates
will not be adversely affected thereby. The Prospectus Supplement or Current
Report on Form 8-K may also specify that, provided the then current ratings of
the Certificates are maintained, coverage under any Special Hazard Instrument
may be cancelled or reduced. Any Special Hazard Insurance Policy will be issued
by an insurance company licensed to transact a property and casualty insurance
business in each state in which Mortgaged Properties covered thereby are
located. The identity of the issuer of any Special Hazard Insurance Policy or
the Letter of Credit providing such coverage and certain financial information
with respect to such issuer will be contained in the related Prospectus
Supplement. No Special Hazard Insurance Instrument will cover Extraordinary
Losses.
Subject to the foregoing limitations, the terms of any Special Hazard
Insurance Instrument will provide generally that, where there has been damage to
property securing a defaulted Mortgage Loan covered by such instrument and such
damage is not fully covered by the hazard insurance policy maintained with
respect to such property, the Special Hazard Insurance Instrument will pay
either (i) the cost of repair of such property or (ii) the unpaid principal
balance of such Mortgage Loan at the time of an approved sale of such property,
plus accrued interest at the Mortgage Interest Rate to the date of claim
settlement and certain expenses incurred in respect of such property, less any
net proceeds upon the sale of such property. In either case, the amount paid
under any Special Hazard Insurance Instrument will be reduced by the proceeds,
if any, received under the hazard insurance policy maintained with respect to
such property. It is expected that the Mortgage Pool Insurer, if any, will
represent to the Master Servicer or the Servicer, as applicable, that
restoration of the property securing a Mortgage Loan from the proceeds described
under (i) above will satisfy the condition under any related Mortgage Pool
Insurance Policy that the property securing a defaulted Mortgage Loan be
restored before a claim under any such policy may be validly presented in
respect of such Mortgage
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Loan. The payment described under (ii) above will render unnecessary
presentation of a claim in respect of such Mortgage Loan under any Mortgage Pool
Insurance Policy. Therefore, so long as any Mortgage Pool Insurance Policy for a
Series of Certificates remains in effect, the decision to pay the cost of repair
rather than to pay the unpaid principal balance of the related Mortgage Loan,
plus accrued interest and certain expenses, will not affect the amount of the
total insurance proceeds paid to the holders of the Certificates of that Series
with respect to such Mortgage Loan, but will affect the amount of special hazard
insurance coverage remaining under any Special Hazard Insurance Instrument and
the coverage remaining under any Mortgage Pool Insurance Policy obtained for
that Series.
LETTER OF CREDIT
If any component of credit enhancement as to any Series of Certificates is
to be provided by a letter of credit (the "Letter of Credit"), a bank or other
entity (the "Letter of Credit Bank") will deliver to the Trustee an irrevocable
Letter of Credit. The Letter of Credit Bank and certain information with respect
thereto, as well as the amount available under the Letter of Credit with respect
to each component of credit enhancement, will be specified in the applicable
Prospectus Supplement. The Letter of Credit will expire on the expiration date
set forth in the related Prospectus Supplement, unless earlier terminated or
extended in accordance with its terms.
The Letter of Credit may also provide for the payment of Advances which the
Master Servicer with respect to Series of Certificates as to which the Company
will act as Master Servicer, or the Servicer with respect to Series of
Certificates as to which the Company will not act as Master Servicer, would be
obligated to make with respect to delinquent monthly payments.
RESERVE FUND
If so specified in the related Prospectus Supplement, the Company, the
Servicer or the Seller, as applicable, will deposit or cause to be deposited in
a Reserve Fund cash or Eligible Investments in specified amounts, or any other
instruments satisfactory to the rating agency or agencies rating the
Certificates offered pursuant to such Prospectus Supplement, which will be
applied and maintained in the manner and under the conditions specified in such
Prospectus Supplement. In the alternative or in addition to such deposit, to the
extent described in the related Prospectus Supplement, a Reserve Fund may be
funded through application of all or a portion of amounts otherwise payable on
one or more related Classes of Certificates, from Retained Yield, or otherwise.
Amounts in a Reserve Fund may be used to provide one or more components of
credit enhancement, or applied to reimburse the Master Servicer with respect to
Series of Certificates as to which the Company will act as Master Servicer, or
the Servicer with respect to Series of Certificates as to which the Company will
not act as Master Servicer, for outstanding Advances, or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement, any
such Reserve Fund will not be deemed to be part of the related Trust Fund.
Amounts deposited in any Reserve Fund for a Series of Certificates will be
invested in Eligible Investments by, or at the direction of, and for the benefit
of the Master Servicer or the Certificate Administrator, as applicable, or any
other person named in the related Prospectus Supplement. Unless otherwise
specified in the applicable Prospectus Supplement, any amounts remaining in the
Reserve Fund upon the termination of the Trust Fund will be returned to whomever
deposited such amounts in the Reserve Fund.
CERTIFICATE INSURANCE POLICIES
If so specified in the related Prospectus Supplement, the Company or the
Servicer may obtain one or more certificate insurance policies, issued by
insurers acceptable to the rating agency or agencies rating the Certificates
offered pursuant to such Prospectus Supplement, insuring the holders of one or
more Classes of Certificates the payment of amounts due in accordance with the
terms of such Class or Classes of Certificates, subject to such limitations and
exceptions as are set forth in the applicable Prospectus Supplement.
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MAINTENANCE OF CREDIT ENHANCEMENTS; CLAIMS THEREUNDER
AND OTHER REALIZATION UPON DEFAULTED MORTGAGE LOANS
For each Series of Certificates which will be covered by a Mortgage Pool
Insurance Policy, or a Letter of Credit established in lieu of such policy (such
coverage to be disclosed in the applicable Prospectus Supplement), the Master
Servicer with respect to Series of Certificates as to which the Company will act
as Master Servicer, or the Servicer with respect to Series of Certificates as to
which the Company will not act as Master Servicer, will exercise its best
reasonable efforts to keep such Mortgage Pool Insurance Policy or Letter of
Credit in full force and effect throughout the term of the Pooling Agreement,
unless coverage thereunder has been exhausted through the payment of claims or
until such instrument is replaced in accordance with the terms of the Pooling
Agreement. Unless otherwise specified in the applicable Prospectus Supplement,
the Master Servicer or the Servicer, as applicable, will agree to pay the
premiums for any Mortgage Pool Insurance Policy, and the fee for any Letter of
Credit, on a timely basis. In the event that the insurer under the Mortgage Pool
Insurance Policy ceases to be a Qualified Insurer (as defined in the Pooling
Agreement), or the Letter of Credit Bank ceases to be acceptable to the agency
or agencies, if any, rating the Series, the Master Servicer or the Servicer, as
applicable, will use its best reasonable efforts to obtain from another
Qualified Insurer or letter of credit issuer a replacement policy or letter of
credit comparable to the Mortgage Pool Insurance Policy or Letter of Credit
which it replaces, with total coverage equal to the then outstanding coverage of
the Mortgage Pool Insurance Policy or Letter of Credit, provided that if the
cost of the replacement policy or letter of credit is greater than the cost of
the Mortgage Pool Insurance Policy or Letter of Credit being replaced, the
coverage of the replacement policy or letter of credit for a Series of
Certificates may be reduced to a level such that its premium rate or cost does
not exceed 150% of the premium rate or cost of the Mortgage Pool Insurance
Policy or Letter of Credit for a Series which is rated by one or more rating
agencies, or 100% of the premium rate or cost for such policy or letter of
credit for a Series which is not so rated.
In addition, the Master Servicer or the Servicer, as applicable, may
substitute at any time a Mortgage Pool Insurance Policy or Letter of Credit for
an existing Mortgage Pool Insurance Policy or Letter of Credit. In no event,
however, may the Master Servicer or the Servicer, as applicable, provide a
Letter of Credit in lieu of a Mortgage Pool Insurance Policy, or vice-versa, or
substitute one such instrument for another, except under the circumstances
detailed in the preceding paragraph, if such action will impair the then current
ratings, if any, of the Certificates.
Unless otherwise specified in the applicable Prospectus Supplement, each
Seller/Servicer with respect to Series of Certificates as to which the Company
will act as Master Servicer, or the Servicer with respect to Series of
Certificates as to which the Company will not act as Master Servicer, will cause
a Primary Insurance Policy to be maintained in full force and effect with
respect to each Mortgage Loan it services with a loan-to-value ratio in excess
of 80%; provided, however, that if the loan-to-value ratio of a Mortgage Loan
based on a subsequent appraisal of the Mortgaged Property is less than 80%, such
Primary Insurance Policy may be terminated, if so specified in the applicable
Prospectus Supplement. Each Seller/Servicer or the Servicer, as applicable, will
agree to pay the premium for each Primary Insurance Policy on a timely basis in
the event that the Mortgagor does not make such payments. See "Primary
Insurance, FHA Mortgage Insurance, VA Mortgage Guaranty, Hazard Insurance;
Claims Thereunder--Primary Insurance" herein.
For each Series of Certificates which will be covered by a Special Hazard
Insurance Instrument (such coverage to be disclosed in the applicable Prospectus
Supplement), the Master Servicer with respect to Series of Certificates as to
which the Company will act as Master Servicer, or the Servicer with respect to
Series of Certificates as to which the Company will not act as Master Servicer,
will exercise its best reasonable efforts to keep such Special Hazard Insurance
Instrument in full force and effect throughout the term of the Pooling
Agreement, unless coverage thereunder has been exhausted through the payment of
claims or until such Special Hazard Insurance Instrument has been replaced in
accordance with the terms of the Pooling Agreement. So long as any applicable
rating on a Series of Certificates will be maintained, the Master Servicer or
the Servicer, as applicable, may at any time replace the initial instrument
providing special hazard coverage with either of the other two alternative
methods. Unless otherwise specified in the applicable Prospectus Supplement, the
Master Servicer or the Servicer, as applicable, will agree to pay the premium
for any Special Hazard Insurance
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Policy (or Letter of Credit obtained in lieu thereof) on a timely basis. Unless
otherwise specified in the applicable Prospectus Supplement, any such policy
will provide for a fixed premium rate on the declining balance of the Mortgage
Loans. In the event that any Special Hazard Insurance Policy is cancelled or
terminated for any reason other than the exhaustion of total policy coverage,
the Master Servicer or the Servicer, as applicable, is obligated either to
substitute a Letter of Credit or Reserve Fund or to exercise its best reasonable
efforts to obtain from another insurer a replacement policy comparable to such
Special Hazard Insurance Policy with a total coverage which is equal to the then
existing coverage of such Special Hazard Insurance Policy; provided, however,
that if the cost of any such replacement policy shall be greater than the cost
of the original Special Hazard Insurance Policy, the amount of coverage of such
replacement policy may be reduced to a level such that the cost shall be equal
to the cost of the original Special Hazard Insurance Policy. As indicated above,
in lieu of obtaining a replacement Special Hazard Insurance Policy, the Master
Servicer or the Servicer, as applicable, may obtain a Letter of Credit or
establish a Reserve Fund in accordance with terms prescribed by any applicable
rating agency so that any rating obtained for the Certificates will not be
impaired.
For each Series of Certificates which will be covered by a Fraud Instrument
(such coverage to be disclosed in the applicable Prospectus Supplement), the
Master Servicer with respect to Series of Certificates as to which the Company
will act as Master Servicer, or the Servicer with respect to Series of
Certificates as to which the Company will not act as Master Servicer, will
exercise its best reasonable efforts to maintain and keep any such Fraud
Instrument in full force and effect throughout the required term as set forth in
the applicable Prospectus Supplement, unless coverage thereunder has been
exhausted through the payment of claims. The Master Servicer or the Servicer, as
applicable, will agree to pay the premium for any Fraud Bond or Bankruptcy Bond
on a timely basis.
For each Series of Certificates or Class of Certificates which will be
covered by a certificate insurance policy or a Letter of Credit or Reserve Fund
(such coverage to be disclosed in the applicable Prospectus Supplement), the
Master Servicer with respect to Series of Certificates as to which the Company
will act as Master Servicer, or the Servicer with respect to Series of
Certificates as to which the Company will not act as Master Servicer, will
exercise its best reasonable efforts to maintain and keep any such certificate
insurance policy, Letter of Credit or Reserve Fund in full force and effect
throughout the required term set forth in the applicable Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, the Master Servicer or
the Servicer, as applicable, will agree to pay the premium for any certificate
insurance policy on a timely basis.
