<PAGE>
PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED SEPTEMBER 18, 1997)
PNC MORTGAGE
SECURITIES CORP.
DEPOSITOR AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-6
$695,684,820
(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. (THE "COMPANY"), PNC BANK, NATIONAL ASSOCIATION (THE
"BANK") OR ANY OF THEIR RESPECTIVE 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 1997-6 (the "CERTIFICATES"),
will consist of the following four classes: (i) Class I-A and Class II-A
(together, the "CLASS A CERTIFICATES" or the "OFFERED CERTIFICATES") and (ii)
the Class I-R and Class II-R Certificates (the "RESIDUAL CERTIFICATES"). The
Residual Certificates are not offered hereby. The approximate initial Class
Principal Balances of the Class I-A and Class II-A Certificates will be
$285,686,562 and $409,998,258, respectively. It is a condition to the issuance
of the Certificates that the Offered Certificates each be rated "AAA" by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ("S&P") and "Aaa" by Moody's Investors Service, Inc. ("MOODY'S"). See
"Certificate Ratings" herein.
On or before the date of the issuance of the Offered Certificates, there
will be obtained from MBIA Insurance Corporation (the "CERTIFICATE INSURER") a
certificate guaranty insurance policy (the "CERTIFICATE INSURANCE POLICY") which
will, subject to its terms, guarantee payments due on the Offered Certificates
to the extent described herein and will guarantee the Bank's obligation to pay
the full purchase price to any holder of an Offered Certificate who exercises
the Put Option or is subject to the Clean-Up Option. See "Credit Enhancements --
The Certificate Insurance Policy and the Certificate Insurer" herein.
[LOGO]
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO COMPANY
PUBLIC (1) DISCOUNT (2) (1)(3)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Class I-A Certificates................................ 99.9875% 0.25% 99.7375%
Class II-A Certificates............................... 99.9748% 0.25% 99.7248%
Total................................................. $695,545,790 $1,739,212 $693,806,578
</TABLE>
- ----------
(1) Plus accrued interest at the Class I-A or Class II-A Remittance Rate, as
applicable, from September 1, 1997.
(2) The Company has agreed to indemnify Goldman, Sachs & Co., Donaldson, Lufkin
& Jenrette Securities Corporation and PNC Capital Markets, Inc. (the
"UNDERWRITERS") against certain liabilities, including liabilities under the
Securities Act of 1933. Certain expenses of the Underwriters incurred in
connection with this offering will be paid for by the Bank.
(3) Before deduction of expenses estimated to be $615,000.
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
SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
The Offered Certificates are offered by the Underwriters, as specified
herein, subject to receipt and acceptance by them, and subject to their right to
reject any order in whole or in part and to certain other conditions. It is
expected that delivery of the Offered Certificates will be made in New York, New
York, through the facilities of The Depository Trust Company, on or about
September 25, 1997. (Additional cover page information is contained on the
following two pages.)
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PNC CAPITAL MARKETS, INC.
------------------
The date of this Prospectus Supplement is September 18, 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE.)
The approximate initial Class Principal Balances of the Class I-A and Class
II-A Certificates will be $285,686,562 and $409,998,258, respectively. Interest
and principal will be passed through 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") commencing October 27, 1997. The Offered
Certificates will accrue interest during the preceding calendar month at an
annual rate (the "REMITTANCE RATE") for each Class of Offered Certificates on
its respective Class Principal Balance. The Remittance Rate for each Class of
Class A Certificates with respect to any Distribution Date will equal (i) on or
prior to the applicable Put Date (as defined herein), the lesser of (x) the
Target Rate for such Class of Certificates and (y) the sum of (a) the weighted
average (by principal balance) of the Pass-Through Rates on the Mortgage Loans
in the related Loan Group (as defined herein) for such Distribution Date, (b)
twelve times the ratio, expressed as a percentage, of the Excess Interest (as
defined herein), if any, received from the other Loan Group, divided by the
Class Principal Balance of such Class of Certificates (such percentage deemed to
be zero after the Distribution Date in July 2000) and (c) twelve times the
ratio, expressed as a percentage, of the applicable Yield Supplement Amount (as
defined herein), divided by the Class Principal Balance of such Class of
Certificates; and (ii) after the applicable Put Date, the weighted average (by
principal balance) of the Pass-Through Rates on the Mortgage Loans in the
related Loan Group for such Distribution Date (which will equal the weighted
average Mortgage Interest Rate of such Mortgage Loans less 1.750%). The "TARGET
RATE" will be 6.490% for the Class I-A Certificates and 6.600% for the Class
II-A Certificates. The "PASS-THROUGH RATE" of a Mortgage Loan for any
Distribution Date will be the Mortgage Interest Rate thereon as of the first day
of the month preceding the month of such Distribution Date less the sum of the
related (a) Servicing Fee, (b) Master Servicing Fee, (c) Supplemental Fee which
will be payable on any Distribution Date after the applicable Put Date and (d)
Premium Payment Rate with respect to the Certificate Insurance Policy (each, as
defined herein). As of the Cut-Off Date, the weighted average Pass-Through Rate
of the Mortgage Loans in Group I will be approximately 7.028% per annum, and in
Group II will be approximately 7.056% per annum.
During the 30 day period ending on the second Distribution Date preceding
the Distribution Date in July, 2000, with respect to Loan Group I, and in
October, 2001, with respect to Loan Group II, (each, a "PUT DATE"), each
Certificateholder of the related Class of Offered Certificates will have the
option to require the Bank to purchase such Certificateholder's Certificates of
the related Class (the "PUT OPTION"). If the Put Option is exercised with
respect to more than 90% of the outstanding Class Principal Balance of a Class
of Offered Certificates, the Bank will have the option to purchase on the same
terms all of the outstanding Certificates of such Class, including Certificates
with respect to which the applicable Certificateholder has not exercised the Put
Option (the "CLEAN-UP OPTION"). The purchase price for any Certificate for which
the related Certificateholder has exercised the Put Option or the Bank has
exercised the Clean-Up Option will be the sum of the outstanding Certificate
Principal Balance on the Put Date (after giving effect to distributions
otherwise made on such date) plus accrued and unpaid interest thereon at the
applicable Remittance Rate up to the Put Date. See "Description of the
Certificates -- Put Option and Clean-Up Option" herein.
The Certificates will evidence all the beneficial ownership interest in a
trust (the "TRUST") established by the Company, the assets of which will consist
of a pool (the "MORTGAGE POOL")of conventional, adjustable-rate one- to
four-family residential mortgage loans with original terms to maturity of not
more than 30 years and initial fixed-interest rate periods of five years (the
"MORTGAGE LOANS") deposited and master serviced by the Company, two Reserve
Funds (as defined herein), a Yield Supplement Account (as defined herein), a
certificate guaranty insurance policy (the "CERTIFICATE INSURANCE POLICY")
issued by MBIA Insurance Corporation (the "CERTIFICATE INSURER") which, subject
to its terms, will insure the receipt of certain interest and principal
distributions to be made with respect to the Certificates with respect to each
Distribution Date, in each case to the extent not covered by the applicable
Reserve Fund (subject to certain limitations as specified herein), and certain
other assets, as described herein.
As described herein, two separate REMIC elections will be made in connection
with the Trust for federal income tax purposes. Each Class of Offered
Certificates will represent ownership of REMIC "regular interests" in the
related REMIC and each Class of Residual Certificates will represent ownership
of the REMIC "residual interests" in the related REMIC. See "Certain Federal
Income Tax Consequences" herein and in the Prospectus.
S-2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE.)
The Mortgage Pool (as described herein) consists of two groups of Mortgage
Loans ("LOAN GROUP I" and "LOAN GROUP II", and each a "LOAN GROUP"). The
Mortgage Loans in Loan Group I are sometimes referred to as the "GROUP I LOANS"
and the Mortgage Loans in Loan Group II are sometimes referred to as the "GROUP
II LOANS". Distributions of interest and principal on the Class I-A Certificates
and the Class II-A Certificates will be based on interest and principal received
or advanced with respect to the Group I Loans and Group II Loans, respectively,
any amounts received with respect to the Certificate Insurance Policy and
amounts withdrawn from the related Reserve Funds (collectively, the "CREDIT
ENHANCEMENTS"), Excess Interest from the unrelated Loan Group and amounts
withdrawn from the Yield Supplement Account.
The Certificates evidence interests only in the Trust and are payable solely
from amounts received with respect thereto.
The Company has the right to effect early retirement of the Certificates
under certain circumstances. See "Description of the Certificates -- Optional
Termination" herein.
For a discussion of the potentially significant impact on the Remittance
Rates upon the commencement of the adjustments to the Mortgage Interest Rates
and the imposition of the Supplemental Fee, see "Risk Factors" and "Yield and
Prepayment Considerations" herein.
The yield to maturity on the Offered Certificates will depend on the rate
and timing of principal payments (including prepayments, defaults and
liquidations) on the Mortgage Loans in the related Loan Group. See "Risk Factors
- -- General" herein.
The Offered 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.
There is at present no market for any Class of Offered Certificates and
there can be no assurance that a secondary market for any Class of Offered
Certificates will develop or, if it does develop, that it will provide
Certificateholders of such Class with liquidity of investment or will continue
for the life of such Class of Offered Certificates.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT TRANSACTIONS, STABILIZING TRANSACTIONS, SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "METHOD OF DISTRIBUTION".
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-3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SUMMARY INFORMATION....................................................................................... S-5
RISK FACTORS.............................................................................................. S-22
General................................................................................................. S-22
Adjustments of the Mortgage Interest Rates on the Mortgage Loans........................................ S-23
Supplemental Fee........................................................................................ S-23
Put Option and Clean-Up Option.......................................................................... S-23
Book-Entry System....................................................................................... S-24
THE TRUST................................................................................................. S-24
DESCRIPTION OF THE MORTGAGE POOL.......................................................................... S-25
Loan Group I............................................................................................ S-26
Loan Group II........................................................................................... S-27
Index................................................................................................... S-28
Additional Information.................................................................................. S-29
DESCRIPTION OF THE CERTIFICATES........................................................................... S-29
General................................................................................................. S-29
Book-Entry Registration................................................................................. S-30
Definitive Certificates................................................................................. S-31
Distributions of Interest............................................................................... S-32
Distributions of Principal.............................................................................. S-34
The Residual Certificates............................................................................... S-36
Advances................................................................................................ S-36
Available Distribution Amount........................................................................... S-36
Last Scheduled Distribution Date........................................................................ S-37
Put Option and Clean-Up Option.......................................................................... S-38
Optional Termination.................................................................................... S-39
Servicing Compensation and Payment of Expenses.......................................................... S-39
YIELD AND PREPAYMENT CONSIDERATIONS....................................................................... S-40
General................................................................................................. S-40
Principal Prepayments and Compensating Interest......................................................... S-41
Rate of Payments........................................................................................ S-42
Prepayment Assumption................................................................................... S-42
Additional Information.................................................................................. S-44
CREDIT ENHANCEMENTS....................................................................................... S-44
The Certificate Insurance Policy and the Certificate Insurer............................................ S-44
Reserve Funds........................................................................................... S-49
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................................................... S-50
CERTAIN LEGAL INVESTMENT ASPECTS.......................................................................... S-52
ERISA CONSIDERATIONS...................................................................................... S-53
Underwriter's PTE....................................................................................... S-53
Prohibited Transaction Class Exemption 83-1............................................................. S-54
METHOD OF DISTRIBUTION.................................................................................... S-54
LEGAL MATTERS............................................................................................. S-55
CERTIFICATE RATINGS....................................................................................... S-55
EXPERTS................................................................................................... S-55
Appendix A................................................................................................ S-56
</TABLE>
S-4
<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 1997-6
(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 25, 1997
Offered Certificates................... The Offered Certificates will be issued pursuant to
a Pooling and Servicing Agreement, dated as of the
Cut-Off Date, among the Depositor and Master
Servicer, PNC Bank, National Association (the
"BANK") and the Trustee (the "POOLING AGREEMENT").
The approximate initial Class Principal Balance of
the Class I-A and Class II-A Certificates will be
$285,686,562 and $409,998,258, respectively.
Non-Offered Certificates............... The Class I-R and Class II-R (the "RESIDUAL
CERTIFICATES") will also be issued pursuant to the
Pooling Agreement and each such Class will
represent ownership of a "residual interest" in a
REMIC. On each Distribution Date, each Class of
Residual Certificates is entitled to receive
payments in respect of Excess Interest (as defined
herein) from the related Loan Group to the extent
not required to be distributed as described in the
fifth paragraph of "Description of the Certificates
-- Distributions of Interest" herein. Payments in
respect of the Excess Interest to the related Class
of Residual Certificates and distributions of the
Interest Distribution Amount (as defined herein) to
the related Class A Certificates will be made on an
equal priority, any shortfall to be allocated pro
rata based on such amounts without giving effect to
any shortfall.
The Mortgage Loans..................... Each Mortgage Loan will be a conventional Mortgage
Loan evidenced by a Mortgage Note. Each such
Mortgage Note will have an original term to
maturity of generally not more than 30 years, a
fixed Mortgage Interest Rate (a "FIXED RATE")
during the initial five years of the Mortgage Loan
and a Monthly Payment which will amortize the
principal balance of the Mortgage Loan over its
term to maturity. Each Mortgage Note will provide
for annual adjustments to the Mortgage Interest
Rate thereon after the initial Fixed Rate period.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
The Mortgage Interest Rate on each Mortgage Loan
will adjust annually commencing on the Due Date (as
defined below) immediately prior to the fifth
anniversary of the first Due Date and thereafter on
each anniversary of the Due Date on which such
adjustment occurred (each, an "ADJUSTMENT DATE").