The Master Servicer or the Seller/Servicers, with respect to Series of
Certificates as to which the Company will act as Master Servicer, or the
Servicer with respect to Series of Certificates as to which the Company will not
act as Master Servicer, on behalf of the Trustee and Certificateholders, will
present claims to the issuer of any applicable Primary Insurance Policy, FHA
Insurance Policy, VA Guaranty, Mortgage Pool Insurance Policy, Special Hazard
Insurance Policy or Letter of Credit, or under any Reserve Fund or other form of
credit enhancement, and will take such reasonable steps as are necessary to
permit recovery under such insurance policies or alternative coverages
respecting defaulted Mortgage Loans. With respect to any applicable Fraud Bond,
Bankruptcy Bond or certificate insurance policy, the Trustee will present claims
to the issuer of such bond or policy on behalf of the Certificateholders. As set
forth above, all collections by the Master Servicer or the Seller/Servicer, or
the Servicer, as applicable, under such policies or alternative coverages that
are not applied to the restoration of the related Mortgaged Property are to be
deposited in the applicable Custodial Account for P&I, the Investment Account or
the Certificate Account, subject to withdrawal as heretofore described.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance policy or any applicable Special
Hazard Insurance Policy (or Letter of Credit or Reserve Fund), as the case may
be, are insufficient to restore the damaged property to a condition sufficient
to permit recovery under any applicable Mortgage Pool Insurance Policy or
Primary Insurance Policy, the Master Servicer, with respect to Series of
Certificates as to which the Company will act as Master Servsicer, or the
Servicer with respect to Series of Certificates as to which the Company will not
act as Master Servicer, will not be required to expend its own funds to restore
the damaged property unless it determines (i) that such restoration will
increase the proceeds to
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Certificateholders upon liquidation of the Mortgage Loan after reimbursement of
the Master Servicer or the Servicer, as applicable, for its expenses and (ii)
that such expenses will be recoverable to it through Liquidation Proceeds or
Insurance Proceeds.
If recovery under any Mortgage Pool Insurance Policy (or Letter of Credit
established in lieu of such policy), Primary Insurance Policy, FHA Insurance
Policy or VA Guaranty is not available because the Master Servicer, with respect
to Series of Certificates as to which the Company will act as Master Servicer,
or the Servicer with respect to Series of Certificates as to which the Company
will not act as Master Servicer, has been unable to make the determinations
described in the second preceding paragraph, or otherwise, the Seller/Servicer
or the Servicer, as applicable, is, nevertheless, obligated to follow such
normal practices and procedures as it deems necessary or advisable to realize
upon the defaulted Mortgage Loan. If the proceeds of any liquidation of the
property securing the defaulted Mortgage Loan are less than the principal
balance of the defaulted Mortgage Loan plus accrued and unpaid interest thereon
at the applicable Pass-Through Rate (after deduction of the Retained Yield, if
any, or a pro rata portion thereof as required by the applicable Pooling
Agreement), Certificateholders in the aggregate will realize a loss in the
amount of such difference plus the aggregate of expenses incurred by the Master
Servicer and the Seller/Servicer, or the Servicer, as applicable, in connection
with such proceedings and which are reimbursable under the Pooling Agreement. In
addition, and as set forth above, in the event that the Master Servicer or the
Servicer, as applicable, has expended its own funds to restore damaged property
and such funds have not been reimbursed under any Special Hazard Insurance
Policy or Letter of Credit or Reserve Fund, it will be entitled to receive from
the Certificate Account, out of related Liquidation Proceeds or Insurance
Proceeds, an amount equal to such expenses incurred by it, in which event the
Certificateholders may realize a loss up to the amount so charged. Since
Insurance Proceeds cannot exceed deficiency claims and certain expenses incurred
by the Master Servicer and the Seller/Servicers, or the Servicer, as applicable,
no insurance payments will result in a recovery to Certificateholders which
exceeds the principal balance of the defaulted Mortgage Loan together with
accrued and unpaid interest thereon at the applicable Pass-Through Rate. In
addition, where property securing a defaulted Mortgage Loan can be resold for an
amount exceeding the principal balance of any related Mortgage Note together
with accrued interest and expenses, it may be expected that, where retention of
any such amount is legally permissible, the insurer will exercise its right
under any related Mortgage Pool Insurance Policy to purchase such property and
realize for itself any excess proceeds. In addition, with respect to certain
Series of Certificates, if so provided in the applicable Prospectus Supplement,
the Master Servicer or the Servicer, as applicable, may have the option to
purchase from the Trust Fund any defaulted Mortgage Loan after a specified
period of delinquency. If a defaulted Mortgage Loan is not so removed from the
Trust Fund, then, upon the final liquidation thereof, if a loss is realized
which is not covered by any applicable form of credit enhancement or other
insurance, the Certificateholders will bear such loss. However, if a gain
results from the final liquidation of a defaulted Mortgage Loan which is not
required by law to be remitted to the related Mortgagor, the Master Servicer or
the Servicer, as applicable, will be entitled to retain such gain as additional
servicing compensation unless the applicable Prospectus Supplement provides
otherwise. See "Description of Credit Enhancements".
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The Mortgages (other than the security agreements with respect to the
Cooperative Loans) will be either deeds of trust or mortgages, depending upon
the prevailing practice in the state in which the Mortgaged Property is located.
A mortgage creates a lien upon the real property encumbered by the mortgage. It
is not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of filing with a
state or county office. There are two parties to a mortgage: the mortgagor, who
is usually the borrower and homeowner, 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-homeowner, called the trustor
(similar to a mortgagor), a lender, called the beneficiary (similar to a
mortgagee), and a third-party grantee, called the trustee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. In some cases, a mortgage will also contain a power of sale. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by law, by the express provisions of the deed of trust or
mortgage and,
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in some cases, by the directions of the beneficiary. For purposes of the
following discussion, "mortgagor" shall, as appropriate, refer to a mortgagor or
trustor and "lender" shall refer to a mortgagee or beneficiary. A Mortgage Pool
may also contain Cooperative Loans which are described below under
"--Cooperative Loans".
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Mortgage Loans may also include Cooperative Loans. Each
promissory note (a "Cooperative Note") evidencing a Cooperative Loan will be
secured by a security interest in shares issued by the related private
cooperative housing corporation (a "Cooperative") that owns the related
apartment building, which is a corporation entitled to be treated as a housing
cooperative under federal tax law, and in the related proprietary lease or
occupancy agreement granting exclusive rights to occupy a specific dwelling unit
in the Cooperative's building. The security agreement will create a lien upon or
grant a security interest in the cooperative shares and proprietary lease or
occupancy agreement, the priority of which will depend on the terms of the
particular security agreement as well as the order of recordation of the
agreement (or the filing of the financing statements related thereto) in the
appropriate recording office or the taking of possession of the cooperative
shares, depending on the law of the state in which the cooperative is located.
Such a lien or security interest is not, in general, prior to liens in favor of
the Cooperative for unpaid assessments or common charges.
Unless otherwise specified in the related Prospectus Supplement, all
cooperative buildings relating to the Cooperative Loans are located in the
States of New York and New Jersey. Generally, each Cooperative owns in fee or
has a leasehold interest in all the real property and owns in fee or leases the
building and all separate dwelling units therein. The Cooperative is directly
responsible for property management and, in most cases, payment of real estate
taxes, other governmental impositions and hazard and liability insurance. If
there is an underlying mortgage (or mortgages) on the Cooperative's building or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the Cooperative, as mortgagor or lessee, as
the case may be, is also responsible for fulfilling such mortgage or rental
obligations. An underlying mortgage loan is ordinarily obtained by the
Cooperative in connection with either the construction or purchase of the
Cooperative's building or the obtaining of capital by the Cooperative. The
interest of the occupant under proprietary leases or occupancy agreements as to
which that Cooperative is the landlord are generally subordinate to the interest
of the holder of an underlying mortgage and to the interest of the holder of a
land lease. If the Cooperative is unable to meet the payment obligations (i)
arising under an underlying mortgage, the mortgagee holding an underlying
mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements or (ii) arising under its land
lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements. In
addition, an underlying mortgage on a Cooperative may provide financing in the
form of a mortgage that does not fully amortize, with a significant portion of
principal being due in one final payment at maturity. The inability of the
Cooperative to refinance a mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land, could lead to termination of
the Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of shares
of the Cooperative or, in the case of a Mortgage Pool, the collateral securing
any related Cooperative Loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly maintenance payment to the Cooperative
pursuant to the proprietary lease, which maintenance payment represents such
tenant-stockholder's PRO RATA share of the Cooperative's payments for its
underlying mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a Cooperative and accompanying
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occupancy rights may be financed through a Cooperative Loan evidenced by a
Cooperative Note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the shares
of the related Cooperative. The lender generally takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the Cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the Cooperative Note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See "-- Foreclosure on Shares of Cooperatives" below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction under
Section 216(a) of the Code for amounts paid or accrued within his or her taxable
year to the corporation representing his or her proportionate share of certain
interest expenses and certain real estate taxes allowable as deductions to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code for the taxable year to which
such interest and tax deductions relate, such section requires, among other
things, that at least 80% of the gross income of the corporation be derived from
its tenant-stockholders. By virtue of this requirement, the status of a
corporation for purposes of Section 216(b)(1) of the Code must be determined on
a year-to-year basis. Consequently, there can be no assurance that Cooperatives
relating to the Cooperative Loans will qualify under such section for any
particular year. In the event that such a Cooperative fails to qualify for one
or more years, the value of the collateral securing any related Cooperative
Loans could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
FORECLOSURE
Foreclosure may be 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 defendant. Judicial foreclosure
proceedings are generally not contested by any of the parties defendant.
However, when the lender's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of judicial foreclosure, the court would issue a judgment of
foreclosure and would generally appoint a referee or other court officer to
conduct the sale of property.
In many states, foreclosure of a mortgage or deed of trust may also be
accomplished by a nonjudicial sale under a specific provision in the mortgage or
deed of trust which authorizes the sale of the property at public auction upon
default by the mortgagor. The laws of the various states establish certain
notice requirements for non-judicial foreclosure sales. In some states, notice
of default must be recorded and sent to the mortgagor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, notice must be provided in some states to certain other persons
including junior lienholders and any other individual having an interest in the
real property. In some states, the mortgagor, 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 law controls the amount
of foreclosure expenses and costs, including limited attorneys' fees, which may
be recovered by a lender. Some states also require a notice of sale to be posted
in a public place and published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer or by the trustee is a public sale.
However, because of a number of factors, including
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the difficulty a potential buyer at the sale would have in determining the exact
status of title and the fact that the physical condition of the property may
have deteriorated during the foreclosure proceedings, it is uncommon for a third
party to purchase the property at the foreclosure sale. Rather, it is common for
the lender to purchase the property from the trustee or referee with a credit
bid in an amount equal to the principal amount of the mortgage or deed of trust,
accrued and unpaid interest and the expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including obtaining casualty
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure
proceedings. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of his defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and sometimes expensive
actions to determine the causes for the mortgagor's default and the likelihood
that the mortgagor will be able to reinstate the loan. In some cases, courts
have substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
mortgagors who are suffering from a temporary financial disability. In other
cases, courts have limited the right of the lender to foreclose if the default
under the security instrument is not monetary, such as the mortgagor failing to
adequately maintain or insure the property or the mortgagor executing a second
mortgage or deed of trust affecting the property. Some courts have been faced
with the issue of whether or not federal or state constitutional provisions
reflecting due process concerns for adequate notice require that mortgagors
receive notices in addition to the statutorily prescribed minimum. For the most
part, these cases have upheld the notice provisions as being reasonable or have
found that the foreclosure sale does not involve sufficient state action to
afford constitutional protections to the mortgagor.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay
maintenance or other obligations or charges owed by such tenant-stockholder,
including mechanics' liens against the Cooperative's building incurred by such
tenant-stockholder. Generally, maintenance and other obligations and charges
arising under a proprietary lease or occupancy agreement which are owed to the
Cooperative are made liens upon the shares to which the proprietary lease or
occupancy agreement relates. In addition, the proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event the borrower defaults in the performance of covenants thereunder.
Typically, the lender and the Cooperative enter into a recognition agreement
which, together with any lender protection provisions contained in the
proprietary lease, establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or
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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 amount realized upon a sale of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and unpaid
interest thereon.
Recognition agreements also generally provide that in the event the lender
succeeds to the tenant-stockholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative Loan,
the lender must obtain the approval or consent of the board of directors of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares and assigning the proprietary lease. Such approval or consent
is usually based on the prospective purchaser's income and net worth, among
other factors, and may significantly reduce the number of potential purchasers,
which could limit the ability of the lender to sell and realize upon the value
of the collateral. Generally, the lender is not limited in any rights it may
have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
A foreclosure on the Cooperative shares is accomplished by public sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (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 sale has been conducted in a "commercially reasonable" manner will depend on
the facts in each case. In determining commercial reasonableness, a court will
look to the notice given the debtor and the method, manner, time, place and
terms of the sale and the sale price. Generally, a sale conducted according to
the usual practice of creditors selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of the
mortgage, there are statutory periods during which the mortgagor and foreclosed
junior lienors may redeem the property from the foreclosure sale. One effect of
the statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust. As a practical matter, the lender may therefore be forced to
retain the property and pay the expenses of ownership until the redemption
period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON
LENDERS
Certain states have imposed statutory prohibitions which restrict or
eliminate the remedies of a lender under a deed of trust or a mortgage. In some
states, statutes limit the right of the lender to obtain a deficiency judgment
against the mortgagor following sale under a deed of trust or foreclosure. A
deficiency judgment would be a personal judgment against the former mortgagor
equal in most cases to the difference between the net amount realized upon the
public sale of the real property and the amount due to the lender. Other
statutes may require the lender 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 mortgagor. Some state statutes also
prohibit any deficiency judgment where the loan proceeds were used to purchase
an owner-occupied dwelling. Finally, other statutory provisions limit any
deficiency judgment against the former mortgagor following a judicial sale to
the
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excess of the outstanding debt over the fair market value of the property at the
time of the public sale. The basic purpose of these statutes is to prevent a
lender from obtaining a large deficiency judgment against the former mortgagor
as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition 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 not
conducted in a commercially reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to collect the full amount of interest due or realize
upon its security. For example, with respect to federal bankruptcy law, a court
with federal bankruptcy jurisdiction may permit a mortgagor through his or her
Chapter 11, Chapter 12 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on the mortgagor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
foreclosure proceedings had occurred prior to the filing of the debtor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also held that the terms of
a mortgage loan secured by property of the mortgagor may be modified. These
courts have held that such modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
and reducing the lender's security interest to the value of the residence, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan. Courts with federal bankruptcy jurisdiction similarly may be able to
modify the terms of a Cooperative Loan.
The Code provides priority to certain tax liens over the lien of the
security instrument. Numerous federal and some state consumer protection laws
impose substantive requirements upon lenders in connection with the origination
and the servicing 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. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the mortgage loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard forms of note, mortgage and deed of trust used by lenders
generally contain "due-on-sale" clauses. These clauses permit the lender to
accelerate the maturity of the loan if the mortgagor sells, transfers or conveys
the property. The enforceability of these clauses was the subject of legislation
and litigation in many states, and in some cases the enforceability of these
clauses was limited or denied. However, the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act") purports to pre-empt state
statutory and case law that prohibits the enforcement of "due-on-sale" clauses
and permits lenders to enforce these clauses in accordance with their terms,
subject to certain limited exceptions. The Garn-St Germain Act does "encourage"
lenders to permit assumption of loans at the original rate of interest or at
some other rate less than the average of the original rate and the market rate.
In addition, certain states have continuing restrictions on the enforceability
of due-on-sale clauses for certain loans.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings associations and
federal savings banks) may not exercise a "due-on-sale" clause, notwithstanding
the fact that a transfer of the property may have occurred. These include
intrafamily transfers, certain transfers by operation of law, leases of less
than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St Germain Act by the Federal Home Loan Bank Board
(now the Office of Thrift Supervision) and statutes in some states also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to
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a "due-on-sale" clause. In addition, a few states have exercised their rights
under the Garn-St Germain Act to limit the enforceability of the due-on-sale
clauses in certain loans made prior to passage of the Garn-St Germain Act. As of
the date hereof, certain states have taken action to reimpose interest rate
limits and/or to limit discount points or other charges.
A consequence of the inability to enforce a due-on-sale clause may be that a
mortgagor's buyer may assume the existing mortgage loan rather than paying it
off, if such existing loan bears an interest rate below the current market rate,
which may have an impact upon the average life of the Mortgage Loans and the
number of Mortgage Loans which may be outstanding until maturity.
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who 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 such
Mortgagor's active duty status, unless a court orders otherwise upon application
of the lender. Any shortfall in interest collections resulting from the
application of the Relief Act, to the extent not covered by any applicable
credit enhancements, could result in losses to the Holders of the Certificates.
In addition, the Relief Act imposes limitations which would impair the ability
of the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a 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.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Federal Home Loan Bank Board (now the Office of Thrift Supervision)
has issued regulations governing the implementation of Title V. The statute
authorizes any state to reimpose interest rate limits by adopting before April
1, 1983, a law or constitutional provision which expressly rejects application
of the federal law. In addition, even where Title V is not so rejected, any
state is authorized to adopt a provision limiting discount points or other
charges prior to origination on mortgage loans covered by Title V.
Under the Company's mortgage purchase program, each Lender is required to
represent and warrant to the Company that all Mortgage Loans are originated in
full compliance with applicable state laws, including usury laws. Based upon
such representations and warranties from the Lenders, the Company will make a
similar representation and warranty in the Pooling Agreement for each Series to
the Trustee for the benefit of Certificateholders. See "Description of
Certificates-- Representations and Warranties".
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable-rate mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary,
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to origination of alternative mortgage instruments by national banks,
state-chartered credit unions may originate alternative mortgage instruments in
accordance with regulations promulgated by the National Credit Union
Administration with respect to origination of alternative mortgage instruments
by federal credit unions, and all other non-federally chartered housing
creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations promulgated
by the Federal Home Loan Bank Board (now the Office of Thrift Supervision) with
respect to origination of
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alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of costs
of clean-up. In several states such a lien has priority over the lien of an
existing mortgage against such property.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), a lender may be liable, as an "owner" or "operator", for costs
arising out of releases or threatened releases of hazardous substances that
require remedy at a mortgaged property. CERCLA imposes liability for such costs
on any and all "responsible parties", including the current owner or operator of
a contaminated property, regardless of whether or not the environmental damage
was caused by a prior owner. 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 a mortgaged property, so that the lender would lose the protection of the
exclusion for secured creditors, has been a matter of judicial interpretation of
the statutory language, and court decisions have historically been inconsistent.
In 1990, the United State Court of Appeals for the Eleventh Circuit suggested,
in UNITED STATES V. FLEET FACTORS CORP., 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 such influence. Other judicial decisions
did not interpret the secured creditor exclusion as narrowly as did the FLEET
FACTORS decision.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996 (the
"Asset Conservation Act"), which took effect on September 30, 1996. The Asset
Conservation Act provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or of the borrower. The Asset Conservation
Act also provides that participation in the management of the property does not
include "merely having the capacity to influence, or unexercised right to
control" operations. Rather, a lender will lose the protection of the secured
creditor exclusion only if it exercises decision making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the mortgaged property. It should also be noted, however, that
liability for costs associated with the investigation and clean-up of
environmental contamination may also be governed by state law, which may not
provide any specific protections to lenders, or, alternatively, may not impose
liability on lenders at all.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion, therefore, does not apply to liability for clean-up costs associated
with releases of petroleum contamination. Federal regulation of underground
petroleum storage tanks (other than heating oil tanks) is governed by Subtitle I
of the federal Resource Conservation and Recovery Act ("RCRA"). The United
States Environmental Protection Agency ("EPA") has promulgated a lender
liability rule for underground storage tanks regulated by Subtitle I of RCRA.
Under the EPA 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 by the holder of the security interest.
Moreover, amendments to RCRA, enacted in 1996, concurrently with the CERCLA
amendments discussed in the previous paragraph, extend to the holders of
security interests in petroleum underground storage tanks the same protections
accorded to secured creditors under CERCLA. Again, it should be noted, however,
that liability for clean-up of petroleum contamination may be governed by state
law, which may not provide any specific protection for lenders or,
alternatively, may not impose liability on lenders at all.
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Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Mortgage Loans were originated, no environmental assessment or a
very limited environment assessment of the Mortgaged Properties will have been
conducted.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on employee benefit plans and other benefit plans
or arrangements which are subject to ERISA or Section 4975 of the Code ("Plans")
and on those persons who are fiduciaries with respect to Plans or otherwise
responsible for the investment of "plan assets" of Plans ("Plan Assets"). In
accordance with the general fiduciary standards of ERISA, an ERISA Plan
fiduciary should consider whether an investment in the Certificates is permitted
by the documents and instruments governing the Plan, consistent with the Plan's
overall investment policy and appropriate in view of the composition of its
investment portfolio.
Employee benefit plans which are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to the requirements of ERISA or Section 4975 of the Code.
Accordingly, assets of such plans may be invested in the Certificates subject to
the provisions of applicable state law and, in the case of any such plan which
is qualified under Section 401(a) of the Code, the restrictions imposed under
Section 503 of the Code.
In addition to imposing general fiduciary standards, ERISA prohibits a broad
range of transactions involving Plan Assets and certain persons ("Parties in
Interest") who have certain specified relationships to the Plan under Section
406 of ERISA, and taxes any such transaction under Section 4975 of the Code,
unless an exemption applies. If the assets of a Mortgage Pool are treated for
purposes of ERISA and Section 4975 of the Code as Plans or other entities
holding Plan Assets with respect to Plans, collective investment funds,
insurance company general or separate accounts (collectively, "Plan Asset
Investors") that purchase or hold Certificates of the applicable Series, an
investment in Certificates by any such Plan might constitute or give rise to a
prohibited transaction under ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption applies. Violation of the prohibited
transaction rules could result in the imposition of excise taxes and/or other
penalties under ERISA and/or Section 4975 of the Code.
PLAN ASSETS REGULATION
The United States Department of Labor ("DOL") has issued a final regulation
(the "Regulation") under which the assets of an entity in which a Plan Asset
Investor makes an equity investment will be treated as Plan Assets in certain
circumstances. Unless the Regulation provides an exemption from this "plan
asset" treatment, and if an exemption is not otherwise available under ERISA, an
undivided portion of the assets of a Mortgage Pool will be treated, for purposes
of applying the fiduciary standards and prohibited transaction rules of ERISA
and Section 4975 of the Code, as Plan Assets with respect to each Plan which
becomes a Certificateholder of the applicable Series.
The Regulation provides an exemption from "plan asset" treatment for
securities issued by an entity if, immediately after the most recent acquisition
of any equity interest in the entity, less than 25% of the value of each class
of equity interests in the entity, excluding interests held by a person who has
discretionary authority or control with respect to the assets of the entity (or
any affiliate of such a person), is held by "benefit plan investors" (I.E.,
Plans, governmental, foreign and other employee benefit plans not subject to
ERISA and entities holding Plan Assets). Because the availability of this
exemption with respect to any Mortgage Pool depends upon the identity of the
Certificateholders of the applicable Series at any time, there can be no
assurance as to whether any Series or Class of Certificates will qualify for
this exemption.
PROHIBITED TRANSACTION CLASS EXEMPTION 83-1
Prohibited Transaction Class Exemption 83-1 (Class Exemption for Certain
Transactions Involving Mortgage Pool Investment Trusts) ("PTCE 83-1") permits,
subject to certain conditions, certain transactions involving the creation,
maintenance and termination of certain residential mortgage pools and the
acquisition and holding of certain residential mortgage pool pass-through
certificates by Plan Asset Investors, regardless of whether (a) the mortgage
pool is exempt from "plan asset" treatment or (b) the transactions would
otherwise be prohibited under ERISA or Section 4975
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of the Code. If the general conditions (described below) of PTCE 83-1 are
satisfied, an investment by a Plan in Certificates (1) will be exempt from the
prohibitions of Section 406(a) of ERISA (relating generally to Plan Asset
transactions involving Parties in Interest who are not fiduciaries) if the
Certificates are purchased at no more than fair market value, and (2) will be
exempt from the prohibitions of Sections 406(b)(1) and (2) of ERISA (relating
generally to Plan Asset transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, the Plan Asset Investor pays
no more for the Certificates than would be paid in an arm's length transaction
with an unrelated party, no sales commission is paid to the Company as Mortgage
Pool sponsor, the Plan Asset Investor does not purchase more than 25% of the
Certificates of the applicable Series, and at least 50% of the Certificates of
that Series is purchased by persons independent of the Company, the Trustee and
the Insurer, as applicable.
PTCE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (1) the existence of a pool
trustee who is not an affiliate of the pool sponsor; (2) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments; and (3) 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.
Unless otherwise specified in the applicable Prospectus Supplement, the
Trustee for each Series will be unaffiliated with the Company, and the first
general condition of PTCE 83-1 will be satisfied for each such Series. With
respect to the second general condition of PTCE 83-1, the Company intends to use
its best efforts to establish for each Series of Certificates an insurance,
indemnification, subordination or other method of credit support which will
adequately protect the Mortgage Pools and indemnify Certificateholders of the
applicable Series against pass-through payment reductions resulting from
property damage or defaults in loan payments. See "Description of Credit
Enhancements". The amount, method and description of the credit support method
applicable to a Series of Certificates will be set forth in the related
Prospectus Supplement. With respect to the third general condition of PTCE 83-1,
the Company intends to use its best efforts to establish for each Series a
compensation method which will produce for the Company total compensation which
will not exceed adequate consideration for forming the Mortgage Pool, selling
the Certificates and serving as Master Servicer of the Mortgage Pool. However,
the Company does not guarantee that its credit support and compensation methods
will be sufficient to meet the second and third general conditions (described
above) with respect to any Series.
As indicated in the two preceding paragraphs, the continued maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments, is one of the three general conditions that must be satisfied for any
transaction involving a Mortgage Pool to remain eligible for exemption by PTCE
83-1 from the prohibited transaction rules of ERISA and Section 4975 of the
Code. If the credit support method established for any Series is cancelled or
terminated, or if the credit support is reduced to such an extent that its
coverage amount is less than the greater of (a) 1% of the aggregate unpaid
principal balance of the Mortgage Loans or (b) the unpaid principal balance of
the largest single Mortgage Loan (see "Description of Credit Enhancements"),
then the Mortgage Pool relating to that Series may no longer satisfy the general
conditions of PTCE 83-1. In such event, the exemption from the prohibited
transaction rules afforded by PTCE 83-1 may no longer be available.