On each Adjustment Date, the Mortgage Interest Rate
will adjust to the sum of the Index (as defined
herein) and the fixed percentage specified in the
applicable Mortgage Note (the "GROSS MARGIN"),
rounded to the nearest one-eighth of one percent,
subject to the limitation that with respect to each
Adjustment Date after the initial Adjustment Date,
the Mortgage Interest Rate after such adjustment
may not vary from the Mortgage Interest Rate in
effect prior to such adjustment by more than two
percentage points (the "PERIODIC CAP"). In
addition, adjustments to the Mortgage Interest Rate
for each Mortgage Loan are subject to a lifetime
maximum interest rate (a "RATE CEILING"). None of
the Mortgage Loans specify a lifetime minimum
interest rate (a "RATE FLOOR"). Consequently, the
minimum Mortgage Interest Rate for each Mortgage
Loan will be the Gross Margin for such Mortgage
Loan. Each Mortgage Loan is not assumable during
the five-year fixed rate period; however, each
Mortgage Loan is assumable after its initial
Adjustment Date. On the first Due Date following
each Adjustment Date, the Monthly Payment for the
Mortgage Loan will be adjusted, if necessary, to an
amount that will fully amortize such Mortgage Loan
at the adjusted Mortgage Interest Rate over its
remaining scheduled term to maturity. All of the
Mortgage Loans were purchased by the Company from
the Bank.
Index.................................. The weekly average yield on United States Treasury
Securities adjusted to a constant maturity of one
year, as made available by the Federal Reserve
Board, published in the Federal Reserve Statistical
Release H.15(519), most recently available as of
the date 45 days before each Adjustment Date.
The Mortgage Pool...................... The Mortgage Pool consists of two groups of
Mortgage Loans ("LOAN GROUP I" and "LOAN GROUP II",
and each, a "LOAN GROUP").
GROUP I LOANS. The Group I Loans consist of
approximately 1062 Mortgage Loans with an aggregate
principal balance as of the Cut-Off Date of
approximately $285,686,562. The Group I Loans had
individual principal balances at origination of at
least $20,050 but not more than $988,000, with an
average principal balance at origination of
approximately $275,502. The Group I Loans have
terms to maturity of not more than 30 years, with a
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
weighted average remaining term to maturity of
approximately 343 months as of the Cut-Off Date.
The initial Adjustment Dates for the Group I Loans
are on various dates beginning July 1, 2000.
GROUP II LOANS. The Group II Loans consist of
approximately 1321 Mortgage Loans with an aggregate
principal balance as of the Cut-off Date of
approximately $409,998,258. The Group II Loans had
individual principal balances at origination of at
least $37,900 but not more than $985,000, with an
average principal balance at origination of
approximately $313,783. The Group II Loans have
terms to maturity of not more than 30 years, with a
weighted average remaining term to maturity of
approximately 352 months as of the Cut-Off Date.
The initial Adjustment Dates for the Group II Loans
are on various dates beginning October 1, 2001.
For a further description of the Mortgage Loans,
see "Description of the Mortgage Pool" herein.
Group Adjustment Date.................. The Group I Adjustment Date will be July 1, 2000
and the Group II Adjustment Date will be October 1,
2001. Such dates reflect the first date on which a
Mortgage Loan in such Loan Group (as of the Cut-Off
Date) is scheduled to have its Mortgage Interest
Rate adjusted and is referred to herein as the
"GROUP ADJUSTMENT DATE".
Supplemental Fee....................... On each Distribution Date following each Put Date
(as defined herein), a Supplemental Fee will be
imposed with respect to each Mortgage Loan in the
related Loan Group. This Supplemental Fee will
equal 1.335% on each Mortgage Loan in Loan Group I
and 1.345% on each Mortgage Loan in Loan Group II
and will be in addition to the Servicing Fee,
Master Servicing Fee and Premium Payment Rate. The
imposition of the Supplemental Fee on the Mortgage
Loans in a Loan Group following the applicable Put
Date will significantly lower the Remittance Rate
on the related Class of Offered Certificates. The
Supplemental Fee will be payable to the Bank.
Initial Aggregate Certificate Principal
Balance of the Offered
Certificates......................... $695,684,820 (approximate, subject to an upward or
downward variance of no more than 5%).
Mortgage Pool Initial Pass-Through
Rate................................. 7.044% (approximate).
Loan Group I Initial Pass-Through
Rate................................. 7.028% (approximate).
Loan Group II Initial Pass-Through
Rate................................. 7.056% (approximate).
The Trust.............................. The assets of the 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 outstanding principal balance as of
the Cut-Off Date of
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
approximately $695,684,820. The 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, by deed in lieu of foreclosure or
otherwise after the Cut-Off Date, (iii) amounts
held in the Certificate Account, (iv) the
Certificate Insurance Policy, (v) the Reserve
Funds, (vi) the Yield Supplement Account and (vii)
certain other assets. See "The Trust" herein.
Book-Entry Registration................ Except in certain limited circumstances as
described herein, the Offered 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.
Interest............................... With respect to each Class of Offered Certificates,
interest will be passed through monthly on each
Distribution Date, commencing in October 1997. With
respect to each Distribution Date, an amount of
interest will accrue on each Class of Offered
Certificates generally equal to 1/12th of the
applicable Remittance Rate for such Class
multiplied by the related Class Principal Balance.
Interest to be distributed on a Class of Offered
Certificates on any Distribution Date (the
"INTEREST DISTRIBUTION AMOUNT") will consist of
interest accrued during the preceding calendar
month, as described above, and the portion of the
Interest Distribution Amount remaining unpaid from
the preceding Distribution Date less the sum, with
respect to any Mortgage Loan in the related Loan
Group, of (i) the portion allocated to such Class
of any shortfalls in interest collections resulting
from the timing of Curtailments and Payoffs not
otherwise covered by Compensating Interest, (ii)
the portion allocated to such Class of any interest
shortfalls related to the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "RELIEF
ACT") and (iii) the portion allocated to such Class
of the amounts which would otherwise be
Compensating Interest but for the Master Servicer's
failure to remit such amounts to the Certificate
Account. The Interest Distribution Amount for a
Class of Offered Certificates will be paid from the
Available Distribution Amount (as defined herein)
for the related Loan Group, together with Excess
Interest from the other Loan Group and the Yield
Supplement Amount applicable to such Loan Group.
Except as described below, to the extent that such
amounts are insufficient to pay the amount of the
Interest Distribution Amount to which such Class of
Offered Certificates is entitled, such
insufficiency will (i) first, be withdrawn from the
applicable Reserve Fund and distributed to such
Class of Offered Certificates until the amount on
deposit in such Reserve Fund has been reduced to
zero and (ii) second, subject to
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
the terms of the Certificate Insurance Policy, be
covered by payments under the Certificate Insurance
Policy. Any failure of the Master Servicer to remit
Compensating Interest and shortfalls in interest
collections resulting from the timing of
Curtailments and Payoffs and due to the Relief Act
will not be covered by the Reserve Funds or the
Certificate Insurance Policy. See "Credit
Enhancements" herein.
The Remittance Rate for each Class of Class A
Certificates with respect to any Distribution Date
will equal (i) on or prior to the applicable Put
Date, the lesser of (x) the Target Rate for such
Class of Certificates and (y) the sum of (a) the
weighted average (by principal balance) of the
Pass-Through Rates on the Mortgage Loans in the
related Loan Group for such Distribution Date, (b)
twelve times the ratio, expressed as a percentage,
of the Excess Interest, if any, received from the
other Loan Group, divided by the Class Principal
Balance of such Class of Certificates (such
percentage deemed to be zero after the Distribution
Date in July 2000) and (c) twelve times the ratio,
expressed as a percentage, of the applicable Yield
Supplement Amount, divided by the Class Principal
Balance of such Class of Certificates; and (ii)
after the applicable Put Date, the weighted average
(by principal balance) of the Pass-Through Rates on
the Mortgage Loans in the related Loan Group for
such Distribution Date (which will equal the
weighted average Mortgage Interest Rate of such
Mortgage Loans less 1.750%). The "TARGET RATE" will
be 6.490% for the Class I-A Certificates and 6.600%
for the Class II-A Certificates. The "PASS-THROUGH
RATE" of a Mortgage Loan for any Distribution Date
will be the Mortgage Interest Rate thereon as of
the first day of the month preceding the month of
such Distribution Date less the sum of the related
(a) Servicing Fee, (b) Master Servicing Fee, (c)
Supplemental Fee which will be payable on any
Distribution Date after the applicable Put Date and
(d) Premium Payment Rate (collectively, the "GROSS
FEES"). The Gross Fees with respect to each
Mortgage Loan in Loan Group I will equal 0.415% for
any Distribution Date on or prior to the applicable
Put Date, and 1.750% thereafter. The Gross Fees
with respect to each Mortgage Loan in Loan Group II
will equal 0.405% for any Distribution Date on or
prior to the applicable Put Date, and 1.750%
thereafter. The "EXCESS INTEREST" for each Loan
Group will equal on any Distribution Date the
excess, if any, of the interest due in respect of
the Mortgage Loans in the related Loan Group on the
Due Date in the month of such Distribution Date
(net of the sum of the Gross Fees and the related
Residual Allocable
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
Share (as defined below) of (i) any shortfalls in
interest collections resulting from the timing of
Curtailments and Payoffs not otherwise covered by
Compensating Interest, (ii) any interest shortfalls
related to the Relief Act and (iii) any failure of
the Master Servicer to remit amounts which would
otherwise constitute Compensating Interest) over
the interest payable on the related Class A
Certificates at the applicable Target Rate on such
Distribution Date. The "RESIDUAL ALLOCABLE SHARE"
for each Class of Residual Certificates on any
Distribution Date will equal a fraction, the
numerator of which is the excess, if any, of (i)
the weighted average Pass-Through Rate of the
Mortgage Loans in the related Loan Group for such
Distribution Date over (ii) the Target Rate for
such Loan Group, and the denominator of which is
the weighted average Pass-Through Rate of the
Mortgage Loans in such Loan Group for such
Distribution Date. The "INTEREST SHORTFALL" for
each Loan Group will equal on any Distribution Date
the excess, if any, of interest payable on the
related Class A Certificates at the applicable
Target Rate on such Distribution Date over the
interest due in respect of the Mortgage Loans in
the related Loan Group on the Due Date in the month
of such Distribution Date (net of Gross Fees). The
Excess Interest, the Residual Allocable Share, the
Yield Supplement Amount and the Interest Shortfall
for a Loan Group will each be deemed to be zero for
any Distribution Date after the applicable Put
Date. The "YIELD SUPPLEMENT AMOUNT" for each Loan
Group will equal on any Distribution Date the
following: (i) if there is no Interest Shortfall
for that Loan Group, zero; (ii) if there is an
Interest Shortfall only for that Loan Group, the
lesser of (a) the amount of such Interest Shortfall
less the Excess Interest received from the other
Loan Group and (b) the amount on deposit in the
Yield Supplement Account; and (iii) if there are
Interest Shortfalls for both Loan Groups, the
amount of the Interest Shortfall with respect to
such Loan Group up to such Loan Group's pro rata
share (by amount of Interest Shortfall) of the
amount in the Yield Supplement Account.
On each Distribution Date, the Excess Interest for
a Loan Group will be distributed (i) first, to the
Class A Certificates related to the other Loan
Group up to the amount of the Interest Shortfall
for such other Loan Group; (ii) second, to the
Yield Supplement Account until it reaches the
Required Account Level; and (iii) third, to the
applicable Class of Residual Certificates;
PROVIDED, however, that if there is Excess Interest
for both Loan Groups, then Excess Interest from
each Loan Group will be contributed pro rata (by
the amount of Excess Interest)
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to the Yield Supplement Account until the Required
Account Level is reached, with any remaining
amounts of Excess Interest distributed to the
applicable Class of Residual Certificates. The
"REQUIRED ACCOUNT LEVEL" on each Distribution Date
will be $50,000.
The Class I-A and Class II-A Certificates will have
the benefit of a single Yield Supplement Account
maintained by the Trustee in order to compensate
for Interest Shortfalls. On any Distribution Date,
(i) if there is Excess Interest for both Loan
Groups, then such Excess Interest will be deposited
pro rata (by amount of Excess Interest) into the
Yield Supplement Account until the amount on
deposit reaches the Required Account Level and (ii)
if there is Excess Interest in one Loan Group which
is greater than the Interest Shortfall for the
other Loan Group, then such excess will be
deposited into the Yield Supplement Account until
the amount on deposit reaches the Required Account
Level. On any Distribution Date, the Yield
Supplement Amount for each Loan Group, if any, will
be withdrawn from the Yield Supplement Account and
distributed to the related Class A Certificates as
described above. On the Distribution Date following
the Group II Adjustment Date, the remaining funds
in the Yield Supplement Account will be distributed
to the holders of the Class I-R and Class II-R
Certificates, and no further amounts will be
deposited therein.
See "Description of the Certificates --
Distributions of Interest" herein.
Compensating Interest.................. Subject to the limitations described in this
Prospectus Supplement under "Yield and Prepayment
Considerations", the Master Servicer is obligated
to remit to the Certificate Account for each Loan
Group on each Distribution Date 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 on the Mortgage Loans in
such Loan Group and (b) the aggregate monthly
Master Servicing Fee for such Loan Group, 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, in each
case on the Mortgage Loans in such Loan Group. The
amount so passed through will hereinafter be
referred to as "COMPENSATING INTEREST". In
addition, for each Loan Group, if the amount
calculated
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in clause (a) is less than the amount calculated in
clause (b), then the excess of clause (b) over
clause (a) for such Loan Group will be available as
Compensating Interest for the other Loan Group. On
each Distribution Date, Compensating Interest for a
Loan Group will be distributed to the related Class
of Offered Certificates and allocated to the
payment of the related Excess Interest, and any
remaining shortfall in interest collections
resulting from the timing of Payoffs and all
shortfalls resulting from the timing of
Curtailments will be allocated in each case, (i) to
the related Class of Offered Certificates in the
proportion that the applicable Target Rate bears to
the weighted average Pass-Through Rate of the
related Loan Group for such Distribution Date and
(ii) to the related Excess Interest, the remainder
thereof; provided, however, that on all
Distribution Dates after the related Put Date and
on all Distribution Dates on which the applicable
Target Rate exceeds the applicable weighted average
Pass-Through Rate, all Compensating Interest for a
Loan Group will be distributed, and all remaining
interest shortfalls will be allocated, to the
related Class of Offered Certificates. Any failure
of the Master Servicer to remit Compensating
Interest and shortfalls in interest collections
resulting from the timing of Curtailments and
Payoffs will not be covered by the Reserve Funds or
the Certificate Insurance Policy.