One or more Series of Certificates may be offered to Plan Asset Investors
through a forward delivery commitment contract, which is a contract for the
purchase of Certificates to be delivered at an agreed future settlement date.
PTCE 83-1 permits the sale of Certificates to a Plan Asset Investor pursuant to
such a contract, provided that the forward delivery commitment is expressly
approved by a fiduciary who is independent of the Company, the Trustee, the
Insurer (if any) and their respective affiliates, and who has the authority to
manage and control the Plan Assets being committed for investment in the
Certificates.
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PTCE 83-1 will not provide exemptive relief with respect to a Series of
Certificates evidencing interests in Trust Funds that include Cooperative Loans.
If a Series of Certificates is subdivided into two or more Classes which are
entitled to disproportionate allocations of the principal and interest payments
on the Mortgage Loans, the availability of the exemption afforded by PTCE 83-1
may be adversely affected, as described in the applicable Prospectus Supplement.
Moreover, if any Class of Certificates is entitled to pass-through payments of
principal (but no or only nominal interest) or interest (but no or only nominal
principal), PTCE 83-1 will not exempt holders of that Class of Certificates from
the prohibited transaction rules of ERISA and Section 4975 of the Code.
OTHER EXEMPTIONS
If for any reason PTCE 83-1 does not provide an exemption for a particular
Certificateholder who is a Plan Asset Investor, one of five other prohibited
transaction class exemptions issued by the DOL might apply, I.E., PTCE 96-23
(Class Exemptions for Plan Asset Transactions Determined by In-House Asset
Managers), PTCE 95-60 (Class Exemption for Certain Transactions Involving
Insurance Company General Accounts), PTCE 91-38 (Class Exemption for Certain
Transactions Involving Bank Collective Investment Funds), PTCE 90-1 (Class
Exemption for Certain Transactions Involving Insurance Company Pooled Separate
Accounts) or PTCE 84-14 (Class Exemption for Plan Asset Transactions Determined
by Independent Qualified Professional Asset Managers). There can be no assurance
that any of these class exemptions will apply with respect to any particular
Plan Asset Investor or, even if it were to apply, that the exemption would apply
to all transactions involving the Mortgage Pool. In addition, the underwriter
with respect to a particular Series may be the recipient of a final prohibited
transaction exemption which, if so specified in the applicable Prospectus
Supplement, may accord a Plan Asset Investor protection from violations of the
prohibited transaction rules of ERISA and Section 4975 of the Code if the Plan
Asset Investor satisfies the conditions described in the applicable Prospectus
Supplement.
GENERAL CONSIDERATIONS
In summary, the Company, the Trustee, the Servicer, any insurer, the obligor
under any other credit enhancement instrument, any Seller/Servicer, any
underwriter for any Series of Certificates, as applicable, and their respective
affiliates might be considered or might become Parties in Interest with respect
to a Plan Asset Investor. In that event, the acquisition or holding of
Certificates of the applicable Series or Class by or on behalf of such Plan
Asset Investor might be viewed as giving rise to a prohibited transaction under
ERISA and Section 4975 of the Code, unless PTCE 83-1 or another exemption is
available. Accordingly, before a Plan Asset Investor makes the investment
decision to purchase, to commit to purchase or to hold Certificates of any
Series or Class, the Plan Asset Investor should determine (a) whether the second
and third general conditions and the specific conditions (described briefly
above) of PTCE 83-1 have been satisfied; (b) whether adequate protection is
accorded by any prohibited transaction exemption issued to the underwriter with
respect to the applicable Series, as described in the applicable Prospectus
Supplement; (c) whether any other prohibited transaction class exemption (if
required) is available under ERISA and Section 4975 of the Code; or (d) whether
an exemption from "plan asset" treatment is available to the applicable Mortgage
Pool. The Plan Asset Investor should also consult the ERISA discussion, if any,
in the applicable Prospectus Supplement for further information regarding the
application of ERISA and Section 4975 of the Code to any Series or Class of
Certificates.
ANY PLAN ASSET INVESTOR THAT PROPOSES TO USE PLAN ASSETS TO PURCHASE
CERTIFICATES SHOULD CONSULT WITH ITS OWN COUNSEL WITH RESPECT TO THE POTENTIAL
CONSEQUENCES UNDER ERISA AND THE CODE OF THE ACQUISITION AND OWNERSHIP OF
CERTIFICATES.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. It does not purport to discuss all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules and does not address
the tax consequences of persons holding Certificates as part of a hedge or
hedging transaction. Further, the authorities on which this discussion is based
are subject to change or differing interpretations, which changes or differing
interpretations could apply retroactively. This discussion does not address the
state or local
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tax consequences of the purchase, ownership and disposition of such
Certificates. Investors should consult their own tax advisors in determining the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses certificates ("REMIC Certificates")
representing interests in a Mortgage Pool ("REMIC Mortgage Pool") as to which
the Master Servicer will cause to elect treatment as a real estate mortgage
investment conduit ("REMIC") under Sections 860A through 860G ("REMIC
Provisions") of the Code. Under the REMIC Provisions, REMICs may issue "regular"
interests and must issue one and only one class of "residual" interests. A REMIC
Certificate representing a regular interest in a REMIC Mortgage Pool will be
referred to as a "REMIC Regular Certificate" and a REMIC Certificate
representing a residual interest in a REMIC Mortgage Pool will be referred to as
a "REMIC Residual Certificate".
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Code Sections 1271 through 1273 and 1275
and in Treasury regulations issued under the original issue discount provisions
of the Code (the "OID Regulations"), and the Treasury regulations issued under
the provisions of the Code relating to REMICs (the "REMIC Regulations"). The OID
Regulations generally are effective with respect to debt instruments issued on
or after April 4, 1994.
A. CLASSIFICATION OF REMIC TRUST FUNDS
With respect to each Series of REMIC Certificates, Orrick, Herrington &
Sutcliffe, special counsel to the Company, will deliver their opinion generally
to the effect that, assuming (i) a REMIC election is made timely in the required
form, (ii) the Master Servicer complies with all provisions of the related
Pooling Agreement, (iii) certain representations set forth in the Pooling
Agreement are true, and (iv) there is continued compliance with applicable
provisions of the Code, as it may be amended from time to time, and applicable
Treasury regulations issued thereunder, the related REMIC Mortgage Pool will
qualify as a REMIC and the classes of interests offered will be considered to be
regular interests or residual interests in that REMIC Mortgage Pool within the
meaning of the REMIC Provisions.
Holders of REMIC Certificates should be aware that, if an entity electing to
be treated as a REMIC fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, the Code
provides that the entity will not be treated as a REMIC for such year and
thereafter. In such event, an entity electing to be treated as a REMIC may be
taxable as a separate corporation under Treasury regulations, and the related
REMIC Certificates may not be accorded the status described below under the
heading "Characterization of Investments in REMIC Certificates". In the case of
an inadvertent termination of REMIC status, the Code provides the Treasury
Department with authority to issue regulations providing relief. Any such
relief, however, may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the REMIC's income for the period of time
in which the requirements for REMIC status are not satisfied.
B. CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, REMIC Certificates are not treated for federal income tax
purposes as ownership interests in the assets of a REMIC Mortgage Pool. However,
with respect to taxable years of a Certificateholder beginning after December
31, 1986, (i) REMIC Certificates held by a mutual savings bank or a domestic
building and loan association will constitute "qualifying real property loans"
within the meaning of Code Section 593(d) in the same proportion that the assets
of the REMIC Mortgage Pool underlying such Certificates ("Assets") would be so
treated; (ii) REMIC Certificates held by a domestic building and loan
association will constitute a "regular or residual interest in a REMIC" within
the meaning of Code Section 7701(a)(19)(C)(xi) in the same proportion that the
Assets would be treated as "loans.......secured by an interest in real property"
within the meaning of
Code Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C); and (iii) REMIC Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the REMIC Certificates will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the Assets would be treated as "interests in
real property" as defined in Code Section 856(c)(6)(C) (or, as provided in the
Committee Report, as "real estate assets" as defined in
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Code Section 856(c)(6)(B)). See, in this regard, "--Characterization of
Investments in Trust Certificates--Buydown Mortgage Loans", below. Moreover, if
95% or more of the Assets qualify for any of the foregoing treatments, the REMIC
Certificates will qualify for the corresponding status in their entirety.
Investors should be aware that the investment of amounts in any reserve account
in assets not so qualifying would, and holding property acquired by foreclosure
pending sale might, reduce the amount of the REMIC Certificate that would
qualify for the foregoing treatment. The REMIC Regulations provide that payments
on Mortgage Loans held pending distribution are considered part of the Mortgage
Loans for purposes of Code Sections 593(d) and 856(c)(5)(A); it is unclear
whether such collected payments would be so treated for purposes of Code Section
7701(a)(19)(c)(v), but there appears to be no reason why analogous treatment
should not be given to such collected payments under that provision. The
determination as to the percentage of the REMIC's assets that will constitute
assets described in the foregoing sections of the Code will be made with respect
to each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The REMIC will report
those determinations to Certificateholders in the manner and at the times
required by applicable Treasury regulations. The applicable Prospectus
Supplement or the related Current Report on Form 8-K for each Series of REMIC
Certificates will describe the Assets as of the Cut-Off Date. REMIC Certificates
held by certain financial institutions will constitute "evidence of
indebtedness" within the meaning of Code Section 582(c)(1); in addition, REMIC
Regular Certificates acquired by a REMIC in accordance with the requirements of
Section 860G(a)(3)(C) or Section 860G(a)(4)(B) of the Code will be treated as
"qualified mortgages" for purposes of Code Section 860D(a)(4).
C. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
Except as otherwise stated in this discussion, the REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC Mortgage Pool and not as ownership interests in the REMIC
Mortgage Pool or its Assets. In general, interest, original issue discount and
market discount paid or accrued on a REMIC Regular Certificate will be treated
as ordinary income to the holder of such REMIC Regular Certificate.
Distributions in reduction of the stated redemption price at maturity of the
REMIC Regular Certificate will be treated as a return of capital to the extent
of such holder's basis in such REMIC Regular Certificate. Holders of REMIC
Regular Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to REMIC Regular
Certificates under an accrual method.
1. ORIGINAL ISSUE DISCOUNT
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Code Section 1273(a). Any holders of REMIC
Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of the receipt of the cash attributable to
such income. The Company will report annually (or more often if required) to the
Internal Revenue Service ("IRS") and to Certificateholders such information with
respect to the original issue discount accruing on the REMIC Regular
Certificates as may be required under Code Section 6049 and the regulations
thereunder. See "--Reporting and Other Administrative Matters of REMICS" below.
Rules governing original issue discount are set forth in Code Sections 1271
through 1273 and 1275 and, to some extent, in the OID Regulations. Code Section
1272(a)(6) provides special original issue discount rules applicable to REMIC
Regular Certificates. Regulations have not yet been proposed or adopted under
Section 1272(a)(6) of the Code. Further, application of the OID Regulations to
the REMIC Regular Certificates remains unclear in some respects because the OID
Regulations generally purport not to apply to instruments to which section
1272(a)(6) applies such as REMIC Regular Certificates, and separately because
they either do not address, or are subject to varying interpretations with
regard to, several relevant issues.
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Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates and for certain other federal income tax
purposes. The Prepayment Assumption is to be determined in the manner prescribed
in Treasury regulations. To date, no such regulations have been promulgated. The
Committee Report indicates that the regulations will provide that the Prepayment
Assumption, if any, used with respect to a particular transaction must be the
same as that used by the parties in pricing the transaction. Unless otherwise
specified in the applicable Prospectus Supplement, the Company will use a
percentage of the Basic Prepayment Assumption (or such other Prepayment
Assumption as may be specified in the applicable Prospectus Supplement) in
reporting original issue discount that is consistent with this standard.
However, the Company does not make any representation that the Mortgage Loans
will in fact prepay at that percentage of the Basic Prepayment Assumption or at
any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the REMIC Regular Certificates. The Prospectus Supplement with
respect to a Series of REMIC Certificates will disclose the percentage of the
Basic Prepayment Assumption (or such other Prepayment Assumption as may be
specified therein) to be used in reporting original issue discount, if any, and
for certain other federal income tax purposes.
The total amount of original issue discount on a REMIC Regular Certificate
is the excess of the "stated redemption price at maturity" of the REMIC Regular
Certificate over its "issue price". Except as discussed in the following two
paragraphs, in general, the issue price of a particular Class of REMIC Regular
Certificates offered hereunder will be the price at which a substantial amount
of REMIC Regular Certificates of that Class are first sold to the public
(excluding bond houses and brokers).
If a REMIC Regular Certificate is sold with accrued interest that relates to
a period prior to the issue date of such REMIC Regular Certificate, the amount
paid for the accrued interest will be treated instead as increasing the issue
price of the REMIC Regular Certificate. In addition, that portion of the first
interest payment in excess of interest accrued from the Closing Date to the
first Distribution Date will be treated for federal income tax reporting
purposes as includible in the stated redemption price at maturity of the REMIC
Regular Certificate, and as excludible from income when received as a payment of
interest on the first Distribution Date. The OID Regulations suggest that some
or all of this pre-issuance accrued interest "may" be treated as a separate
asset (and hence not includible in a REMIC Regular Certificate's issue price or
stated redemption price at maturity), whose cost is recovered entirely out of
interest paid on the first Distribution Date. It is unclear how such treatment
would be elected under the OID Regulations and whether an election could be made
unilaterally by a Certificateholder.
The stated redemption price at maturity of a REMIC Regular Certificate is
equal to the total of all payments to be made on such Certificate other than
"qualified stated interest." Under the OID Regulations, "qualified stated
interest" is interest that is unconditionally payable at least annually during
the entire term of the Certificate at either (i) a single fixed rate that
appropriately takes into account the length of the interval between payments or
(ii) the current values of a single "qualified floating rate" or "objective
rate" (each, a "Single Variable Rate"). A "current value" is the value of a
variable rate on any day that is no earlier than three months prior to the first
day on which that value is in effect and no later than one year following that
day. A "qualified floating rate" is a rate whose variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds in the currency in which the Certificate is denominated. Such a rate
remains qualified even though it is multiplied by a fixed, positive multiple not
exceeding 1.35, increased or decreased by a fixed rate, or both. Certain
combinations of rates constitute a single qualified floating rate, including (i)
interest stated at a fixed rate for an initial period of less than one year
followed by a qualified floating rate if the value of the floating rate at the
closing date is intended to approximate the fixed rate, and (ii) two or more
qualified floating rates that can be expected to have approximately the same
values throughout the term of the Certificate. A combination of such rates is
conclusively presumed to be a single floating rate if the values of all rates on
the closing date are within 0.25% of each other. A variable rate that is subject
to an interest rate cap, floor, "governor" or similar restriction on rate
adjustment may be a qualified floating rate only if such restriction is fixed
throughout the term of the instrument, or is not reasonably expected as of the
closing date to cause the yield on the debt
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instrument to differ significantly from the expected yield absent the
restriction. An "objective rate" is a rate (other than a qualified floating
rate) determined using a single formula fixed for the life of the Certificate,
which is based on (i) one or more qualified floating rates (including a multiple
or inverse of a qualified floating rate), (ii) one or more rates each of which
would be a qualified floating rate for a debt instrument denominated in a
foreign currency, (iii) the yield or changes in price of one or more items of
"actively traded" personal property, (iv) a combination of rates described in
(i), (ii) and (iii), or (v) a rate designated by the IRS. However, a variable
rate is not an objective rate if it is reasonably expected that the average
value of the rate during the first half of the Certificate's term will differ
significantly from the average value of such rate during the final half of its
term. A combination of interest stated at a fixed rate for an initial period of
less than one year followed by an objective rate is treated as a single
objective rate if the value of the objective rate at the closing date is
intended to approximate the fixed rate; such a combination of rates is
conclusively presumed to be a single objective rate if the objective rate on the
closing date does not differ from the fixed rate by more than 0.25%. The
qualified stated interest payable with respect to certain variable rate debt
instruments not bearing stated interest at a Single Variable Rate generally is
determined under the OID Regulations by converting such instruments into fixed
rate debt instruments. Instruments qualifying for such treatment generally
include those providing for stated interest at (i) more than one qualified
floating rates, or at (ii) a single fixed rate and (a) one or more qualified
floating rates or (b) a single "qualified inverse floating rate" (each, a
"Multiple Variable Rate"). A qualified inverse floating rate is an objective
rate equal to a fixed rate reduced by a qualified floating rate, the variations
in which can reasonably be expected to inversely reflect contemporaneous
variations in the cost of newly borrowed funds (disregarding permissible rate
caps, floors, governors and similar restrictions such as are described above).
Under these rules, some of the payments of interest on a Certificate bearing a
fixed rate of interest for an initial period followed by a qualified floating
rate of interest in subsequent periods could be treated as included in the
stated redemption price at maturity if the initial fixed rate were to differ
sufficiently from the rate that would have been set using the formula applicable
to subsequent periods. See "--Variable Rate Certificates". REMIC Regular
Certificates offered hereby other than Certificates providing for variable rates
of interest or for the accretion of interest are not anticipated to have stated
interest other than "qualified stated interest", but if any such REMIC Regular
Certificates are so offered, appropriate disclosures will be made in the
Prospectus Supplement. Some or all of the payments on REMIC Regular Certificates
providing for the accretion of interest will be included in the stated
redemption price at maturity of such Certificates.
Under a DE MINIMIS rule in the Code, as interpreted in the OID Regulations,
original issue discount on a REMIC Regular Certificate will be considered to be
zero if such original issue discount is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average life of the REMIC Regular Certificate. For this purpose, the weighted
average life of the REMIC Regular Certificate is computed as the sum of the
amounts determined by multiplying the amount of each payment under the
instrument (other than a payment of qualified stated interest) by a fraction,
whose numerator is the number of complete years from the issue date until such
payment is made, and whose denominator is the stated redemption price at
maturity of such REMIC Regular Certificate. The IRS may be anticipated to take
the position that this rule should be applied taking into account the Prepayment
Assumption and the effect of any anticipated investment income. Under the OID
Regulations, REMIC Regular Certificates bearing only qualified stated interest
except for any "teaser" rate, interest holiday or similar provision would be
treated as subject to the DE MINIMIS rule if the greater of the deferred or
foregone interest or the other original issue discount is less than such DE
MINIMIS amount.
The OID Regulations generally would treat DE MINIMIS original issue discount
as includible in income as each principal payment is made, based on the product
of the total amount of such DE MINIMIS original issue discount and a fraction,
whose numerator is the amount of such principal payment and whose denominator is
the stated principal amount of the REMIC Regular Certificate. The OID
Regulations also would permit a Certificateholder to elect to accrue DE MINIMIS
original issue discount into income currently based on a constant yield method.
See "Taxation of Owners of REMIC Regular Certificates--Market Discount and
Premium".
Each holder of a REMIC Regular Certificate must include in gross income the
sum of the "daily portions" of original issue discount on its REMIC Regular
Certificate for each day during its taxable
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year on which it held such REMIC Regular Certificate. For this purpose, in the
case of an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows. A calculation will first
be made of the portion of the original issue discount that accrued during each
accrual period, that is, unless otherwise stated in the applicable Prospectus
Supplement, each period that begins or ends on a date that corresponds to a
Distribution Date on the REMIC Regular Certificate and begins on the first day
following the immediately preceding accrual period (beginning on the Closing
Date in the case of the first such period). For any accrual period such portion
will equal the excess, if any, of (i) the sum of (A) the present value of all of
the distributions remaining to be made on the REMIC Regular Certificate, if any,
as of the end of the accrual period and (B) the distribution made on such REMIC
Regular Certificate during the accrual period of amounts included in the stated
redemption price at maturity, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining payments referred to in the preceding sentence will be calculated
based on (i) the yield to maturity of the REMIC Regular Certificate, calculated
as of the settlement date, giving effect to the Prepayment Assumption, (ii)
events (including actual prepayments) that have occurred prior to the end of the
accrual period, and (iii) the Prepayment Assumption. The adjusted issue price of
a REMIC Regular Certificate at the beginning of any accrual period will equal
the issue price of such Certificate, increased by the aggregate amount of
original issue discount with respect to such REMIC Regular Certificate that
accrued in prior accrual periods, and reduced by the amount of any distributions
made on such REMIC Regular Certificate in prior accrual periods of amounts
included in the stated redemption price at maturity. The original issue discount
accruing during any accrual period will be allocated ratably to each day during
the period to determine the daily portion of original issue discount for each
day. With respect to an accrual period between the settlement date and the first
Distribution Date on the REMIC Regular Certificate (notwithstanding that no
distribution is scheduled to be made on such date) that is shorter than a full
accrual period, the OID Regulations permit the daily portions of original issue
discount to be determined according to any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost (not including payment for accrued qualified
stated interest) less than its remaining stated redemption price at maturity
will also be required to include in gross income, for each day on which it holds
such REMIC Regular Certificate, the daily portions of original issue discount
with respect to such REMIC Regular Certificate, but reduced, if such cost
exceeds the "adjusted issue price", by an amount equal to the product of (i)
such daily portions and (ii) a constant fraction, whose numerator is such excess
and whose denominator is the sum of the daily portions of original issue
discount on such REMIC Regular Certificate for all days on or after the day of
purchase. The adjusted issue price of a REMIC Regular Certificate on any given
day is equal to the sum of the adjusted issue price (or, in the case of the
first accrual period, the issue price) of the REMIC Regular Certificate at the
beginning of the accrual period during which such day occurs and the daily
portions of original issue discount for all days during such accrual period
prior to such day, reduced by the aggregate amount of distributions previously
made other than distributions of qualified stated interest.
VARIABLE RATE CERTIFICATES. Purchasers of REMIC Regular Certificates
bearing a variable rate of interest should be aware that there is uncertainty
concerning the application of Section 1272(a)(6) of the Code and the OID
Regulations to such Certificates. In the absence of other authority, the Company
intends to be guided by the provisions of the OID Regulations governing variable
rate debt instruments in adapting the provisions of Section 1272(a)(6) of the
Code to such Certificates for the purpose of preparing reports furnished to
Certificateholders. The effect of the application of such provisions generally
will be to cause Certificateholders holding Certificates bearing interest at a
Single Variable Rate to take into account for each period an amount
corresponding approximately to the sum of (i) the qualified stated interest,
accruing on the outstanding face amount of the REMIC Regular Certificate as the
stated interest rate for that Certificate varies from time to time and (ii) the
amount of original issue discount that would have been attributable to that
period on the basis of a constant yield to maturity for a bond issued at the
same time and issue price as the REMIC Regular Certificate, having the same face
amount and schedule of payments of principal as such Certificate, subject to the
same Prepayment Assumption, and bearing interest at a fixed rate equal to the
value of the applicable qualified floating rate or qualified inverse floating
rate in the case of a Certificate
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providing for either such rate, or equal to the fixed rate that reflects the
reasonably expected yield on the Certificate in the case of a Certificate
providing for an objective rate other than an inverse floating rate, in each
case as of the issue date. Certificateholders holding REMIC Regular Certificates
bearing interest at a Multiple Variable Rate generally will take into account
interest and original issue discount under a similar methodology, except that
the amounts of qualified stated interest and original issue discount
attributable to such a Certificate first will be determined for an equivalent
fixed rate debt instrument, the assumed fixed rates for which are (a) for each
qualified floating rate, the value of each such rate as of the closing date
(with appropriate adjustment for any differences in intervals between interest
adjustment dates), (b) for a qualified inverse floating rate, the value of the
rate as of the closing date, (c) for any other objective rate, the fixed rate
that reflects the yield that is reasonably expected for the Certificate, and (d)
for an actual fixed rate, such hypothetical fixed rate as would result under (a)
or (b) if the actual fixed rate were replaced by a hypothetical qualified
floating rate or qualified inverse floating rate such that the fair market value
of the Certificate as of the issue date would be approximately the same as that
of an otherwise identical debt instrument providing for the hypothetical
variable rate rather than the actual fixed rate. If the interest paid or accrued
with respect to a Multiple Variable Rate Certificate during an accrual period
differs from the assumed fixed interest rate, such difference will be an
adjustment (to interest or original issue discount, as applicable) to the
Certificateholder's taxable income for the taxable period or periods to which
such difference relates. Additionally, purchasers of such Certificates should be
aware that the provisions of the OID Regulations applicable to variable rate
debt instruments have been limited and may not apply to some REMIC Regular
Certificates having variable rates. If such a Certificate is not governed by the
provisions of the OID Regulations applicable to variable rate debt instruments,
it may be subject to provisions of proposed Treasury Regulations applicable to
instruments having contingent payments. The application of those provisions to
instruments such as variable rate REMIC Regular Certificates is subject to
differing interpretations. Prospective purchasers of variable rate REMIC Regular
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
2. MARKET DISCOUNT AND PREMIUM
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, at a purchase price less than the adjusted issue price (as
defined under "--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount") of such REMIC Regular Certificate generally will recognize
market discount upon receipt of each distribution of principal. In particular,
such a holder will generally be required to allocate each payment of principal
on a REMIC Regular Certificate first to accrued market discount, and to
recognize ordinary income to the extent such principal payment does not exceed
the aggregate amount of accrued market discount on such REMIC Regular
Certificate not previously included in income. Such market discount must be
included in income in addition to any original issue discount includible in
income with respect to such REMIC Regular Certificate.