See "Description of the Certificates --
Distributions of Interest -- COMPENSATING INTEREST"
herein.
Principal (including Principal
Prepayments)......................... On each Distribution Date, holders of each Class of
Offered Certificates will be entitled to receive
principal distributions from the Available
Distribution Amount for the related Loan Group to
the extent thereof after giving effect to
distributions of interest to such Class of
Certificates on such Distribution Date and payments
in respect of the Excess Interest for the related
Loan Group on such Distribution Date, to the extent
described herein. Distributions of principal to the
Offered Certificates will be based on principal
payments received with respect to the Mortgage
Loans in the related Loan Group, together with
payments received with respect to the Credit
Enhancements, as described herein.
The Class I-A and Class II-A Certificates will each
be entitled to receive on each Distribution Date as
payments of principal the sum of (i) the Principal
Payment Amount (as defined in "Description of the
Certificates -- Distributions of Principal" herein)
for the related Loan Group, (ii) the Principal
Prepayment Amount (as defined in "Description of
the Certificates -- Distributions of
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Principal" herein) for the related Loan Group and
(iii) the principal balance of any Mortgage Loan in
the related Loan Group which became a Liquidated
Mortgage Loan (as defined in "Description of the
Certificates -- Distributions of Principal" herein)
during the calendar month preceding the month of
the Distribution Date. On each Last Scheduled
Distribution Date (as defined herein), the related
Class of Offered Certificates will be entitled to
receive the remaining Class Principal Balance of
such Class.
On each Distribution Date, principal distributions
to holders of Offered Certificates representing the
portion of the balance of a Liquidated Mortgage
Loan which constitutes a realized loss will be made
from the Credit Enhancements as follows: (i) first,
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),
such amount will be withdrawn from the applicable
Reserve Fund until the amount on deposit in such
Reserve Fund has been reduced to zero and (ii)
second, subject to the terms of the Certificate
Insurance Policy, such amount will be covered by
payments under the Certificate Insurance Policy.
During the continuance of a default under the
Certificate Insurance Policy, any remaining portion
of such loss will be allocated to the related Class
of Offered Certificates in reduction of its Class
Principal Balance.
Shortfalls in amounts available to pay other
principal distributions may also be withdrawn from
the respective Reserve Fund.
See "Description of the Certificates --
Distributions of Principal" herein.
Credit Enhancements.................... RESERVE FUNDS. The Class I-A and Class II-A
Certificates will each have the benefit of a
reserve fund (the "CLASS I-A RESERVE FUND" and
"CLASS II-A RESERVE FUND", respectively, and
collectively, the "RESERVE FUNDS") maintained by
the Trustee into which $5,713,731 and $8,199,965,
respectively, will be deposited by the Bank on the
Closing Date. On each Distribution Date, amounts on
deposit in each Reserve Fund will be available for
distributions on the related Class of Certificates
to cover certain shortfalls and losses in respect
of interest and principal (including shortfalls
with respect to amounts available to pay the Excess
Interest Amount (as defined herein)).
On each Distribution Date, amounts on deposit in a
Reserve Fund will, subject to certain restrictions
as
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described under "Credit Enhancements -- Reserve
Funds" herein, be released to the Bank in an amount
equal to the sum of (i) the related Reserve Fund
Percentage (as defined below) of the related
Principal Payment Amount distributed on such
Distribution Date, (ii) the related Reserve Fund
Prepayment Percentage (as defined below) of the
related Principal Prepayment Amount distributed on
such Distribution Date and (iii) the related
Reserve Fund Liquidation Amount (as defined in
"Credit Enhancements -- Reserve Funds" herein) for
such Distribution Date. The "RESERVE FUND
PERCENTAGE" for each Class of Offered Certificates
will equal on any Distribution Date the amount in
the respective Reserve Fund, before giving effect
to any withdrawals therefrom on such Distribution
Date, divided by the related Class Principal
Balance of such Class of Offered Certificates,
before giving effect to distributions on such
Distribution Date. The "RESERVE FUND PREPAYMENT
PERCENTAGE" for each Class of Offered Certificates
on any Distribution Date will, subject to certain
conditions described under "Credit Enhancements --
Reserve Funds" herein, equal zero percent until the
tenth anniversary of the first Distribution Date
and gradually increase thereafter until it equals
the Reserve Fund Percentage for that Distribution
Date. Earnings on the amounts deposited in the
Reserve Funds will be distributed to the Bank
monthly. See "Credit Enhancements -- Reserve Funds"
herein.
CERTIFICATE INSURANCE POLICY. Subject to the terms
of the Certificate Insurance Policy, the Offered
Certificates will be insured as to the timely
payment of interest and principal by MBIA Insurance
Corporation under the Certificate Insurance Policy
issued by the Certificate Insurer to the Trustee
for the benefit of the holders of the Offered
Certificates. With limited exceptions, the
Certificate Insurance Policy will, subject to its
terms, require the Certificate Insurer to make
payments for the benefit of the holders of the
Offered Certificates in respect of shortfalls in
collections of the Interest Distribution Amount and
principal distribution amounts on the Mortgage
Loans not covered by either Reserve Fund and
certain mortgage loan payments to the holders of
the Offered Certificates avoided in bankruptcy as
preferential transfers. On each Last Scheduled
Distribution Date, the Certificate Insurance Policy
will, subject to its terms, cover the remaining
Class Principal Balance of the related Class of
Offered Certificates, after giving effect to
distributions to be made on such date. In addition,
the Certificate Insurance Policy will, subject to
its terms, guaranty to the holders of the Offered
Certificates the obligation of the Bank to pay the
exercise price for the Put Option and
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Clean-Up Option (as described below). The
Certificate Insurance Policy does not cover any
shortfalls related to the Relief Act, any
prepayment interest shortfalls allocable to the
Insured Certificates or any failure of the Master
Servicer to pay Compensating Interest. See "Credit
Enhancements -- Certificate Insurance Policy"
herein.
Advances............................... The Master Servicer is required to make Advances in
respect of certain delinquent payments of principal
and interest on any Mortgage Loan, to the extent
the Master Servicer determines that such Advances
will be recoverable from future amounts to be
received with respect to such Mortgage Loan, and
subject to the limitations described herein. See
"Description of the Certificates -- Advances"
herein and in the Prospectus.
Put Option and Clean-Up Option......... During the 30 day period ending on the second
Distribution Date preceding the Distribution Date
in July, 2000, with respect to Loan Group I, and in
October, 2001, with respect to Loan Group II,
(each, a "PUT DATE"), each Certificateholder of the
related Class of Offered Certificates will have the
option to require the Bank to purchase such
Certificateholder's Certificates of the related
Class (the "PUT OPTION"). If the Put Option is
exercised with respect to more than 90% of the
outstanding Class Principal Balance of a Class of
Offered Certificates, the Bank will have the option
to purchase on the same terms all of the
outstanding Offered Certificates of such Class,
including Certificates with respect to which the
applicable Certificateholder has not exercised the
Put Option (the "CLEAN-UP OPTION"). Subject to its
terms, the Certificate Insurance Policy will insure
the obligation of the Bank to pay the purchase
price to any holder of an Offered Certificate who
exercises the Put Option and, if the Bank exercises
the Clean-Up Option, the purchase price for all of
the Certificates of such Class. If the Bank fails
to pay the purchase price with respect to any
Certificate for which the holder thereof has
exercised the Put Option, resulting in a claim upon
the Certificate Insurance Policy, the Certificate
Insurer will have the right to purchase all of the
Certificates of the related Class without regard to
whether Certificateholders of such Class
representing 90% or more of the outstanding Class
Principal Balance have exercised the Put Option
(the "CERTIFICATE INSURER CLEAN-UP OPTION"). The
purchase price for any Certificate for which the
related Certificateholder has exercised the Put
Option, the Bank has exercised the Clean-Up Option
or the Certificate Insurer has exercised the
Certificate Insurer Clean-Up Option will be the sum
of the outstanding Certificate Principal Balance of
such Certificate on the Put Date (after
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giving effect to distributions otherwise made on
such date) plus accrued and unpaid interest thereon
at the applicable Remittance Rate up to the Put
Date.
Certificateholders will be notified of their right
to exercise the Put Option on or before the third
Distribution Date preceding the Put Date for the
related Loan Group, and will be required to give
written notice to the Master Servicer of their
intention to exercise the Put Option during the 30
day period ending on the second Distribution Date
preceding such Put Date. Notice of exercise of the
Put Option delivered to the Master Servicer by a
Certificateholder will be irrevocable. Receipt by
the Master Servicer of notices from
Certificateholders holding more than 90% of the
Class Principal Balance of the applicable Class
will permit the Bank to exercise the Clean-Up
Option. If the Bank intends to exercise the
Clean-Up Option, the Bank will cause the Master
Servicer to provide notice to the applicable Class
of Certificateholders by the Distribution Date
prior to the Put Date.
Optional Termination................... On any Distribution Date after the first date on
which the aggregate outstanding principal balance
of the Mortgage Loans in a Loan Group is less than
10% of the aggregate principal balance of such
Mortgage Loans as of the Cut-Off Date, the Company
may repurchase such Mortgage Loans and all property
acquired in respect of such Mortgage Loans
remaining in the Trust, and thereby effect the
termination of the related REMIC and the retirement
of the related Certificates. In connection with any
such repurchase, Certificateholders will receive an
amount not less than the aggregate Certificate
Principal Balance of the related Offered
Certificates plus accrued interest thereon through
the last day of the preceding calendar month. 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 a REMIC will cause the
outstanding principal balance of the related
Offered Certificates to be paid in full through the
distribution of such proceeds. In no event will the
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.
Yield and Prepayment Considerations.... The effective yield to maturity of each Class of
Offered 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 in the
related Loan Group, the rate of
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principal payments (including Principal
Prepayments) on the Mortgage Loans in the related
Loan Group and the rate of liquidations on the
Mortgage Loans in the related Loan Group. 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 in a Loan Group could
result in a lower than expected yield to maturity
on the related Class of Offered Certificates if
purchased at a premium. Conversely, a lower than
anticipated rate of principal payments (including
Principal Prepayments) and liquidations in a Loan
Group could result in a lower than expected yield
to maturity on the related Class of Offered
Certificates if purchased at a discount, in that
payments of principal with respect to the Mortgage
Loans in such Loan Group would occur later than
anticipated. Principal distributions to the Class
I-A Certificates and Class II-A Certificates relate
to principal payments on the Group I Loans and
Group II Loans, respectively.
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, during the fixed-rate period, if interest
rates generally rise above the interest rates on
the Mortgage Loans, the rate of prepayment would be
expected to decrease. Conversely, during the
fixed-rate period, 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.
The Mortgage Interest Rates on the Mortgage Loans
will be fixed for the first five years after
origination and thereafter will adjust annually and
may vary significantly over time. Upon a Mortgage
Loan commencing its adjustable period, annual
increases and decreases in the Mortgage Interest
Rate on such Mortgage Loan will be limited by the
Periodic Cap (other than with respect to the first
Adjustment Date) and the Rate Ceiling applicable to
such Mortgage Loan and will be based on the Index
in effect 45 days prior to the Adjustment Date
(which may not rise and fall consistently with
mortgage interest rates) plus the applicable Gross
Margin. As a result, the Mortgage Interest Rates on
the Mortgage Loans at any time may not equal the
prevailing rates for similar adjustable rate loans,
and accordingly the rate of
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prepayment may be lower or higher than would
otherwise be anticipated. Although each of the
Mortgage Loans has a Rate Ceiling, none has a
specified Rate Floor. Accordingly, the minimum
Mortgage Interest Rate to which a Mortgage Loan may
adjust on any Adjustment Date is the Gross Margin
for such Mortgage Loan. Further, some mortgagors
who prefer the certainty provided by fixed rate
mortgage loans may nevertheless obtain adjustable
rate mortgage loans at a time when they regard the
interest rates (and, therefore, the payments) on
fixed rate mortgage loans as unacceptably high.
Such mortgagors may be induced to refinance
adjustable rate mortgage loans when the interest
rates and monthly payments on comparable fixed rate
loans decline to levels which such mortgagors
regard as acceptable, even though such interest
rates and monthly payments may be significantly
higher than the current interest rates and monthly
payments on the mortgagors' adjustable rate
mortgage loans. The ability to refinance a Mortgage
Loan will depend on a number of factors prevailing
at the time refinancing is desired, including,
without limitation, real estate values, the
Mortgagor's financial situation, prevailing
mortgage loan interest rates, the Mortgagor's
equity in the related Mortgaged Property, tax laws
and prevailing general economic conditions.
In addition, the Remittance Rates applicable to
each Class of Offered Certificates may decrease,
and may decrease significantly after the Mortgage
Interest Rates on the Mortgage Loans in the related
Loan Group begin to adjust. Any such decrease may
result, in part, due to the imposition of the
Supplemental Fee on each Distribution Date after
the applicable Put Date. This may increase the
likelihood that the Put Option and, consequently,
the Clean-Up Option or Certificate Insurer Clean-Up
Option will be exercised.
If the Put Option is exercised with respect to any
Offered Certificate, the Clean-Up Option or the
Certificate Insurer Clean-Up Option is exercised
with respect to any Class of Offered Certificates,
or the clean-up call discussed under "Description
of the Certificates -- Optional Termination" herein
is exercised by the Company with respect to one or
both Loan Groups, such action would shorten the
weighted average life of the related investment,
thereby affecting the yield of such investment.
Ratings................................ It is a condition to the issuance of the
Certificates that the Offered Certificates each be
rated "AAA" by Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies, Inc.
("S&P") and "Aaa" by Moody's
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Investors Service, Inc. ("MOODY'S"). 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 of
the payment of the Put Option, Clean-Up Option and
Certificate Insurer Clean-Up Option, if exercised.
They 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.
The ratings assigned to the Offered Certificates
will depend primarily upon the creditworthiness of
the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the
Certificate Insurer below the ratings initially
assigned to the Offered Certificates may result in
a reduction of one or more of the ratings assigned
to the Offered Certificates.
Last Scheduled Distribution Date....... The Last Scheduled Distribution Date for the Class
I-A and Class II-A Certificates is the Distribution
Date in October 2026 and July 2027, respectively,
which in each case is the Distribution Date in the
month after the scheduled maturity date for the
latest maturing Mortgage Loan in the related Loan
Group.
The actual rate of principal payments on the
Offered 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 will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market 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
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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, two separate "real
estate mortgage investment conduit" ("REMIC")
elections will be made in connection with the
Trust. The Class I-A and Class II-A Certificates
issued by the Trust generally will represent direct
or indirect ownership of REMIC regular interests of
REMIC I and REMIC II, respectively, together with
certain other rights or obligations. The portion of
such Certificates treated as REMIC regular
interests will generally be treated as debt for
federal income tax purposes. Holders of
Certificates 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, the Class I-R and
Class II-R Certificates will be the "residual
interests" in REMIC I and REMIC II, respectively.
The portions of the Class I-A and Class II-A
Certificates treated as regular interests will not
be treated as having been issued with OID for
federal income tax reporting purposes. Certain
Classes of Certificates may be treated for federal
income tax purposes as having been purchased 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 15% CPR as described herein under
"Yield and Prepayment Consideration". No
representation is made that the Mortgage Loans will
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prepay at any given percentage of the Prepayment
Assumption.
For further important information regarding the
federal income tax consequences of investing in the
Certificates, see "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
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RISK FACTORS
GENERAL
Distributions of principal and interest to the Class I-A Certificates and
Class II-A Certificates will be based solely on payments with respect to the
Mortgage Loans in the related Loan Group, certain payments from Excess Interest
(as defined herein) collected with respect to the other Loan Group, amounts
withdrawn from the Yield Supplement Account and payments received with respect
to the Credit Enhancements, as described herein.
The rate of principal payments, amount of each interest payment and yield to
maturity on each Class of Offered 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 or liquidations. In general,
during the initial fixed-rate period, 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 payment 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" 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.
The Mortgage Loans are not assumable during the initial five year fixed-rate
period. See "Description of the Mortgage Pool" herein. Consequently,
acceleration of maturity as a result of certain transfers of Mortgaged Property
(as defined herein) during that time will affect the level of prepayments on the
Mortgage Loans.
Each Mortgage Loan comprising the Mortgage Pool (as defined herein) is an
adjustable-rate mortgage loan with an initial fixed-rate period of five years.
The Company is not aware of any publicly available statistics that set forth
principal prepayment experience or prepayment forecasts of such mortgage loans
over an extended period of time, and its experience with respect to such
mortgage loans is insufficient to draw any conclusions with respect to the
expected prepayment rates on the Mortgage Loans. As is the case with
conventional fixed-rate mortgage loans, adjustable-rate mortgage loans with an
initial fixed-rate period of five years may be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable-rate mortgage loans
with an initial fixed-rate period of five years could be subject to higher
prepayment rates either before or after the interest rate on the mortgage loan
begins to adjust than if prevailing interest rates remain constant because the
availability of fixed-rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance their mortgage loans to "lock in" lower fixed
interest rate. The features of such adjustable-rate mortgage loan programs of
mortgage loan originators during the past years have varied significantly in
response to market conditions such as interest rates, consumer demand,
regulatory restrictions and other factors. The lack of uniformity of the terms
and provisions of such adjustable-rate mortgage loan programs have made it
impracticable to compile meaningful comparative data on prepayment rates and,
accordingly, there can be no certainty as to the rate of prepayments on the
Mortgage Loans in stable or changing interest rate environments.
If any Certificate is purchased at a discount from its original Certificate
Principal Balance (as defined herein), 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 in the related Loan Group, 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
S-22
<PAGE>
received on the Mortgage Loans in the related Loan Group, the actual yield to
maturity will be lower than that so calculated.
ADJUSTMENTS OF THE MORTGAGE INTEREST RATES ON THE MORTGAGE LOANS
As of the Cut-Off Date, the Mortgage Interest Rate on each Mortgage Loan is
a Fixed Rate (as defined herein). On each Adjustment Date (as defined herein)
for each Mortgage Loan, the Mortgage Interest Rate on such Mortgage Loan will
adjust based on the Index and the applicable Gross Margin (each, as defined
herein), subject to certain limitations. See "Description of the Mortgage Pool"
herein.
The Remittance Rate applicable to each Class of Offered Certificates may
decrease, and may decrease significantly, after the Mortgage Interest Rates on
the Mortgage Loans in the related Loan Group begin to adjust as a result of,
among other factors, a change in the method of calculating the Remittance Rate,
the imposition of the Supplemental Fee and the Index level at the time of each
such adjustment. Moreover, although each of the Mortgage Loans has a Rate
Ceiling, none has a specified Rate Floor (each, as defined herein). Accordingly,
the minimum Mortgage Interest Rate to which a Mortgage Loan may adjust on any
Adjustment Date is determined by the applicable Gross Margin. In the event that,
despite prevailing market interest rates, the Mortgage Interest Rate on any
Mortgage Loan cannot increase due to the Rate Ceiling or Periodic Cap, the yield
on the Offered Certificates could be adversely affected. See "Description of the
Mortgage Pool" and "Yield and Prepayment Considerations" herein.
SUPPLEMENTAL FEE
On each Distribution Date following each Put Date, a Supplemental Fee will
be paid with respect to each Mortgage Loan in the related Loan Group. This
Supplemental Fee will equal 1.335% on each Mortgage Loan in Loan Group I and
1.345% on each Mortgage Loan in Loan Group II and will be in addition to the
Servicing Fee, Master Servicing Fee and Premium Payment Rate with respect to the
Certificate Insurance Policy. The payment of the Supplemental Fee on each
Distribution Date following the applicable Put Date may significantly lower the
Remittance Rate on the related Class of Offered Certificates. This may increase
the likelihood that the Put Option and, consequently, the Clean-Up Option or the
Certificate Insurer Clean-Up Option will be exercised.
PUT OPTION AND CLEAN-UP OPTION
During the 30 day period ending on the second Distribution Date preceding
the Put Date (as defined herein) with respect to a Loan Group, the
Certificateholders of the related Class will have the option to exercise the Put
Option (as defined herein). If the Put Option is exercised with respect to more
than 90% of the outstanding Class Principal Balance of the applicable Class, the
Bank will have the option to exercise the Clean-Up Option (as defined herein) to
purchase on the same terms all of the outstanding Offered Certificates of such
Class. Accordingly, a Certificateholder may be required to sell its Certificates
to the Bank or the Certificate Insurer on the Put Date, regardless of whether
the Certificateholder has elected to exercise the Put Option. There can be no
assurance as to whether the Bank will elect to exercise the Clean-Up Option if
it is entitled to do so. Moreover, if the Bank fails to pay the purchase price
with respect to any Certificate for which the holder thereof has exercised the
Put Option, resulting in a claim upon the Certificate Insurance Policy, the
Certificate Insurer will have the right to purchase all of the Certificates of
the related Class regardless of the percentage of the related Class Principal
Balance holders of which have exercised the Put Option. Consequently, a
Certificateholder may be required to sell its Certificates regardless of whether
such Certificateholder has elected to exercise the Put Option and regardless of
the percentage of the related Class Principal Balance holders of which have
exercised the Put Option. See "Description of the Certificates -- Put Option and
Clean-Up Option" herein.
S-23
<PAGE>
If the Put Option is exercised with respect to any Offered Certificate, the
Clean-Up Option or the Certificate Insurer Clean-Up Option is exercised with
respect to any Class of Offered Certificates, or the clean-up call discussed
under "Description of the Certificates -- Optional Termination" herein is
exercised by the Company with respect to one or both Loan Groups, such action
would shorten the weighted average life of the related investment, thereby
affecting the yield of such investment.
BOOK-ENTRY SYSTEM
Since transactions in the Offered 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 or unable to
purchase securities for which they cannot obtain delivery of physical
certificates. See "Description of the Certificates -- Book - Entry Registration"
herein.
THE TRUST
The assets of the Trust will consist of a pool (the "MORTGAGE POOL") of
conventional adjustable-rate one- to four-family residential Mortgage Loans with
original terms to maturity of not more than 30 years and initial fixed-interest
rate periods of five years. The 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, by deed in lieu of
foreclosure or otherwise after the Cut-Off Date, (iii) amounts held in the
Certificate Account, (iv) the Certificate Insurance Policy, (v) the Reserve
Funds, (vi) the Yield Supplement Account and (vii) 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 applicable Loan Group,
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, the
Mortgage Interest Rate in effect on the Cut-Off Date, the Gross Margin, the
Adjustment Date, the Periodic Cap, the Rate Ceiling and certain other
information.
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
$695,684,820. The Group I Loans and Group II Loans will have aggregate principal
balances outstanding as of the Cut-Off Date, after deducting payments due on or
before that date, of approximately $285,686,562 and $409,998,258, respectively.
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. All
of the Mortgage Loans were purchased by the Company from the Bank.
Each Mortgage Loan will be a conventional Mortgage Loan evidenced by a
Mortgage Note. Each such Mortgage Note will have an original term to maturity of
generally not more than 30 years, a fixed Mortgage Interest Rate (a "FIXED
RATE") during the initial five years of the Mortgage Loan and a Monthly Payment
during such period which will fully amortize the principal balance of the
Mortgage Loan over its original term to maturity. Each Mortgage Note will
provide for adjustments to the Mortgage Interest Rate thereon at the end of the
initial Fixed Rate period and annually thereafter.
The Mortgage Interest Rate on each Mortgage Loan will adjust annually
commencing on the Due Date (as defined below) immediately prior to the fifth
anniversary of the first Due Date and thereafter on each anniversary of the Due
Date on which such adjustment occurred (each, an "ADJUSTMENT DATE"). On each
Adjustment Date, the Mortgage Interest Rate will adjust to the sum of the Index
(as defined herein) and the fixed percentage specified in the applicable
Mortgage Note (the "GROSS MARGIN"), rounded to the nearest one-eighth of one
percent, subject to the limitation that with respect to each Adjustment Date
after the initial Adjustment Date, the Mortgage Interest Rate after such
adjustment may not vary from the Mortgage Interest Rate in effect prior to such
adjustment by more than two percentage points (the "PERIODIC CAP"). In addition,
adjustments to the Mortgage Interest Rate for each Mortgage Loan are subject to
a lifetime maximum interest rate (a "RATE CEILING") equal to the Fixed Rate plus
between five and six and five-eighths percentage points. None of the Mortgage
Loans specify a lifetime
- ---------
* 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 related 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 related
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.
S-25
<PAGE>
minimum interest rate (a "RATE FLOOR"). Consequently, the minimum Mortgage
Interest Rate for each Mortgage Loan will be the Gross Margin for such Mortgage
Loan. Each Mortgage Loan is not assumable during the five-year fixed rate
period; however, each Mortgage Loan is assumable after its initial Adjustment
Date. On the first Due Date following each Adjustment Date, the Monthly Payment
for the Mortgage Loan will be adjusted, if necessary, to an amount that will
fully amortize such Mortgage Loan at the adjusted Mortgage Interest Rate over
its remaining scheduled term to maturity. The Group I Adjustment Date will be
July 1, 2000 and the Group II Adjustment Date will be October 1, 2001. Such
dates reflect the first date on which a Mortgage Loan in such Loan Group (as of
the Cut-Off Date) is scheduled to have its Mortgage Interest Rate adjusted and
is referred to herein as the "GROUP ADJUSTMENT DATE".
LOAN GROUP I
Each Group I Loan will have a first payment date during the period from
August 1, 1995 through October 1, 1996, inclusive, and will have an original
term to maturity of not more than 30 years. As of the Cut-Off Date, none of the
Group I Loans will have had its initial Adjustment Date. The weighted average
number of months to the initial Adjustment Date will be approximately 42.8
months. The earliest and the latest month in which any Group I Loan will begin
to accrue interest at a Mortgage Interest Rate based on the Index will be July
1, 2000 and September 1, 2001, respectively. As of the Cut-Off Date, each of the
Group I Loans will bear interest at a Fixed Rate ranging from 6.500% to 8.250%
with a weighted average of approximately 7.443% per annum. Each of the Group I
Loans has a Gross Margin of not less than 2.750% and not more than 2.875%, and
the weighted average of the Gross Margins is approximately 2.750%.
The highest Rate Ceiling for any Group I Loan is 13.250% and the lowest Rate
Ceiling is 11.500% and the weighted average of the Rate Ceilings is 12.578%.
Each Group I Loan will have a pass-through rate (the "PASS-THROUGH RATE") for
any Distribution Date equal to the excess, if any, of the Mortgage Interest Rate
for such Mortgage Loan as of the first day of the month preceding the month of
such Distribution Date over the related Gross Fees (as defined herein). As of
the Cut-Off Date, the Pass-Through Rate for each Group I Loan will be not less
than 6.085% and not more than 7.835% per annum. As of the Cut-Off Date, the
weighted average of the Pass-Through Rates for the Group I Loans will be
approximately 7.028% per annum.