A Certificateholder may elect to include market discount in income currently
as it accrues, rather than including it on a deferred basis in accordance with
the foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder on or after the first day of the first
taxable year to which such election applies. In addition, the OID Regulations
permit a Certificateholder to elect to accrue all interest, discount (including
DE MINIMIS market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were made for a REMIC
Regular Certificate with market discount, the Certificateholder would be deemed
to have made an election to currently include market discount in income with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate that
is acquired at a premium is deemed to have made an election to amortize bond
premium, as described below, with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Certificate is irrevocable.
Under a statutory DE MINIMIS exception, market discount with respect to a
REMIC Regular Certificate will be considered to be zero for purposes of Code
Sections 1276 through 1278 if such market discount is less than 0.25% of the
stated redemption price at maturity of such REMIC Regular Certificate multiplied
by the number of complete years to maturity remaining after the date of its
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purchase. In interpreting a similar DE MINIMIS rule with respect to original
issue discount on obligations payable in installments, the OID Regulations refer
to the weighted average maturity of obligations, and it is likely that the same
rule will be applied in determining whether market discount is DE MINIMIS. It
appears that DE MINIMIS market discount on a REMIC Regular Certificate would be
treated in a manner similar to original issue discount of a DE MINIMIS amount.
See "Taxation of Holders of REMIC Regular Certificates--Original Issue
Discount". Such treatment would result in discount being included in income at a
slower rate than discount would be required to be included using the method
described above. However, Treasury regulations implementing the market discount
DE MINIMIS exception have not been issued in proposed or temporary form, and the
precise treatment of DE MINIMIS market discount on obligations payable in more
than one installment therefore remains uncertain.
The 1986 Act grants authority to the Treasury Department to issue
regulations providing for the method for accruing market discount of more than a
DE MINIMIS amount on debt instruments, the principal of which is payable in more
than one installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in the Committee Report will apply. Under
those rules, the holder of a bond purchased with more than DE MINIMIS market
discount may elect to accrue such market discount either on the basis of a
constant yield method or on the basis of the appropriate proportionate method
described below. Under the proportionate method for obligations issued with
original issue discount, the amount of market discount that accrues during a
period is equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the original issue
discount accruing during the period and the denominator of which is the total
remaining original issue discount at the beginning of the period. Under the
proportionate method for obligations issued without original issue discount, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. The Prepayment Assumption,
if any, used in calculating the accrual of original issue discount is to be used
in calculating the accrual of market discount under any of the above methods.
Because the regulations referred to in this paragraph have not been issued, it
is not possible to predict what effect such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
Further, a purchaser generally will be required to treat a portion of any
gain on sale or exchange of a REMIC Regular Certificate as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income. Such purchaser also may be required to defer a portion of
its interest deductions for the taxable year attributable to any indebtedness
incurred or continued to purchase or carry such REMIC Regular Certificate. Any
such deferred interest expense is, in general, allowed as a deduction not later
than the year in which the related market discount income is recognized. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
A REMIC Regular Certificate purchased at a cost (not including payment for
accrued qualified stated interest) greater than its remaining stated redemption
price at maturity will be considered to be purchased at a premium. The holder of
such a REMIC Regular Certificate may elect to amortize such premium under the
constant yield method. The OID Regulations also permit Certificateholders to
elect to include all interest, discount and premium in income based on a
constant yield method, further treating the Certificateholder as having made the
election to amortize premium generally, as discussed above. The Committee Report
indicates a Congressional intent that the same rules that will apply to accrual
of market discount on installment obligations will also apply in amortizing bond
premium under Code Section 171 on installment obligations such as the REMIC
Regular Certificates.
3. REALIZED LOSSES
Under Code Section 166, both corporate holders of REMIC Regular Certificates
and noncorporate holders of REMIC Regular Certificates that acquire such
Certificates in connection with a trade or business should be allowed to deduct,
as ordinary losses, any losses sustained during a taxable year in
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which their Certificates become wholly or partially worthless as a result of one
or more realized losses on the Mortgage Loans. However, it appears that a
noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Code Section 166 until such holder's Certificate becomes wholly worthless (I.E.,
until its outstanding principal balance has been reduced to zero) and that the
loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate without
regard to any reduction in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the underlying assets until it can be
established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as a result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
D. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
1. GENERAL
An owner of a REMIC Residual Certificate ("Residual Owner") generally will
be required to report its daily portion of the taxable income or, subject to the
limitation described below in "--Taxation of Owners of REMIC Residual
Certificates--Basis Rules and Distributions", the net loss of the REMIC Mortgage
Pool for each day during a calendar quarter that the Residual Owner owned such
REMIC Residual Certificate. For this purpose, the daily portion will be
determined by allocating to each day in the calendar quarter, using a 30 days
per month/90 days per quarter/360 days per year counting convention (unless
otherwise disclosed in the applicable Prospectus Supplement), its ratable
portion of the taxable income or net loss of the REMIC Mortgage Pool for such
quarter, and by allocating the daily portions among the Residual Owners (on such
day) in accordance with their percentage of ownership interests on such day. Any
amount included in the gross income or allowed as a loss of any Residual Owner
by virtue of this paragraph will be treated as ordinary income or loss.
Purchasers of REMIC Residual Certificates should be aware that taxable income
from such Certificates could exceed cash distributions thereon in any taxable
year. For example, if Mortgage Loans are acquired by a REMIC at a discount, then
the holder of a residual interest may recognize income without corresponding
cash distributions. This result could occur because a payment produces
recognition of discount on the Mortgage Loan while the payment could be used in
whole or in part to make principal payments on REMIC Regular Certificates issued
without substantial discount. Taxable income may also be greater in earlier
years as a result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular
Certificates, will increase over time as the lower yielding sequences of
Certificates are paid, whereas interest income with respect to any given fixed
rate Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such Certificate will be taken into account
in determining the income of such holder for federal income tax purposes.
Although it appears likely that any such payment would be includible in income
immediately upon its receipt, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or according
to some other method. Because of the uncertainty concerning the treatment of
such payments, holders of REMIC Residual Certificates should consult their tax
advisors concerning the treatment of such payments for income tax purposes.
2. TAXABLE INCOME OR NET LOSS OF THE REMIC TRUST FUND
The taxable income or net loss of the REMIC Mortgage Pool will reflect a
netting of income from the Mortgage Loans, any cancellation of indebtedness
income due to the allocation of Realized Losses to REMIC Regular Certificates,
and deductions and losses allowed to the REMIC Mortgage Pool. Such taxable
income or net loss for a given calendar quarter will be determined in the same
manner as for
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an individual having the calendar year as his taxable year and using the accrual
method of accounting, with certain modifications. The first modification is that
a deduction will be allowed for accruals of interest (including original issue
discount) on the REMIC Regular Certificates. Second, market discount equal to
the excess of any Mortgage Loan's adjusted issue price (as determined under
"Taxation of Owners of REMIC Regular Certificates--Market Discount and Premium")
over its fair market value at the time of their transfer to the REMIC Mortgage
Pool generally will be included in income as it accrues, based on a constant
yield and on the Prepayment Assumption. For this purpose, the Company intends to
treat the fair market value of the Mortgage Loans as being equal to the
aggregate issue prices of the REMIC Regular Certificates and REMIC Residual
Certificates; if one or more classes of REMIC Regular Certificates or REMIC
Residual Certificates are retained by the Company, it will estimate the value of
such retained interests in order to determine the fair market value of the
Mortgage Loans for this purpose. Third, no item of income, gain, loss or
deduction allocable to a prohibited transaction (see "--Prohibited Transactions
and Other Possible REMIC Taxes", below) will be taken into account. Fourth, the
REMIC Mortgage Pool generally may not deduct any item that would not be allowed
in calculating the taxable income of a partnership by virtue of Code Section
703(a)(2). Fifth, the REMIC Regulations provide that the limitation on
miscellaneous itemized deductions imposed on individuals by Code Section 67 will
not be applied at the Mortgage Pool level to the servicing fees paid to the
Master Servicer or sub-servicers, if any. (See, however, "--Pass-Through of
Servicing Fees", below.) If the deductions allowed to the REMIC Mortgage Pool
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC Mortgage Pool for that calendar quarter.
3. BASIS RULES AND DISTRIBUTIONS
Any distribution by a REMIC Mortgage Pool to a Residual Owner will not be
included in the gross income of such Residual Owner to the extent it does not
exceed the adjusted basis of such Residual Owner's interest in a REMIC Residual
Certificate. Such distribution will reduce the adjusted basis of such interest,
but not below zero. To the extent a distribution exceeds the adjusted basis of
the REMIC Residual Certificate, it will be treated as gain from the sale of the
REMIC Residual Certificate. (See "--Sales of REMIC Certificates", below.) The
adjusted basis of a REMIC Residual Certificate is equal to the amount paid for
such REMIC Residual Certificate, increased by amounts included in the income of
the Residual Owner (See "--Taxation of Owners of REMIC Residual
Certificates--Daily Portions", above) and decreased by distributions and by net
losses taken into account with respect to such interest.
A Residual Owner is not allowed to take into account any net loss for any
calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC Residual Certificate as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Certificate.
The effect of these basis and distribution rules is that a Residual Owner
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC Mortgage Pool or upon the sale of its REMIC Residual Certificate (See
"--Sales of REMIC Certificates", below). The residual holder does, however,
receive reduced taxable income over the life of the REMIC, because the REMIC's
basis in the underlying REMIC Mortgage Pool includes the fair market value of
the REMIC Regular Certificates and REMIC Residual Certificates.
4. EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate are
subject to certain special tax rules. With respect to a Residual Owner, the
excess inclusion for any calendar quarter is defined as the excess (if any) of
the daily portions of taxable income over the sum of the "daily accruals" for
each day during such quarter that such REMIC Residual Certificate was held by
such Residual Owner. The daily accruals are determined by allocating to each day
during a calendar quarter its ratable portion of the product of the "adjusted
issue price" of the REMIC Residual Certificate at the beginning of the calendar
quarter and 120 percent of the long-term "applicable federal rate"
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(generally, an average of current yields on Treasury securities of comparable
maturity) (the "AFR") in effect at the time of issuance of the REMIC Residual
Certificate. For this purpose, the adjusted issue price of a REMIC Residual
Certificate as of the beginning of any calendar quarter is the issue price of
the REMIC Residual Certificate, increased by the amount of daily accruals for
all prior quarters and decreased by any distributions made with respect to such
REMIC Residual Certificate before the beginning of such quarter. The issue price
of a REMIC Residual Certificate is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the REMIC
Residual Certificates were sold.
For Residual Owners, other than thrift institutions described in Code
Section 593, an excess inclusion cannot be offset by deductions, losses or loss
carryovers from other activities. For Residual Owners that are subject to tax on
unrelated business taxable income (as defined in Code Section 511), an excess
inclusion of such Residual Owner is treated as unrelated business taxable
income. For Residual Owners that are nonresident alien individuals or foreign
corporations generally subject to United States 30% withholding tax, even if
interest paid to such Residual Owners is generally eligible for exemptions from
such tax, an excess inclusion will be subject to such tax and no tax treaty rate
reduction or exemption may be claimed with respect thereto. See "--Foreign
Investors in REMIC Certificates".
Provisions enacted by the "Technical and Miscellaneous Revenue Act of 1988"
(the "1988 Act") cause the above-described exception for thrift institutions
generally to apply only to those residual interests held and deductions, losses
and loss carryovers incurred directly by such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income tax
return) or certain wholly owned direct subsidiaries of such institutions formed
and operated exclusively in connection with the organization and operation of
one or more REMICs. The REMIC Regulations further limit this exception to
residual interests having "significant value". In order to have significant
value, the REMIC Residual Certificates must have an aggregate issue price, at
issuance, at least equal to two percent of the aggregate issue prices of all of
the related REMIC Regular and Residual Certificates. In addition, the
anticipated weighted average life of the REMIC Residual Certificates must equal
or exceed 20 percent of the anticipated weighted average life of the REMIC,
based on the Prepayment Assumption and on any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents. Although it has not done so, the Treasury also has authority to issue
regulations that, if REMIC Residual Certificates are found in the aggregate not
to have "significant value", would treat as excess inclusions with respect to
such REMIC Residual Certificates the entire daily portion of taxable income for
such REMIC Residual Certificates. Each Prospectus Supplement pursuant to which
REMIC Residual Certificates are offered will state whether such REMIC Residual
Certificates will have, or may be regarded as having, "significant value" under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will have "significant value" will be based upon certain
assumptions, and the Company will make no representation that a REMIC Residual
Certificate will have "significant value" for purposes of the above described
rules or that a Residual Owner will receive distributions of amounts calculated
pursuant to those assumptions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder.
5. NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax". If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate will be considered a noneconomic
residual interest unless, at the time of its
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transfer and based on the Prepayment Assumption and any required or permitted
clean up calls or required liquidation provided for in the REMIC's
organizational documents, (1) the present value of the expected future
distributions (discounted using the AFR) on the REMIC Residual Certificate
equals at least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee. Prior to purchasing a REMIC
Residual Certificate, prospective purchasers should consider the possibility
that a purported transfer of such REMIC Residual Certificate by such a purchaser
to another purchaser at some future date may be disregarded in accordance with
the above-described rules, which would result in the retention of tax liability
by such purchaser. The applicable Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered "noneconomic" residual
interests under the REMIC Regulations; provided, however, that any disclosure
that a REMIC Residual Certificate will or will not be considered "noneconomic"
will be based upon certain assumptions, and the Company will make no
representation that a REMIC Residual Certificate will not be considered
"noneconomic" for purposes of the above-described rules or that a REMIC Residual
Owner will receive distributions calculated pursuant to such assumptions. See
"Foreign Investors in REMIC Certificates" below for additional restrictions
applicable to transfers of certain REMIC Residual Certificates to foreign
persons.