All of the Group I Loans will have principal and interest payable on the
first day of each month (the "DUE DATE"). None of the Group I Loans will be
Buydown Loans. The latest original scheduled maturity of any Group I Loan will
be September 1, 2026. All of the Group I Loans will have had an original term to
maturity of 30 years, and as of the Cut-Off Date, the weighted average remaining
term to maturity of the Group I Loans will be approximately 343 months. At
origination, based upon an appraisal of the Mortgaged Property securing each
Mortgage Loan, approximately 77.5% of the Group I Loans will have Loan-to-Value
Ratios less than or equal to 80%, and approximately 22.5% of the Group I Loans
will have Loan-to-Value Ratios greater than 80% but less than or equal to 95%.
No Group I Loan will have a Loan-to-Value Ratio at origination greater than 95%.
At origination, the weighted average of the Loan-to-Value Ratios of the Group I
Loans was approximately 75.9%. As of the Cut-Off Date, the weighted average of
the Loan-to-Value Ratios of the Group I Loans is approximately 74.5%. As of the
Cut-Off Date, approximately 22.5% of the Group I Loans are covered by Primary
Insurance Policies. All of the Group I Loans with Loan-to-Value Ratios as of the
Cut-Off Date in excess of 80% will be covered by Primary Insurance Policies. At
origination, each Group I Loan will have had a principal balance of not less
than $20,050 nor more than $988,000, and the average principal balance of the
Group I Loans as of the Cut-Off Date will be approximately $269,008.
Approximately 99.7% of the Group I Loans will be secured by owner-occupied
Mortgaged Properties which are 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 0.3% of the Group I Loans will be
secured by owner-occupied Mortgaged Properties which are second or vacation
homes of the related Mortgagors, based solely on such representations.
S-26
<PAGE>
None of the Group I Loans will be secured by Mortgaged Properties which are
investor properties of the related Mortgagors, based solely on such
representations. The aggregate principal balance of Group I Loans originated
under a reduced documentation program, which generally limits the original
Loan-to-Value Ratio of such Mortgage Loan, will be approximately $32,273,170,
which will be approximately 11.3% of Loan Group I. As of the Cut-Off Date, the
weighted average of the Loan-to-Value Ratios at origination of such Mortgage
Loans originated under a reduced documentation program is approximately 67.0%
Approximately 33.9% of the Group I Loans are secured by Mortgaged Properties
located in California; 9.1%, in Connecticut; 7.0%, in Ohio; 5.7%, in
Pennsylvania; 5.6%, in New Jersey; 5.1%, in Illinois; and no other single state
contains Mortgaged Properties securing more than 5% of the Group I Loans. No
more than 1.0% of the Group I Loans will be secured by Mortgaged Properties
located in any one California zip code area, and no more than 1.2% of the Group
I Loans will be secured by Mortgaged Properties located in any other single zip
code area. Approximately 34.1% of the Group I Loans will have been originated
for the purpose of refinancing existing mortgage debt, including cash-out
refinancings. Approximately 65.9% of the Group I Loans will have been originated
for the purpose of purchasing the Mortgaged Property.
LOAN GROUP II
Each Group II Loan will have a first payment date during the period from
November 1, 1996 through July 1, 1997, inclusive, and will have an original term
to maturity of not more than 30 years. As of the Cut-Off Date, none of the Group
II Loans will have had its initial Adjustment Date. The weighted average number
of months to the initial Adjustment Date will be approximately 51.7 months. The
earliest and the latest month in which any Group II Loan will begin to accrue
interest at a Mortgage Interest Rate based on the Index will be October 1, 2001
and June 1, 2002, respectively. As of the Cut-Off Date, each of the Group II
Loans will bear interest at a Fixed Rate ranging from 6.500% to 8.250% with a
weighted average of approximately 7.461% per annum. Each of the Group II Loans
has a Gross Margin of not less than 2.750% and not more than 3.000%, and the
weighted average of the Gross Margins is approximately 2.750%.
The highest Rate Ceiling for any Group II Loan is 13.250% and the lowest
Rate Ceiling is 11.500% and the weighted average of the Rate Ceilings is
12.461%. As of the Cut-Off Date, the Pass-Through Rate for each Group II Loan
will be not less than 6.095% and not more than 7.845% per annum. As of the Cut-
Off Date, the weighted average of the Pass-Through Rates for the Group II Loans
will be approximately 7.056% per annum.
All of the Group II Loans will have principal and interest payable on the
first day of each month (the "DUE DATE"). None of the Group II Loans will be
Buydown Loans. The latest original scheduled maturity of any Group II Loan will
be June 1, 2027. Except for one Group II Loan (which has an original term to
maturity of 20 years), each of the Group II Loans will have had an original term
to maturity of 30 years, and as of the Cut-Off Date, the weighted average
remaining term to maturity of the Group II Loans will be approximately 352
months. At origination, based upon an appraisal of the Mortgaged Property
securing each Mortgage Loan, approximately 82.4% of the Group II Loans will have
Loan-to-Value Ratios less than or equal to 80%, and approximately 17.6% of the
Group II Loans will have Loan-to-Value Ratios greater than 80% but less than or
equal to 95%. No Group II Loan will have a Loan-to-Value Ratio at origination
greater than 95%. At origination, the weighted average of the Loan-to-Value
Ratios of the Group II Loans was approximately 75.4%. As of the Cut-Off Date,
the weighted average of the Loan-to-Value Ratios of the Group II Loans is
approximately 74.8%. As of the Cut-Off Date, approximately 17.6% of the Group II
Loans are covered by Primary Insurance Policies. All of the Group II Loans with
Loan-to-Value Ratios as of the Cut-Off Date in excess of 80% were covered by
Primary Insurance Policies. At origination, each Group II Loan will have had a
principal balance of not less than $37,900 nor more than $985,000, and the
average principal balance of the Group II Loans as of the Cut-Off Date will be
approximately $310,370.
S-27
<PAGE>
Approximately 99.9% of the Group II Loans will be secured by owner-occupied
Mortgaged Properties which are 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 0.1% of the Group II Loans will be
secured by owner-occupied Mortgaged Properties which are second or vacation
homes of the related Mortgagors, based solely on such representations. None of
the Group II Loans will be secured by Mortgaged Properties which are investor
properties of the related Mortgagors, based solely on such representations. The
aggregate principal balance of Group II Loans originated under a reduced
documentation program, which generally limits the original Loan-to-Value Ratio
of such Mortgage Loan, will be approximately $35,784,951, which will be
approximately 8.7% of Loan Group II. As of the Cut-Off Date, the weighted
average of the Loan-to-Value Ratios at origination of such Mortgage Loans
originated under a reduced documentation program is approximately 64.5%.
Approximately 31.9% of the Group II Loans are secured by Mortgaged
Properties located in California; 9.3%, in New Jersey; 8.7%, in Connecticut;
7.1%, in Pennsylvania; and no other single state contains Mortgaged Properties
securing more than 5% of the Group II Loans. No more than 1.6% of the Group II
Loans will be secured by Mortgaged Properties located in any one California zip
code area, and no more than 1.1% of the Group II Loans will be secured by
Mortgaged Properties located in any other single zip code area. Approximately
32.5% of the Group II Loans will have been originated for the purpose of
refinancing existing mortgage debt, including cash-out refinancings.
Approximately 67.5% of the Group II Loans will have been originated for the
purpose of purchasing the Mortgaged Property.
INDEX
The Index is the weekly average yield on United States Treasury Securities
adjusted to a constant maturity of one year, as made available by the Federal
Reserve Board, published in Federal Reserve Statistical Release H.15(519) and
most recently available as of the date 45 days before the applicable Adjustment
Date. In the event the Index is no longer available, the Master Servicer will
select a substitute Index in accordance with the terms of the related Mortgage
Note and in compliance with federal law.
Listed below are historical values of certain average yields since January
1992, which are related to the Index. The values shown are the average monthly
yields on United States Treasury Securities adjusted to a constant maturity of
one-year for the months indicated, published by the Federal Reserve Board. By
contrast, the applicable Index is determined by reference to a weekly average
yield on United States Treasury Securities adjusted to a constant maturity of
one year, rather than such monthly average yields. The monthly averages shown
are intended only to provide a historical summary of the movements in yields on
United States Treasury Securities adjusted to a constant maturity of one-year.
The source of the values shown below is Federal Reserve Statistical Release H.15
(519).
<TABLE>
<CAPTION>
YEAR
--------------------------------------------------
MONTH 1997 1996 1995 1994
- --------------------------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
January.............................................................. 5.61% 5.09% 7.05% 3.54%
February............................................................. 5.53 4.94 6.70 3.87
March................................................................ 5.80 5.34 6.43 4.32
April................................................................ 5.99 5.54 6.27 4.82
May.................................................................. 5.87 5.64 6.00 5.31
June................................................................. 5.69 5.81 5.64 5.27
July................................................................. 5.54 5.85 5.59 5.48
August............................................................... 5.56 5.67 5.75 5.56
September............................................................ 5.83 5.62 5.76
October.............................................................. 5.55 5.59 6.11
November............................................................. 5.42 5.43 6.54
December............................................................. 5.47 5.31 7.14
<CAPTION>
MONTH 1993 1992
- --------------------------------------------------------------------- ----- -----
<S> <C> <C>
January.............................................................. 3.50% 4.15%
February............................................................. 3.39 4.29
March................................................................ 3.33 4.63
April................................................................ 3.24 4.30
May.................................................................. 3.36 4.19
June................................................................. 3.54 4.17
July................................................................. 3.47 3.60
August............................................................... 3.44 3.47
September............................................................ 3.36 3.18
October.............................................................. 3.39 3.30
November............................................................. 3.58 3.68
December............................................................. 3.61 3.71
</TABLE>
S-28
<PAGE>
ADDITIONAL INFORMATION
A Current Report on Form 8-K relating to the Offered Certificate 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 for
each Loan Group: the number of Mortgage Loans, the range of Mortgage Interest
Rates, the range of Pass-Through Rates, the range of initial Adjustment Dates,
the range of Gross Margins, the range of Rate Ceilings, 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, the original terms of the
Mortgage Loans, the Mortgagors' purpose of financing and the number of Mortgage
Loans originated under a reduced documentation program, if any, in each case,
for each Loan Group.
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, among
the Company, as Depositor and Master Servicer, PNC Bank, National Association
(the "BANK") 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
Certificates that the Offered Certificates each be rated "AAA" by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"),
and "Aaa" by Moody's Investors Service, Inc. ("MOODY'S"). See "Certificate
Ratings" herein. At the time of their issuance, the Offered 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 evidence all the beneficial ownership in a trust (the
"TRUST") established by the Company, into which the Mortgage Loans will be
deposited. The Mortgage Pass-Through Certificates, Series 1997-6 (the
"CERTIFICATES"), will consist of the following four classes: (i) Class I-A and
Class II-A (together, the "CLASS A CERTIFICATES" or the "OFFERED CERTIFICATES")
and (ii) Class I-R and Class II-R (the "RESIDUAL CERTIFICATES"). The Residual
Certificates are not offered hereby. The "CLASS PRINCIPAL BALANCE" for any Class
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 and
(ii) allocations of losses required to be borne by such Class.
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 Offered Certificates will comprise 100% of the initial aggregate Certificate
Principal Balance of the Certificates. The Offered 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.
S-29
<PAGE>
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-entry changes in DTC Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. DTC
Participants include the Underwriters, 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
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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 related
Book-Entry 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 Book-Entry 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.
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, holders 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 described 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 A, 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.
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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.
DISTRIBUTIONS OF INTEREST
With respect to each Class of Offered Certificates, interest will be passed
through monthly on each Distribution Date, commencing in October 1997. With
respect to each Distribution Date, an amount of interest will accrue on each
Class of Offered Certificates generally equal to 1/12th of the applicable
Remittance Rate for such Class multiplied by the related Class Principal
Balance. Interest to be distributed on a Class of Offered Certificates on any
Distribution Date (the "INTEREST DISTRIBUTION AMOUNT") will consist of interest
accrued during the preceding calendar month, as described above, and the portion
of the Interest Distribution Amount remaining unpaid from the preceding
Distribution Date less the sum, with respect to any Mortgage Loan in the related
Loan Group, of (i) the portion allocated to such Class of any shortfalls in
interest collections resulting from the timing of Curtailments and Payoffs not
otherwise covered by Compensating Interest, (ii) the portion allocated to such
Class of any interest shortfalls related to the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended (the "RELIEF ACT") and (iii) the portion
allocated to such Class of the amounts which would otherwise be Compensating
Interest but for the Master Servicer's failure to remit such amounts to the
Certificate Account. The Interest Distribution Amount for a Class of Offered
Certificates will be paid from the Available Distribution Amount (as defined
herein) for the related Loan Group, together with Excess Interest from the other
Loan Group and the Yield Supplement Amount applicable to such Loan Group. Except
as described below, to the extent that such amounts are insufficient to pay the
amount of the Interest Distribution Amount to which such Class of Offered
Certificates is entitled, such insufficiency will (i) first, be withdrawn from
the applicable Reserve Fund and distributed to such Class of Offered
Certificates until the amount on deposit in such Reserve Fund has been reduced
to zero and (ii) second, subject to the terms of the Certificate Insurance
Policy, be covered by payments under the Certificate Insurance Policy. Any
failure of the Master Servicer to remit Compensating Interest and shortfalls in
interest collections resulting from the timing of Curtailments and Payoffs and
due to the Relief Act will not be covered by the Reserve Funds or the
Certificate Insurance Policy. See "Credit Enhancements" herein.
The Remittance Rate for each Class of Class A Certificates with respect to
any Distribution Date will equal (i) on or prior to the applicable Put Date, the
lesser of (x) the Target Rate for such Class of Certificates and (y) the sum of
(a) the weighted average (by principal balance) of the Pass-Through Rates on the
Mortgage Loans in the related Loan Group for such Distribution Date, (b) twelve
times the ratio, expressed as a percentage, of the Excess Interest, if any,
received from the other Loan Group, divided by the Class Principal Balance of
such Class of Certificates (such percentage deemed to be zero after the
Distribution Date in July 2000) and (c) twelve times the ratio, expressed as a
percentage, of the applicable Yield Supplement Amount, divided by the Class
Principal Balance of such Class of Certificates; and (ii) after the applicable
Put Date, the weighted average (by principal balance) of the Pass-Through Rates
on the Mortgage Loans in the related Loan Group for such Distribution Date
(which will equal the weighted average Mortgage Interest Rate of such Mortgage
Loans less 1.750%). The "TARGET RATE" will be 6.490% for the Class I-A
Certificates and 6.600% for the Class II-A Certificates. The "PASS-THROUGH RATE"
of a Mortgage Loan for any Distribution Date will be the Mortgage Interest Rate
thereon as of the first day of the month preceding the month of such
Distribution Date less the sum of the related (a) Servicing Fee, (b) Master
Servicing Fee, (c) Supplemental Fee which will be payable on any Distribution
Date after the applicable Put Date and (d) Premium Payment Rate (collectively,
the "GROSS FEES"). The Gross Fees with respect to each Mortgage Loan in Loan
Group I will equal 0.415% for any Distribution Date on or prior to the Put Date,
and 1.750% thereafter. The Gross Fees with respect to each Mortgage Loan in Loan
Group II will equal 0.405% for any Distribution Date on or prior to the Put
Date, and 1.750% thereafter.
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The "EXCESS INTEREST" for each Loan Group will equal on any Distribution
Date the excess, if any, of the interest due in respect of the Mortgage Loans in
the related Loan Group on the Due Date in the month of such Distribution Date
(net of the sum of the Gross Fees and the related Residual Allocable Share (as
defined below) of (i) any shortfalls in interest collections resulting from the
timing of Curtailments and Payoffs not otherwise covered by Compensating
Interest, (ii) any interest shortfalls related to the Relief Act and (iii) any
failure of the Master Servicer to remit amounts which would otherwise constitute
Compensating Interest) over the interest payable on the related Class A
Certificates at the applicable Target Rate on such Distribution Date. The
"RESIDUAL ALLOCABLE SHARE" for each Class of Residual Certificates on any
Distribution Date will equal a fraction, the numerator of which is the excess,
if any, of (i) the weighted average Pass-Through Rate of the Mortgage Loans in
the related Loan Group for such Distribution Date over (ii) the Target Rate for
such Loan Group, and the denominator of which is the weighted average
Pass-Through Rate of the Mortgage Loans in such Loan Group for such Distribution
Date. The "INTEREST SHORTFALL" for each Loan Group will equal on any
Distribution Date the excess, if any, of interest payable on the related Class A
Certificates at the applicable Target Rate on such Distribution Date over the
interest due in respect of the Mortgage Loans in the related Loan Group on the
Due Date in the month of such Distribution Date (net of Gross Fees). The Excess
Interest, the Residual Allocable Share, the Yield Supplement Amount and the
Interest Shortfall for a Loan Group will each be deemed to be zero for any
Distribution Date after the applicable Put Date.
The "YIELD SUPPLEMENT AMOUNT" for each Loan Group will equal on any
Distribution Date the following: (i) if there is no Interest Shortfall for that
Loan Group, zero; (ii) if there is an Interest Shortfall only for that Loan
Group, the lesser of (a) the amount of such Interest Shortfall less the Excess
Interest received from the other Loan Group and (b) the amount on deposit in the
Yield Supplement Account; and (iii) if there are Interest Shortfalls for both
Loan Groups, the amount of the Interest Shortfall with respect to such Loan
Group up to such Loan Group's pro rata share (by amount of Interest Shortfall)
of the amount in the Yield Supplement Account.
On each Distribution Date, the Excess Interest for a Loan Group will be
distributed (i) first, to the Class A Certificates related to the other Loan
Group up to the amount of the Interest Shortfall for such other Loan Group; (ii)
second, to the Yield Supplement Account until it reaches the Required Account
Level; and (iii) third, to the applicable Class of Residual Certificates;
PROVIDED, however, that if there is Excess Interest for both Loan Groups, then
Excess Interest from each Loan Group will be contributed pro rata (by the amount
of Excess Interest) to the Yield Supplement Account until the Required Account
Level is reached, with any remaining amounts of Excess Interest distributed to
the applicable Class of Residual Certificates. The "REQUIRED ACCOUNT LEVEL" on
each Distribution Date will be $50,000.
The Class I-A and Class II-A Certificates will have the benefit of a single
Yield Supplement Account maintained by the Trustee in order to compensate for
Interest Shortfalls. On any Distribution Date, (i) if there is Excess Interest
for both Loan Groups, then such Excess Interest will be deposited pro rata (by
amount of Excess Interest) into the Yield Supplement Account until the amount on
deposit reaches the Required Account Level and (ii) if there is Excess Interest
in one Loan Group which is greater than the Interest Shortfall for the other
Loan Group, then such excess will be deposited into the Yield Supplement Account
until the amount on deposit reaches the Required Account Level. On any
Distribution Date, the Yield Supplement Amount for each Loan Group, if any, will
be withdrawn from the Yield Supplement Account and distributed to the related
Class A Certificates as described above. On the Distribution Date following the
Group II Adjustment Date, the remaining funds in the Yield Supplement Account
will be distributed to the holders of the Class I-R and Class II-R Certificates,
and no further amounts will be deposited therein.
COMPENSATING INTEREST. Subject to the limitations described in this
Prospectus Supplement under "Yield and Prepayment Considerations", the Master
Servicer is obligated to remit to the Certificate Account for each Loan Group on
each Distribution Date 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
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the calendar month preceding such Distribution Date to the last day of such
month on the Mortgage Loans in such Loan Group and (b) the aggregate monthly
Master Servicing Fee for such Loan Group, 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, in
each case on the Mortgage Loans in such Loan Group. The amount so passed through
will hereinafter be referred to as "COMPENSATING INTEREST". In addition, for
each Loan Group, if the amount calculated in clause (a) is less than the amount
calculated in clause (b), then the excess of clause (b) over clause (a) for such
Loan Group will be available as Compensating Interest for the other Loan Group.
On each Distribution Date, Compensating Interest for a Loan Group will be
distributed to the related Class of Offered Certificates and allocated to the
payment of the related Excess Interest, and any remaining shortfall in interest
collections resulting from the timing of Payoffs and all shortfalls resulting
from the timing of Curtailments will be allocated in each case, (i) to the
related Class of Offered Certificates in the proportion that the applicable
Target Rate bears to the weighted average Pass-Through Rate of the related Loan
Group for such Distribution Date and (ii) to the related Excess Interest, the
remainder thereof; provided, however, that on all Distribution Dates after the
related Put Date and on all Distribution Dates on which the applicable Target
Rate exceeds the applicable weighted average Pass-Through Rate, all Compensating
Interest for a Loan Group will be distributed, and all remaining interest
shortfalls will be allocated, to the related Class of Offered Certificates. Any
failure of the Master Servicer to remit Compensating Interest and shortfalls in
interest collections resulting from the timing of Curtailments and Payoffs will
not be covered by the Reserve Funds or the Certificate Insurance Policy. See
"Yield and Prepayment Considerations" herein and "Yield Considerations --
Effective Interest Rate" in the Prospectus.
DISTRIBUTIONS OF PRINCIPAL
On each Distribution Date, holders of each Class of Offered Certificates
will be entitled to receive principal distributions from the Available
Distribution Amount for the related Loan Group to the extent thereof after
giving effect to distributions of interest to that Class of Certificates on such
Distribution Date and payments in respect of the Excess Interest for the related
Loan Group on such Distribution Date, to the extent described herein.
Distributions of principal to the Offered Certificates will be based on
principal payments received with respect to the Mortgage Loans in the related
Loan Group, together with payments received with respect to the Credit
Enhancements, as described herein.
The Class I-A and Class II-A Certificates will each be entitled to receive
on each Distribution Date as payments of principal the sum of (i) the Principal
Payment Amount for the related Loan Group, (ii) the Principal Prepayment Amount
for the related Loan Group and (iii) the principal balance of any Mortgage Loan
in the related Loan Group which became a Liquidated Mortgage Loan during the
calendar month preceding the month of the Distribution Date. On each Last
Scheduled Distribution Date (as defined herein), the related Class of Offered
Certificates will be entitled to receive the remaining Class Principal Balance
of such Class.
For any Distribution Date and for any Loan Group, the "PRINCIPAL PAYMENT
AMOUNT" is, with respect to the Mortgage Loans in such Loan Group, the sum of
(i) scheduled principal payments on such Mortgage Loans due on the related Due
Date to the extent received or advanced, (ii) the principal portion of
repurchase proceeds received with respect to any such 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 from such Mortgage Loans
during the preceding calendar month, other than Payoffs, Curtailments or amounts
received with respect to Liquidated Mortgage Loans (as defined herein). For any
Distribution Date and for any Loan Group, the "PRINCIPAL PREPAYMENT AMOUNT" is,
with respect to the Mortgage Loans in such Loan Group, the sum of (i) all
Curtailments from such Mortgage Loans which were received during
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the preceding calendar month and (ii) all Payoffs from such Mortgage Loans
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 Offered Certificates on the October
1997 Distribution Date). 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.
On each Distribution Date, principal distributions to holders of Offered
Certificates representing the portion of the balance of a Liquidated Mortgage
Loan which constitutes a realized loss will be made from the Credit Enhancements
as follows: (i) first, except for Special Hazard Losses, Fraud Losses and
Bankruptcy Losses (each, as defined in the Prospectus) in excess of the
designated amounts of Special Hazard Coverage, Fraud Coverage and Bankruptcy
Coverage (each, as defined herein), such amount will be withdrawn from the
applicable Reserve Fund until the amount on deposit in such Reserve Fund has
been reduced to zero and (ii) second, subject to the terms of the Certificate
Insurance Policy, such amount will be covered by payments under the Certificate
Insurance Policy. During the continuance of a default under the Certificate
Insurance Policy, any remaining portion of such loss will be allocated to the
related Class of Offered Certificates in reduction of its Class Principal
Balance.
Shortfalls in amounts available to pay other principal distributions may
also be withdrawn from the respective Reserve Fund.
"GROUP I SPECIAL HAZARD COVERAGE" is expected to equal approximately
$2,856,865 as of the Cut-Off Date. "GROUP II SPECIAL HAZARD COVERAGE" is
expected to equal approximately $6,394,339 as of the Cut-Off Date. Special
Hazard Coverage for a Loan Group will be reduced, from time to time, by the
amount of Special Hazard Losses incurred for such Loan Group. On each
anniversary of the Cut-Off Date, the Special Hazard Coverage for a Loan Group
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 in the
Loan Group located in the single California zip code area containing the largest
aggregate principal balance of such Mortgage Loans, (b) 1% of the aggregate
unpaid principal balance of the Mortgage Loans in the Loan Group and (c) twice
the unpaid principal balance of the largest single Mortgage Loan in the Loan
Group, in each case calculated as of the Due Date in the immediately preceding
month and (2) the Special Hazard Coverage for the Loan Group as of the Cut-Off
Date as reduced by the Special Hazard Losses incurred for such Loan Group since
the Cut-Off Date.
"GROUP I FRAUD COVERAGE" is expected to equal approximately $5,713,731 as of
the Cut-Off Date. "GROUP II FRAUD COVERAGE" is expected to equal approximately
$8,199,965 as of the Cut-Off Date. Fraud Coverage for a Loan Group will be
reduced, from time to time, by the amount of Fraud Losses incurred for such Loan
Group. On each anniversary of the Cut-Off Date, Fraud Coverage for a Loan Group
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 in the related Loan Group as of the Due Date in the preceding
month and (ii) the excess of the Fraud Coverage for such Loan Group as of the
Cut-Off Date over cumulative Fraud Losses incurred for such Loan Group. On the
fifth anniversary of the Cut-Off Date, Fraud Coverage for each Loan Group will
be reduced to zero.
"GROUP I BANKRUPTCY COVERAGE" is expected to equal approximately $110,667 as
of the Cut-Off Date. "GROUP II BANKRUPTCY COVERAGE" is expected to equal
approximately $148,720 as of the Cut-Off Date. Bankruptcy Coverage will be
reduced, from time to time, by the amount of Bankruptcy Losses incurred for such
Loan Group.
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Special Hazard Coverage, Fraud Coverage or Bankruptcy Coverage may also be
reduced with the prior written consent of the Certificate Insurer upon written
confirmation from the Rating Agencies that such reduction will not adversely
affect the then current ratings assigned to the applicable Classes of Offered
Certificates by the Rating Agencies. Such a reduction, in the event of Special
Hazard Losses, Fraud Losses or Bankruptcy Losses, could adversely affect the
level of protection afforded the applicable Classes of Offered Certificates by
the related Reserve Fund.
THE RESIDUAL CERTIFICATES
On each Distribution Date, in addition to payments to the Residual
Certificates described in "-- Distributions of Interest" herein, any amounts
remaining in the Certificate Account from the Available Distribution Amount for
a Loan Group after distributions of interest and principal on the related Class
of Offered Certificates and distributions of Excess Interest, if any, paid to
the other Class of Offered Certificates or deposited to the Yield Supplement
Account will be distributed to the applicable Residual Certificateholders,
together with Excess Liquidation Proceeds (as defined below), if any.
Distributions of such remaining amounts to the Residual Certificateholders will
be subordinate to all payments required to be made on the other Certificates on
any Distribution Date.