6. TAX-EXEMPT INVESTORS
Generally, tax exempt organizations that are not subject to Federal income
taxation on "unrelated business taxable income" pursuant to Code Section 511 are
treated as "disqualified organizations" under provisions of the 1988 Act. Under
provisions of the Pooling Agreement, such organizations generally are prohibited
from owning Residual Certificates. For Residual Owners that are subject to tax
on unrelated business taxable income (as defined in Code Section 511), an excess
inclusion of such Residual Owner is treated as unrelated business taxable
income. See "--Sales of REMIC Certificates".
7. REAL ESTATE INVESTMENT TRUSTS
If the applicable Prospectus Supplement so provides, a Mortgage Pool may
hold Mortgage Loans bearing interest based wholly or partially on Mortgagor
profits, Mortgaged Property appreciation, or similar contingencies. Such
interest, if earned directly by a real estate investment trust ("REIT"), would
be subject to the limitations of Code sections 856 (f) and 856 (j). Treasury
Regulations treat a REIT holding a REMIC Residual Certificate for a principal
purpose of avoiding such Code provisions as receiving directly the income of the
REMIC Mortgage Pool, hence potentially jeopardizing its qualification for
taxation as a REIT and exposing such income to taxation as a prohibited
transaction at a 100 percent rate.
8. MARK-TO-MARKET RULES
On December 28, 1993, the IRS released temporary regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" REMIC Residual Certificate is not treated as a
security and thus generally may not be marked to market. This exclusion from the
mark-to-market requirement is expanded to include all REMIC Residual
Certificates under proposed Treasury regulations published January 4, 1995 which
provide that any REMIC Residual Certificate issued after January 4, 1995 will
not be treated as a security and
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therefore generally may not be marked to market. Prospective purchasers of a
REMIC Residual Certificate should consult their tax advisors regarding the
possible application of the mark-to-market requirement to REMIC Residual
Certificates.
E. SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted basis
in the REMIC Certificate. The adjusted basis of a REMIC Regular Certificate
generally will equal the cost of such REMIC Regular Certificate to the seller,
increased by any original issue discount or market discount included in the
seller's gross income with respect to such REMIC Regular Certificate and reduced
by premium amortization deductions and distributions previously received by the
seller of amounts included in the stated redemption price at maturity of such
REMIC Regular Certificate. The adjusted basis of a REMIC Residual Certificate
will be determined as described under "--Taxation of Owners of REMIC Residual
Certificates--Basis Rules and Distributions", above. Gain from the disposition
of a REMIC Regular Certificate that might otherwise be treated as a capital gain
will be treated as ordinary income to the extent that such gain does not exceed
the excess, if any, of (i) the amount that would have been includible in such
holder's income had income accrued at a rate equal to 110% of the AFR as of the
date of purchase over (ii) the amount actually includible in such holder's
income. Except as otherwise provided under "--Taxation of Owners of REMIC
Regular Certificates--Market Discount and Premium" and under Code Section
582(c), any additional gain or any loss on the sale or exchange of a REMIC
Certificate will be capital gain or loss, provided such REMIC Certificate is
held as a capital asset (generally, property held for investment) within the
meaning of Code Section 1221. The Code currently provides for a top marginal tax
rate on ordinary income of 39.6% for individuals while maintaining a maximum
marginal rate for the long-term capital gains of individuals at 28%. There is no
such rate differential for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes, including limitations on the use of capital losses to offset ordinary
income.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Code Section 1258. A conversion transaction generally is one in which
the taxpayer has taken two or more positions in Certificates or similar property
that reduce or eliminate market risk, if substantially all of the taxpayer's
return is attributable to the time value of the taxpayer's net investment in
such transaction. The amount of gain so realized in a conversion transaction
that is recharacterized as ordinary income generally will not exceed the amount
of interest that would have accrued on the taxpayer's net investment at 120% of
the AFR at the time the taxpayer enters into the conversion transaction, subject
to appropriate reduction for prior inclusion of interest and other ordinary
income items from the transaction.
A taxpayer may elect to have net capital gain taxed at ordinary income rates
rather than capital gains rates in order to include such net capital gain in
total net investment income for that taxable year, for purposes of the
limitation on the deduction of interest on indebtedness incurred to purchase or
carry property held for investment to a taxpayer's net investment income.
The recently enacted Omnibus Budget Reconciliation Act of 1993 (the "Budget
Act") revised the rules for deducting interest on indebtedness allocable to
property held for investment. Generally, deductions for such interest are
limited to a taxpayer's net investment income for each taxable year. As amended
by the Budget Act, net investment income for each taxable year includes net
capital gain attributable to the disposition of investment property only if the
taxpayer elects to have such net capital gain taxed at ordinary income rates
rather than capital gains rates.
If a Residual Owner sells a REMIC Residual Certificate at a loss, the loss
will not be recognized if, within six months before or after the sale of the
REMIC Residual Certificate, such Residual Owner purchases another residual
interest in any REMIC or any interest in a taxable mortgage pool (as defined in
Code Section 7701(i)) comparable to a residual interest in a REMIC. Such
disallowed loss will be allowed upon the sale of the other residual interest (or
comparable interest) if the rule referred to in the preceding sentence does not
apply to that sale. While the Committee Report states that this
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rule may be modified by Treasury regulations, the REMIC Regulations do not
address this issue and it is not clear whether any such modification will in
fact be implemented or, if implemented, what the precise nature or effective
date of it would be.
The 1988 Act makes transfers of a residual interest to certain "disqualified
organizations" subject to an additional tax on the transferor in an amount equal
to the maximum corporate tax rate applied to the present value of the total
anticipated excess inclusions (discounted using the applicable Federal rate)
with respect to such residual interest for the periods after the transfer. For
this purpose, "disqualified organizations" includes the United States, any state
or political subdivision of a state, any foreign government or international
organization or any agency or instrumentality of any of the foregoing; any
tax-exempt entity (other than a Code Section 521 cooperative) which is not
subject to the tax on unrelated business income; and any rural electrical and
telephone cooperative. The anticipated excess inclusions must be determined as
of the date that the REMIC Residual Certificate is transferred and must be based
on events that have occurred up to the time of such transfer, the Prepayment
Assumption, and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. The tax generally is
imposed on the transferor of the REMIC Residual Certificate, except that it is
imposed on an agent for a disqualified organization if the transfer occurs
through such agent. The Pooling and Servicing Agreement requires, as a
prerequisite to any transfer of a Residual Certificate, the delivery to the
Trustee of an affidavit of the transferee to the effect that it is not a
disqualified organization and contains other provisions designed to render any
attempted transfer of a Residual Certificate to a disqualified organization
void.
In addition, if a "pass-through entity" includes in income excess inclusions
with respect to a REMIC Residual Certificate, and a disqualified organization is
the record holder of an interest in such entity, then a tax will be imposed on
such entity equal to the product of (i) the amount of excess inclusions on the
REMIC Residual Certificate that are allocable to the interest in the
pass-through entity held by such disqualified organization and (ii) the highest
marginal federal income tax rate imposed on corporations. A pass-through entity
will not be subject to this tax for any period, however, if the record holder of
an interest in such entity furnishes to such entity (i) such holder's social
security number and a statement under penalties of perjury that such social
security number is that of the record holder or (ii) a statement under
penalities of perjury that such record holder is not a disqualified
organization. For these purposes, a "pass-through entity" means any regulated
investment company, real estate investment trust, trust, partnership or certain
other entities described in Section 860E(e)(6) of the Code. In addition, a
person holding an interest in a pass-through entity as a nominee for another
person shall, with respect to such interest, be treated as a pass-through
entity. Legislation presently pending before the United States Congress, the Tax
Simplification and Technical Corrections Bill of 1993 (the "Simplification
Act"), would apply this tax on an annual basis to "large partnerships".
Generally, the Simplification Act would treat partnerships that have, or have
had, 250 or more partners as a large partnership for this purpose. The
Simplification Act would not limit application of the tax to excess inclusions
allocable to disqualified organizations, and in fact would apply the tax to
large partnerships having no disqualified organizations as partners. If enacted
in its present form, the Simplification Act would apply to partnership taxable
years ending on or after December 31, 1994.
F. PASS-THROUGH OF SERVICING FEES
The general rule is that Residual Certificateholders take into account
taxable income or net loss of the related REMIC Mortgage Pool. Under that rule,
servicing compensation of the Company and the subservicers (if any) would be
allocated to the holders of the REMIC Residual Certificates, and therefore would
not affect the income or deductions of holders of REMIC Regular Certificates.
However, in the case of a "single-class REMIC", such expenses and an equivalent
amount of additional gross income will be allocated among all holders of REMIC
Regular Certificates and REMIC Residual Certificates for purposes of the
limitations on the deductibility of certain miscellaneous itemized deductions by
individuals contained in Code Sections 56(b)(1) and 67. Generally, any holder of
a REMIC Certificate who is an individual, estate or trust will be able to deduct
such expenses in determining regular tax liability only to the extent that such
expenses together with certain other miscellaneous itemized deductions of such
individual, estate or trust exceed 2% of adjusted gross
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income; such a holder may not deduct such expenses to any extent in determining
liability for alternative minimum tax. Accordingly, REMIC Residual Certificates,
and REMIC Regular Certificates receiving an allocation of servicing
compensation, may not be appropriate investments for individuals, estates or
trusts, and such persons should carefully consult with their own tax advisors
regarding the advisability of an investment in such Certificates.
A "single-class REMIC" is a REMIC that either (i) would be treated as a
pass-through trust under the provisions of Treasury Regulation Section
301.7701-4(c) in the absence of a REMIC election, or (ii) is substantially
similar to such a pass-through trust and is structured with the principal
purpose of avoiding the allocation of investment expenses to holders of REMIC
Regular Certificates. Unless otherwise stated in the related Prospectus
Supplement, the Company intends to treat a REMIC Mortgage Pool as other than a
"single-class REMIC", consequently allocating servicing compensation expenses
and related income amounts entirely to REMIC Residual Certificates and in no
part to REMIC Regular Certificates.
G. PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMIC Mortgage Pools equal to 100 percent of the
net income derived from "prohibited transactions". In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. The Code also imposes a 100 percent tax
on the value of any contribution of assets to the REMIC after the "start-up day"
(the day on which the regular and residual interests are issued), other than
pursuant to specified exceptions, and subjects "net income from foreclosure
property" to tax at the highest corporate rate. It is not anticipated that a
REMIC Mortgage Pool will engage in any such transactions or receive any such
income.
H. TERMINATION OF A REMIC TRUST FUND
In general, no special tax consequences will apply to a holder of a REMIC
Regular Certificate upon the termination of the REMIC Mortgage Pool by virtue of
the final payment or liquidation of the last Mortgage Loan remaining in the
REMIC Mortgage Pool. If a Residual Owner's adjusted basis in its REMIC Residual
Certificate at the time such termination occurs exceeds the amount of cash
distributed to such Residual Owner in liquidation of its interest, then,
although the matter is not entirely free from doubt, it appears that the
Residual Owner would be entitled to a loss (which would be a capital loss) equal
to the amount of such excess.
I. REPORTING AND OTHER ADMINISTRATIVE MATTERS OF REMICS
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. In addition to those holders of
REMIC Regular Certificates to whom information reporting generally applies,
certain holders of REMIC Regular Certificates who are generally exempt from
information reporting on debt instruments, such as corporations, banks,
registered securities or commodities brokers, real estate investment trusts,
registered investment companies, common trust funds, charitable remainder
annuity trusts and unitrusts, will be provided interest and original issue
discount income information and the information set forth in the following
paragraph upon request in accordance with the requirements of the Treasury
regulations. The information must be provided by the later of 30 days after the
end of the quarter for which the information was requested, or two weeks after
the receipt of the request. The REMIC Mortgage Pool must also comply with rules
requiring the face of a REMIC Certificate issued at more than a DE MINIMIS
discount to disclose the amount of original issue discount and the issue date
and requiring such information to be reported to the Treasury Department.
The REMIC Regular Certificate information reports must include a statement
of the "adjusted issue price" of the REMIC Regular Certificate at the beginning
of each accrual period. In addition, the reports must include information
necessary to compute the accrual of any market discount that may arise upon
secondary trading of REMIC Regular Certificates. Because exact computation of
the
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accrual of market discount on a constant yield method would require information
relating to the holder's purchase price which the REMIC Mortgage Pool may not
have, it appears that this provision will only require information pertaining to
the appropriate proportionate method of accruing market discount.