Any amounts remaining in the Certificate Account related to a Loan Group
upon reduction of the aggregate Certificate Principal Balance of the related
Certificates to zero, payment of reimbursement amounts to the Certificate
Insurer, payment of any outstanding expenses and termination of the applicable
REMIC will be distributable to the applicable Class of Residual
Certificateholders. See "-- Optional Termination" herein.
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 for such
Distribution Date which will be determined separately with respect to Loan Group
I and Loan Group II, will, in each case, generally include scheduled principal
and interest payments due on the related Due Date to the extent received or
advanced, 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 with respect
to such Loan Group in the previous calendar month, and 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" for any Distribution Date for each Loan
Group, as more fully described in the Pooling Agreement, will equal the sum,
with respect to the Mortgage Loans in such Loan Group, of the following amounts:
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(1) the total amount of all cash received by or on behalf of the Master
Servicer with respect to such Mortgage Loans by the Determination Date for
such Distribution Date and not previously distributed (including advances
made by servicers and proceeds of liquidated Mortgage Loans), except:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Date;
(b) all Curtailments on such Mortgage Loans 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 such Mortgage Loans for the period subsequent to the previous
calendar month);
(c) all Payoffs on such Mortgage Loans 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 Mortgage Loans for the
period subsequent to the previous calendar month), and interest which was
accrued and received on such 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 on Mortgage
Loans 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;
(f) the sum of the Servicing Fee, the Master Servicing Fee, the
Supplemental Fee and the Premium Payment Rate for each Mortgage Loan; and
(g) the excess, if any, of aggregate Liquidation Proceeds on such
Mortgage Loans received during the previous calendar month over the
amount that would have been received if Payoffs had been made with
respect to such 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 relating to such Mortgage Loans; and
(b) any amounts payable as Compensating Interest on such Distribution
Date relating to such Mortgage Loans; and
(3) the total amount of any cash received by the Trustee or the Master
Servicer during the preceding month in respect of the obligation of the
Company to repurchase any such Mortgage Loan.
With respect to each Distribution Date, the Trustee, on behalf of the
holders of the Class A Certificates, may make a claim on the Certificate
Insurance Policy, which guarantees for such Certificateholders the Deficiency
Amount (as defined in "Credit Enhancements -- The Certificate Insurance Policy
and the Certificate Insurer" herein.) See "Distribution of Credit Enhancements
- -- Enforceability of Certain Provisions" in the Prospectus.
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for the Class I-A and Class II-A
Certificates is the Distribution Date in October, 2026 and July, 2027,
respectively, which in each case is the Distribution Date in the
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month after the scheduled maturity date for the latest maturing Mortgage Loan in
the related Loan Group.
The actual rate of principal payments on the Offered 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.
PUT OPTION AND CLEAN-UP OPTION
During the 30 day period ending on the second Distribution Date preceding
the Distribution Date in July, 2000, with respect to Loan Group I, and in
October, 2001, with respect to Loan Group II, (each, a "PUT DATE"), each
Certificateholder of the related Class of Offered Certificates will have the
option to require the Bank to purchase such Certificateholder's Certificates of
the related Class (the "PUT OPTION"). If the Put Option is exercised with
respect to more than 90% of the outstanding Class Principal Balance of a Class
of Offered Certificates, the Bank will have the option to purchase on the same
terms all of the outstanding Offered Certificates of such Class, including
Certificates with respect to which the applicable Certificateholder has not
exercised the Put Option (the "CLEAN-UP OPTION"). Subject to its terms, the
Certificate Insurance Policy will insure the obligation of the Bank to pay the
purchase price to any holder of an Offered Certificate who exercises the Put
Option and, if the Bank exercises the Clean-Up Option, the purchase price for
all of the Certificates of such Class. If the Bank fails to pay the purchase
price with respect to any Certificate for which the holder thereof has exercised
the Put Option, resulting in a claim upon the Certificate Insurance Policy, the
Certificate Insurer will have the right to purchase all of the Certificates of
the related Class without regard to whether Certificateholders of such Class
representing 90% or more of the outstanding Class Principal Balance have
exercised the Put Option (the "CERTIFICATE INSURER CLEAN-UP OPTION"). The
purchase price for any Certificate for which the related Certificateholder has
exercised the Put Option, the Bank has exercised the Clean-Up Option or the
Certificate Insurer has exercised the Certificate Insurer Clean-Up Option will
be the sum of the outstanding Certificate Principal Balance of such Certificate
on the Put Date (after giving effect to distributions otherwise made on such
date) plus accrued and unpaid interest thereon at the applicable Remittance Rate
up to the Put Date.
Certificateholders will be notified of their right to exercise the Put
Option on or before the third Distribution Date preceding the Put Date for the
related Loan Group, and will be required to give written notice to the Master
Servicer of their intention to exercise the Put Option during the 30 day period
ending on the second Distribution Date preceding such Put Date. Notice of
exercise of the Put Option delivered to the Master Servicer by a
Certificateholder will be irrevocable. Receipt by the Master Servicer of notices
from Certificateholders holding more than 90% of the Class Principal Balance of
the applicable Class will permit the Bank to exercise the Clean-Up Option. If
the Bank intends to exercise the Clean-Up Option, the Bank will cause the Master
Servicer to provide notice to the applicable Class of Certificateholders by the
Distribution Date prior to the Put Date.
PNC BANK, NATIONAL ASSOCIATION
PNC Bank, National Association (the "BANK") is a national banking
association with its principal office in Pittsburgh, Pennsylvania. The Bank
offers a wide range of domestic and international consumer banking, corporate
banking and trust and asset management services to its customers. At December
31, 1996, the Bank had total assets of $57.6 billion, total loans (net of
unearned income) of $41.3 billion, total deposits of $36.4 billion and total
equity capital of $4.6 billion. At June 30, 1997, the corresponding amounts were
$57.5 billion, $44.1 billion, $36.2 billion and $4.8 billion, respectively. Such
amounts reflect the September 6, 1996 merger of Midlantic Bank, National
Association and PNC Bank,
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<PAGE>
National Association, with the surviving entity continuing under the name "PNC
Bank, National Association". The Bank's business is subject to examination and
regulation by federal banking authorities. Its primary federal bank regulatory
authority is the Office of the Comptroller of the Currency.
The Bank is a wholly-owned indirect subsidiary of PNC Bank Corp. (the
"HOLDING COMPANY" and together with its subsidiaries, the "CORPORATION"), a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended. The Holding Company was incorporated in 1983 under the laws of the
Commonwealth of Pennsylvania with the consolidation of Pittsburgh National
Corporation and Provident National Corporation. Since 1983, the Corporation has
diversified its geographical presence and product capabilities through strategic
bank and non-bank acquisitions and the formation of various non-banking
subsidiaries. The Corporation operates banking subsidiaries in Pennsylvania,
Delaware, Florida, Indiana, Kentucky, Massachusetts, New Jersey and Ohio and
conducts certain non-banking operations throughout the United States. The
Corporation's major businesses include consumer banking, corporate banking, real
estate banking, mortgage banking and asset management. At December 31, 1996, the
Corporation had total assets of $73.3 billion, total loans (net of unearned
income) of $51.8 billion, total deposits of $45.7 billion and total
shareholders' equity of $5.9 billion. At June 30, 1997, the corresponding
amounts were $72.0 billion, $53.5 billion, $45.2 billion and $5.4 billion,
respectively.
The Corporation's corporate legal structure currently consists of 10
subsidiary banks and over 110 nonbank subsidiaries. The Bank is the
Corporation's principal bank subsidiary, accounting for approximately 80% of
total assets at June 30, 1997. The Corporation anticipates that some of its
subsidiary banks may merge with the Bank as permitted by law.
Audited financial statements of the Corporation are available upon request
from PNC Mortgage Securities Corp., 75 North Fairway Drive, Vernon Hills,
Illinois 60061, attn: Richie Moore.
OPTIONAL TERMINATION
On any Distribution Date after the first date on which the aggregate
outstanding principal balance of the Mortgage Loans in a Loan Group is less than
10% of the aggregate principal balance of such Mortgage Loans as of the Cut-Off
Date, the Company may repurchase such Mortgage Loans and all property acquired
in respect of such Mortgage Loans remaining in the Trust, and thereby effect the
termination of the related REMIC and the retirement of the related Certificates.
In connection with any such repurchase, Certificateholders will receive an
amount not less than the aggregate Certificate Principal Balance of the related
Offered Certificates plus accrued interest thereon through the last day of the
preceding calendar month. 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 a REMIC will cause
the outstanding principal balance of the related Offered Certificates to be paid
in full through the distribution of such proceeds. In no event will the 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 is 0.250%. The Master
Servicing Fee with respect to each Mortgage Loan is 0.050%.
In addition, on each Distribution Date following the Put Date for each Loan
Group, a Supplemental Fee will be paid with respect to each Mortgage Loan in the
related Loan Group. This Supplemental Fee will equal 1.335% on each Mortgage
Loan in Loan Group I and 1.345% on each Mortgage Loan in Loan Group II and will
be in addition to the Servicing Fee, Master Servicing Fee and Premium Payment
Rate. The payment of the Supplemental Fee on each Distribution Date following
the applicable Put Date may significantly lower the Remittance Rate on the
related Class of Offered Certificates, thereby increasing
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<PAGE>
the likelihood that Certificateholders will exercise the Put Option and
consequently increasing the likelihood that the Bank will exercise the Clean-Up
Option or the Certificate Insurer will exercise the Certificate Insurer Clean-Up
Option. The Supplemental Fee will be payable to the Bank.
The Premium Payment Rate with respect to each Mortgage Loan in a Loan Group
is the rate at which the fee payable to the Certificate Insurer is calculated.
For each Mortgage Loan and for each Distribution Date, the "GROSS FEES" will
equal the sum of the applicable (a) Servicing Fee, (b) Master Servicing Fee, (c)
Supplemental Fee (for any Distribution Date after the applicable Put Date) and
(d) Premium Payment Rate. The Gross Fees with respect to each Mortgage Loan in
Loan Group I will equal 0.415% for any Distribution Date on or prior to the Put
Date, and 1.750% thereafter. The Gross Fees with respect to each Mortgage Loan
in Loan Group II will equal 0.405% for any Distribution Date on or prior to the
Put Date, and 1.750% thereafter.
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 Trust, as prescribed by the Pooling Agreement.
YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The effective yield to maturity of each Class of Offered Certificates will
depend upon, among other things, the price at which such Offered Certificates
are purchased, the applicable Remittance Rate, the actual characteristics of the
Mortgage Loans in the related Loan Group, the rate of principal payments
(including Principal Prepayments) on the Mortgage Loans and the rate of
liquidations on the Mortgage Loans in the related Loan Group. The effective
yield to maturity to holders of the Offered Certificates will be lower than the
yield to maturity otherwise produced by the applicable Remittance Rate and
purchase price of such Offered 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
distributions to the Class I-A Certificates and Class II-A Certificates relate
to principal payments on the Group I Loans and Group II Loans, respectively.
The Mortgage Interest Rates on the Mortgage Loans will be fixed for the
first five years after origination and thereafter will adjust annually and may
vary significantly over time. Upon a Mortgage Loan commencing its adjustable
period, annual increases and decreases in the Mortgage Interest Rate on such
Mortgage Loan will be limited by the Periodic Cap (other than with respect to
the first Adjustment Date) and the Rate Ceiling applicable to such Mortgage Loan
and will be based on the Index in effect 45 days prior to the Adjustment Date
(which may not rise and fall consistently with mortgage interest rates) plus the
applicable Gross Margin. As a result, the Mortgage Interest Rates on the
Mortgage Loans at any time may not equal the prevailing rates for similar
adjustable rate loans, and accordingly the rate of prepayment may be lower or
higher than would otherwise be anticipated. Moreover, although each of the
Mortgage Loans has a Rate Ceiling, none has a specified Rate Floor. Accordingly,
the minimum Mortgage Interest Rate to which a Mortgage Loan may adjust on any
Adjustment Date is the Gross Margin for such Mortgage Loan. Further, some
mortgagors who prefer the certainty provided by fixed rate mortgage loans may
nevertheless obtain adjustable rate mortgage loans at a time when they regard
the interest rates (and, therefore, the payments) on fixed rate mortgage loans
as unacceptably high. Such mortgagors may be induced to refinance adjustable
rate mortgage loans when the interest rates
S-40
<PAGE>
and monthly payments on comparable fixed rate loans decline to levels which such
mortgagors regard as acceptable, even though such interest rates and monthly
payments may be significantly higher than the current interest rates and monthly
payments on the mortgagors' adjustable rate mortgage loans. The ability to
refinance a Mortgage Loan will depend on a number of factors prevailing at the
time refinancing is desired, including, without limitation, real estate values,
the Mortgagor's financial situation, prevailing mortgage loan interest rates,
the Mortgagor's equity in the related Mortgaged Property, tax laws and
prevailing general economic conditions.
In addition, the Remittance Rates applicable to each Class of Offered
Certificates may decrease, and may decrease significantly after the Mortgage
Interest Rates on the Mortgage Loans in the related Loan Group begin to adjust.
Any such decrease may result, in part, due to the payment of the Supplemental
Fee on each Distribution Date after the applicable Put Date. This may increase
the likelihood that the Put Option and, consequently, the Clean-Up Option or
Certificate Insurer Clean-Up Option will be exercised.
If the Put Option is exercised with respect to any Offered Certificate, the
Clean-Up Option or the Certificate Insurer Clean-Up Option is exercised with
respect to any Class of Offered Certificates, or the clean-up call discussed
under "Description of the Certificates -- Optional Termination of the Trust"
herein is exercised by the Company with respect to one or both Loan Groups, such
action would shorten the weighted average life of the related investment,
thereby affecting the yield of such investment.
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 Certificateholders until the Distribution Date in the next
month; therefore, one month of interest shortfall accrues on the amount of such
Curtailment which Certificateholders will not recoup from any other source.