The responsibility for complying with the foregoing reporting rules will be
borne by the Company.
For purposes of the administrative provisions of the Code, REMIC Mortgage
Pools will be treated as partnerships and the holders of Residual Certificates
will be treated as partners. Unless otherwise stated in the applicable
Prospectus Supplement, the Company will file federal income tax information
returns on behalf of the related REMIC Mortgage Pool, and will be designated as
agent for, and will act on behalf of the "tax matters person" with respect to
the REMIC Mortgage Pool in all respects.
As agent for the tax matters person, the Company will, subject to certain
notice requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the Residual Owners in connection
with the administrative and judicial review of items of income, deduction, gain
or loss of the REMIC Mortgage Pool, as well as the REMIC Mortgage Pool's
classification. Residual Owners will generally be required to report such REMIC
Mortgage Pool items consistently with their treatment on the REMIC Mortgage
Pool's federal income tax information return and may in some circumstances be
bound by a settlement agreement between the Master Servicer, as agent for the
tax matters person, and the IRS concerning any such REMIC Mortgage Pool item.
Adjustments made to the REMIC Mortgage Pool tax return may require a Residual
Owner to make corresponding adjustments on its return, and an audit of the REMIC
Mortgage Pool's tax return, or the adjustments resulting from such an audit,
could result in an audit of a Residual Owner's return.
J. BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal on REMIC Regular Certificates, as well as
payments of proceeds from the sale of REMIC Certificates, may be subject to the
"backup withholding tax" under Section 3406 of the Code at a rate of 31 percent
if recipients of such payments fail to furnish to the payor certain information,
including their taxpayer identification numbers, or otherwise fail to establish
an exemption from such tax. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of payments that is required to supply information but
that does not do so in the proper manner.
K. FOREIGN INVESTORS IN REMIC CERTIFICATES
1. REMIC REGULAR CERTIFICATES
Except as qualified below, payments made on a REMIC Regular Certificate to a
REMIC Regular Certificateholder that is not a U.S. Person, as hereinafter
defined (a "Non-U.S. Person"), or to a person acting on behalf of such a
Certificateholder, generally will be exempt from U.S. federal income and
withholding taxes, provided (a) the holder of the Certificate is not subject to
U.S. tax as a result of a connection to the United States other than ownership
of such Certificate, (b) the holder of such Certificate signs a statement under
penalties of perjury that certifies that such holder is a Non-U.S. Person, and
provides the name and address of such holder, and (c) the last U.S. Person in
the chain of payment to the holder received such statement from such holder or a
financial institution holding on its behalf and does not have actual knowledge
that such statement is false. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such holder may be subject to a withholding tax rate
of 30 percent, subject to reduction under any applicable tax treaty.
"U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate or
trust that is subject to U.S. federal income tax regardless of the source of its
income.
Holders of REMIC Regular Certificates should be aware that the IRS might
take the position that exemption from U.S. withholding taxes does not apply to
such a holder that also directly or indirectly
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owns 10 percent or more of the REMIC Residual Certificates of a particular
Series of Certificates. Further, the foregoing rules will not apply to exempt a
United States shareholder of a controlled foreign corporation from taxation on
such United States shareholder's allocable portion of the interest or original
issue discount income earned by such controlled foreign corporation.
2. REMIC RESIDUAL CERTIFICATES
Amounts paid to a Residual Owner that is a Non-U.S. Person generally will be
treated as interest for purposes of applying the withholding tax on Non-U.S.
Persons with respect to income on its REMIC Residual Certificate. However, it is
unclear whether distributions on REMIC Residual Certificates will be eligible
for the general exemption from withholding tax that applies to REMIC Regular
Certificates as described above. Treasury regulations provide that, for purposes
of the portfolio interest exception, payments to the foreign owner of a REMIC
Residual Certificate are to be considered paid on the obligations held by the
REMIC, rather than on the Certificate itself. Such payments would thus only
qualify for the portfolio interest exception if the underlying obligations held
by the REMIC would so qualify. Such withholding tax generally would be imposed
at a rate of 30 percent but would be subject to reduction under any tax treaty
applicable to the Residual Owner. However, there is no exemption from
withholding tax nor may the rate of such tax be reduced, under a tax treaty or
otherwise, with respect to any distribution of income that is an excess
inclusion. See "--Taxation of Owners of REMIC Residual Certificates--Excess
Inclusions".
Certain restrictions relating to transfers of REMIC Residual Certificates to
and by investors who are not U.S. Persons are also imposed by the REMIC
Regulations. First, transfers of REMIC Residual Certificates to Non-U.S. Persons
that have "tax avoidance potential" are disregarded for all federal income tax
purposes. If such transfer is disregarded, the purported transferor of such a
REMIC Residual Certificate to a Non-U.S. Person would continue to remain liable
for any taxes due with respect to the income on such REMIC Residual Certificate.
A REMIC Residual Certificate has tax avoidance potential unless, at the time of
the 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 such amounts will be distributed at or after the time at
which the excess inclusion accrues and not later than the close of the calendar
year following the calendar year of accrual. This rule does not apply to
transfers if the income from the REMIC Residual Certificate is taxed in the
hands of the transferee as income effectively connected with the conduct of a
U.S. trade or business. Second, if a Non-U.S. Person transfers a REMIC Residual
Certificate to a U.S. Person, and the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, that transfer is
disregarded for all federal income tax purposes and the purported Non-U.S.
Person transferor continues to be treated as the owner of the REMIC Residual
Certificate. Thus, the REMIC's liability to withhold 30 percent of the accrued
excess inclusions is not terminated even though the REMIC Residual Certificate
is no longer held by a Non-U.S. Person.
L. STATE AND LOCAL TAXATION
Many states do not automatically conform to changes in the federal income
tax laws. Consequently, a REMIC Mortgage Pool which would not qualify as a fixed
investment trust for federal income tax purposes may be characterized as a
corporation, a partnership, or some other entity for purposes of state income
tax law. Such characterization could result in entity level income or franchise
taxation of a REMIC Mortgage Pool formed in, owning mortgages or property in, or
having servicing activity performed in a state without conforming REMIC
provisions in its income or franchise tax law. Further, REMIC Regular
Certificateholders resident in nonconforming states may have their ownership of
REMIC Regular Certificates characterized as an interest other than debt of the
REMIC such as stock or a partnership interest. Investors are advised to consult
their tax advisors concerning the state and local income tax consequences of
their purchase and ownership of REMIC Regular Certificates.
METHODS OF DISTRIBUTION
Certificates are being offered hereby in Series from time to time (each
Series evidencing a separate Mortgage Pool) through any of the following
methods:
1. By negotiated firm commitment underwriting and public reoffering by
underwriters;
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2. By agency placements through one or more placement agents primarily
with institutional investors and dealers; and
3. By placement directly by the Company 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 underwriters thereof and either the price at which such Series
is being offered, the nature and amount of any underwriting discounts or
additional compensation to such underwriters and the proceeds of the offering to
the Company, 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 Company 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 such Series if any such 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 Company to indemnification by the Company against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended (the "Act"),
or to contribution with respect to payments which such underwriters or agents
may be required to make in respect thereof.
If a Series is offered other than through underwriters, the Prospectus
Supplement relating thereto will contain information regarding the nature of
such offering and any agreements to be entered into between the Company and
purchasers of Certificates of such Series.
TRANSFERABILITY OF CERTIFICATES
The Company anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Act, in connection with reoffers and
sales by them of Certificates. Certain purchasers will be required to give the
Company prior notice of their intention to resell their Certificates, and to
represent to the Company that they will observe certain prospectus delivery and
anti-manipulative requirements of the Act and the Securities Exchange Act of
1934, as amended. The Company will charge any Certificateholder requesting
amended or updated Prospectuses or Prospectus Supplements all expenses incurred
by the Company for preparation and delivery of such documents.
Certificateholders should consult with their legal advisors in this regard prior
to any such reoffer or resale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Thomas G.
Lehmann, General Counsel, Vice President and Secretary of the Company, and by
its special counsel, Orrick, Herrington & Sutcliffe, San Francisco, California.
FINANCIAL INFORMATION
The Company has determined that its financial statements are not material to
the offering made hereby. However, any prospective investor who desires to
review financial information concerning the Company will be provided, upon
request, with a copy of the consolidated balance sheet of the Company as of
December 31, 1994 or the end of its last fiscal year, whichever is later, and a
copy of the most recent statement of earnings of the Company. Such requests
should be directed to PNC Mortgage Securities Corp., Controller's Department, 75
North Fairway Drive, Vernon Hills, Illinois 60061.
79
<PAGE>
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each Series of
Certificates, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., may be obtained at rates prescribed
by the Commission upon request to the Commission and may be inspected, without
charge, at the Commission's offices.
80
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GLOSSARY
Set forth below is a list of certain of the more significant terms used in
this Prospectus and the pages on which the definitions of such terms may be
found.
<TABLE>
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Act............................................ 79
Advance Claims Endorsement..................... 45
Advances....................................... 13
AFR............................................ 72
Agency Certificates............................ 7
Bankruptcy Bond................................ 6
Bankruptcy Instrument.......................... 44
Bankruptcy Loss................................ 44
Basic Prepayment Assumption.................... 17
BPA............................................ 17
Buydown Fund................................... 12
Buydown Loans.................................. 5
CERCLA......................................... 59
Certificate Account............................ 28
Certificate Administrator...................... 4
Certificate Administrator Fee.................. 13
Certificates................................... 1
Class.......................................... 1
Code........................................... 38
Commission..................................... 12
Company........................................ 1
Compensating Interest.......................... 16
Conversion Fee................................. 14
Cooperative.................................... 10
Cooperative Loan............................... 1
Cooperative Note............................... 10
Curtailment.................................... 16
Custodial Account for P&I...................... 26
Cut-Off Date................................... 8
Defaulted Mortgage Loss........................ 44
Determination Date............................. 31
Distribution Date.............................. 4
Distribution Period............................ 30
DOL............................................ 60
Eligible Investments........................... 8
ERISA.......................................... 8
Extraordinary Losses........................... 44
FDIC........................................... 17
FHA............................................ 11
FHA Approved Mortgagees........................ 17
FHA Insurance Policies......................... 11
FHLMC.......................................... 7
FHLMC Approved Mortgagees...................... 18
FNMA........................................... 7
FNMA Approved Mortgagees....................... 17
Fraud Bond..................................... 6
Fraud Instrument............................... 44
Fraud Loss..................................... 44
Garn-St. Germain Act........................... 57
GNMA........................................... 7
Indemnified Parties............................ 36
Insurance Proceeds............................. 26
Investment Account............................. 27
Investment Period.............................. 27
IRS............................................ 64
Lenders........................................ 18
Letter of Credit............................... 6
Letter of Credit Bank.......................... 49
<CAPTION>
PAGE
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<S> <C>
Liquidation Proceeds........................... 26
Loss........................................... 40
Master Servicer................................ 4
Master Servicing Fee........................... 12
Mortgaged Properties........................... 10
Mortgage Loans................................. 1
Mortgage Notes................................. 10
Mortgage Pool.................................. 1
Mortgage Pool Insurance Policy................. 6
Mortgages...................................... 10
Mortgagor...................................... 6
Net Rate....................................... 25
1988 Act....................................... 72
Non-U.S. Person................................ 77
OID Regulations................................ 62
Parties in Interest............................ 60
Paying Agent................................... 21
Payoff......................................... 15
Plans.......................................... 60
Pooling Agreement.............................. 13
Prepayment Assumption.......................... 65
Primary Insurance Policy....................... 6
Principal Prepayment........................... 17
Private Certificates........................... 7
PTCE 83-1...................................... 60
Record Date.................................... 21
Regulation..................................... 60
Relief Act..................................... 58
REMIC.......................................... 1
REMIC Certificates............................. 63
REMIC Mortgage Pool............................ 63
REMIC Provisions............................... 63
REMIC Regulations.............................. 63
Remittance Rate................................ 1
Reserve Account................................ 47
Reserve Fund................................... 6
Residual Owner................................. 70
Retained Yield................................. 25
Sellers........................................ 4
Seller/Servicers............................... 4
Selling and Servicing Contracts................ 20
Senior Certificates............................ 46
Series......................................... 1
Servicer....................................... 4
Servicing Contracts............................ 12
Servicing Fee.................................. 13
Special Hazard Instrument...................... 44
Special Hazard Insurance Policy................ 6
Special Hazard Loss............................ 44
Title V........................................ 58
Title VIII..................................... 48
Trustee........................................ 13
Trust Fund..................................... 1
UCC............................................ 56
VA............................................. 11
VA Guaranties.................................. 11
VA Loans....................................... 11
Withdrawal Date................................ 27
</TABLE>
81
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PNC MORTGAGE
SECURITIES CORP.
DEPOSITOR AND MASTER SERVICER
MORTGAGE
PASS-THROUGH CERTIFICATES
SERIES 1997-5
$288,274,518
(APPROXIMATE)
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PROSPECTUS SUPPLEMENT
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DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SEPTEMBER 26, 1997
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