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 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 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 Offered
Certificates on the October 1997 Distribution Date), rather than on the
Distribution Date of the following 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 Certificateholders with respect
to such period.
The amount available for payment of Compensating Interest on any
Distribution Date will include, among other things, interest at the Pass-Through
Rate to the extent of interest payments paid by Mortgagors on Payoffs received
from the second day through the 14th day of the month of such Distribution Date.
See "Description of the Certificates -- Distributions of Interest" herein. 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 in the manner described
under "Description of the Certificates -- Distributions of Interest --
Compensating Interest" herein.
S-41
<PAGE>
RATE OF PAYMENTS
The rate of principal payments on the Offered Certificates generally is
directly related to the rate of principal payments on the Mortgage Loans in the
related Loan Group, 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 in a Loan Group could result in a lower than
expected yield to maturity on the related Class of Offered 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 in a Loan Group would reduce the return to investors on
the related Class of Offered 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 Offered Certificates at a rate
which is comparable to the applicable Remittance Rate. Investors should fully
consider all of the associated risks.
PREPAYMENT ASSUMPTION
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement (the "Prepayment
Assumption"), the Constant Prepayment Rate model ("CPR"), assumes that the
outstanding principal balance of a pool of mortgage loans prepays at a specified
constant annual rate or CPR. In generating monthly cash flows, this rate is
converted to an equivalent constant monthly rate. To assume a 15% CPR or any
other CPR percentage is to assume that the stated percentage of the outstanding
principal balance of the pool is prepaid over the course of a year.
The CPR percentage does not purport to be a historical description of
prepayment experience 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 the CPR percentage or any other
rate. 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, during the initial fixed-rate period, 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, during
the initial fixed-rate period, if prevailing 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 A, it is assumed 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 Trust does not occur, (v) the
Mortgage Loans in each Loan Group are comprised of two subgroups of hypothetical
mortgage loans which have the common characteristics indicated:
S-42
<PAGE>
GROUPS OF HYPOTHETICAL MORTGAGE LOANS -- LOAN GROUP I
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE REMAINING PRINCIPAL AND
UNPAID PRINCIPAL TERM INTEREST PASS-THROUGH TERM INTEREST NEXT PAY
BALANCE (MONTHS) RATE RATE (MONTHS) PAYMENT CHANGE
- ---------------- ----------------- --------------- ----------------- --------------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 123,429.09 360 7.327% 6.912% 345 $ 5,558.99 (1)
20,504,664.47 360 7.326 6.911 334 146,084.61 7/1/00
13,398,342.63 360 7.131 6.716 335 92,932.44 8/1/00
13,264,790.56 360 7.319 6.904 336 94,088.22 9/1/00
3,245,917.95 360 7.355 6.940 337 22,931.71 10/1/00
6,776,884.90 360 7.473 7.058 338 48,244.63 11/1/00
10,110,372.94 360 7.440 7.025 339 71,613.72 12/1/00
15,940,243.26 360 7.357 6.942 340 112,209.00 1/1/01
13,421,094.71 360 7.198 6.783 341 92,740.33 2/1/01
13,500,099.18 360 7.001 6.586 342 91,406.41 3/1/01
22,266,974.59 360 7.214 6.799 343 154,527.80 4/1/01
33,055,665.57 360 7.438 7.023 344 235,489.57 5/1/01
26,933,828.43 360 7.646 7.231 345 193,625.83 6/1/01
10,987,335.09 360 7.842 7.427 346 81,544.89 7/1/01
28,791,426.20 360 7.739 7.324 347 209,178.72 8/1/01
53,365,493.08 360 7.551 7.136 348 379,268.74 9/1/01
<CAPTION>
UNPAID PRINCIPAL GROSS RATE
BALANCE MARGIN CAP
- ---------------- ----------- ---------
<S> <C> <C>
$ 123,429.09 (1) (1)
20,504,664.47 2.750% 13.127%
13,398,342.63 2.750 13.106
13,264,790.56 2.750 12.977
3,245,917.95 2.750 12.764
6,776,884.90 2.750 12.463
10,110,372.94 2.750 12.362
15,940,243.26 2.750 12.357
13,421,094.71 2.750 12.198
13,500,099.18 2.750 12.001
22,266,974.59 2.750 12.214
33,055,665.57 2.750 12.438
26,933,828.43 2.750 12.646
10,987,335.09 2.750 12.842
28,791,426.20 2.750 12.739
53,365,493.08 2.751 12.550
</TABLE>
GROUPS OF HYPOTHETICAL MORTGAGE LOANS -- LOAN GROUP II
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE REMAINING PRINCIPAL AND
UNPAID PRINCIPAL TERM INTEREST PASS-THROUGH TERM INTEREST NEXT PAY
BALANCE (MONTHS) RATE RATE (MONTHS) PAYMENT CHANGE
- ---------------- ----------------- --------------- ----------------- --------------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 80,826.21 360 7.375% 6.970% 352 $ 6,057.22 (1)
51,609,632.96 360 7.599 7.194 349 368,016.82 10/1/01
81,184,641.54 360 7.570 7.165 350 577,335.87 11/1/01
73,450,242.76 360 7.436 7.031 351 514,997.32 12/1/01
73,433,121.66 360 7.300 6.895 352 509,328.65 1/1/02
48,990,693.58 360 7.381 6.976 353 342,356.94 2/1/02
35,225,885.94 360 7.433 7.028 354 246,493.45 3/1/02
33,804,393.47 360 7.419 7.014 355 235,536.33 4/1/02
11,648,784.67 360 7.789 7.384 356 84,083.16 5/1/02
570,035.54 360 7.766 7.361 357 4,098.96 6/1/02
<CAPTION>
UNPAID PRINCIPAL GROSS RATE
BALANCE MARGIN CAP
- ---------------- ----------- ---------
<S> <C> <C>
$ 80,826.21 (1) (1)
51,609,632.96 2.750% 12.599%
81,184,641.54 2.751 12.570
73,450,242.76 2.750 12.436
73,433,121.66 2.751 12.300
48,990,693.58 2.750 12.381
35,225,885.94 2.750 12.433
33,804,393.47 2.750 12.419
11,648,784.67 2.750 12.774
570,035.54 2.750 12.766
</TABLE>
- ------------
(1) Based on its current principal balance and its current principal and
interest payment, this hypothetical mortgage loan would be expected to
amortize fully prior to its first Adjustment Date.
(vi) there are no partial prepayments on the Mortgage Loans and prepayments are
computed after giving effect to scheduled payments received on the following
day, (vii) the Mortgage Loans prepay at the indicated constant percentages of
the CPR, (viii) the date of issuance for the Certificates is September 25, 1997,
(ix) cash distributions are received by the Certificateholders on the 25th day
of each month when due and (x) the scheduled monthly payments for each Mortgage
Loan are based on the principal and interest payment indicated above until the
first Adjustment Date, at which time the Mortgage Loan is reamortized with the
principal and interest payment computed based upon its unpaid principal balance,
Mortgage Interest Rate and remaining term such that the Mortgage Loan will fully
amortize by its maturity date (collectively, the "MODELING ASSUMPTIONS").
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 A, the outstanding Class Principal Balance of any Class of Offered
Certificates may be reduced to zero earlier or later than indicated by such
tables.
S-43
<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 A. Such variations may
occur even if the average prepayment experience of all the Mortgage Loans equals
the indicated CPR percentage. There is no assurance, however, that prepayment of
the Mortgage Loans will conform to any given CPR percentage.
Based on the foregoing assumptions, the tables in Appendix A 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 CPR percentages.
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 Underwriters 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.
CREDIT ENHANCEMENTS
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by MBIA Insurance Corporation
(the "Certificate Insurer") for inclusion in this Prospectus Supplement. The
following constitutes a summary of the provisions of the Certificate Insurance
Policy and it does not purport to be complete and is qualified in its entirety
by reference to the Certificate Insurance Policy, a copy of which may be
obtained from the Trustee upon request. The term "Owner", as more specifically
defined below, generally refers to the registered holder from time to time of a
Class I-A, Class I-R, Class II-A or Class II-R Certificate (the "INSURED
CERTIFICATES").
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the certificate guaranty insurance policy (the
"Certificate Insurance Policy"), thereby unconditionally and irrevocably
guarantees to any Owner that an amount equal to each full and complete Insured
Payment will be received from the Certificate Insurer by the Trustee, or its
successor, as trustee for the Owners on behalf of the Owners, for distribution
by the Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Certificate Insurer's obligations under the Certificate Insurance
Policy with respect to a particular Insured Payment shall be discharged to the
extent funds equal to the applicable Insured Payment are received by the
Trustee, whether or not such funds are properly applied by the Trustee. Insured
Payments shall be made only at the time set forth in the Certificate Insurance
Policy and no accelerated Insured Payments shall be made regardless of any
acceleration of the Insured Certificates, unless such acceleration is at the
sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust,
the REMICs or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). The Certificate Insurance Policy
does not cover, and Insured Payments do not include, any shortfalls related to
the Relief Act, any prepayment interest shortfalls allocable to the Insured
Certificates or any failure of the Master Servicer to pay Compensating Interest.
The Certificate Insurance Policy does not cover, and the Insured Payments do not
include, any amounts payable to the Residual Certificates other than the Excess
Interest Amount, including without limitation, any Excess Liquidation Proceeds
or any residual distribution amount.
S-44
<PAGE>
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount (as defined below) on the Business Day (as defined below) following
receipt on a Business Day by the Fiscal Agent (as defined below) of (i) a
certified copy of the order requiring the return of a preference payment, (ii)
an opinion of counsel satisfactory to the Certificate Insurer that such order is
final and not subject to appeal, (iii) an assignment in such form as is
reasonably required by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Owner relating to or arising
under the Insured Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment and (iv)
appropriate instruments to effect the appointment of the Certificate Insurer as
agent for such Owner in any legal proceeding related to such preference payment,
such instruments being in a form satisfactory to the Certificate Insurer,
provided that if such documents are received after 12:00 noon New York City time
on such Business Day, they will be deemed to be received on the following
Business Day. Such payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless such Owner has returned
principal or interest paid on the Insured Certificates to such receiver or
trustee in bankruptcy, in which case such payment shall be disbursed to such
Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of (i) the Distribution Date or Put Date, as applicable, on which the
related distribution is due or (ii) the second Business Day following receipt in
New York, New York on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Certificate Insurer or any successor fiscal agent
appointed by the Certificate Insurer (the "FISCAL AGENT") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon New
York City time on such Business Day, it will be deemed to be received on the
following Business Day. If any such Notice received by the Fiscal Agent is not
in proper form or is otherwise insufficient for the purpose of making claim
under the Certificate Insurance Policy it shall be deemed not to have been
received by the Fiscal Agent for purposes of this paragraph, and the Certificate
Insurer or the Fiscal Agent, as the case may be, shall promptly so advise the
Trustee and the Trustee may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policy unless otherwise
stated therein will be disbursed by the Fiscal Agent to the Trustee on behalf of
the Owners by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Trustee for the payment of such Insured Payment
and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the Fiscal
Agent shall in no event be liable to Owners for any acts of the Fiscal Agent or
any failure of the Certificate Insurer to deposit or cause to be deposited,
sufficient funds to make payments due under the Certificate Insurance Policy.
As used in this section "-- The Certificate Insurance Policy and the
Certificate Insurer", the following terms shall have the following meanings:
"AGREEMENT" means the Pooling and Servicing Agreement dated as of September
1, 1997 among PNC Mortgage Securities Corp., as depositor and master servicer,
PNC Bank, National Association and the Trustee, as trustee, without regard to
any amendment or supplement thereto unless such amendment or supplement has been
approved in writing by the Certificate Insurer.
"AVAILABLE AMOUNT" means with respect to the Related Insured Certificates
and any Distribution Date, the lesser of (a) the amount on deposit in the
Certificate Account applicable to the Related Insured Certificates, after giving
effect to (i) amounts paid or advanced by the Master Servicer, (ii) transfers
from the related Reserve Fund, (iii) transfers of Excess Interest to, or from,
the other Loan Group and (iv) transfers from the Yield Supplement Account and
(b) the sum of (i) the Available Distribution Amount applicable to the Related
Insured Certificates in accordance with the Agreement, (ii) the Excess Interest
received from the other Loan Group in accordance with the Agreement, (iii) the
Yield Supplement
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<PAGE>
Amount applicable to the Related Insured Certificates and (iv) the amount of any
withdrawal from the applicable Reserve Fund minus (v) the Excess Interest paid
to the other Loan Group in accordance with the Agreement.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which the Certificate Insurer or banking institutions in New York City or in the
city in which the corporate trust office of the Trustee under the Agreement is
located are authorized or obligated by law or executive order to close.
"DEFICIENCY AMOUNT" means (i) with respect to the Related Class A
Certificates and the Related Residual Certificates, as of any Distribution Date,
the amount, if any, by which (a) the sum of the Interest Distribution Amount
payable to the Related Class A Certificates and the Excess Interest Amount
payable to the Related Residual Certificates exceeds (b) the related Available
Amount and (ii) with respect to the Related Class A Certificates, (a) as of any
Distribution Date, the amount, if any, by which (1) the sum of (A) the sum of
the Principal Payment Amount and the Principal Prepayment Amount applicable to
the Related Class A Certificates to the extent received by the Trustee or
advanced by the Master Servicer or related servicer and (B) the sum of the
principal balances of the Mortgage Loans for the related Loan Group which became
Liquidated Mortgage Loans during the prior calendar month, exceeds (2) the
excess, if any, of the related Available Amount over the sum of the related
Excess Interest Amount and the related Interest Distribution Amount, (b) as of
each Last Scheduled Distribution Date or on any Distribution Date on which the
Company repurchases the Mortgage Loans and all property acquired in respect of
such Mortgage Loans, after payment, if any, of all other amounts to the Related
Class A Certificates, any remaining Class Principal Balance of the related Class
A Certificates and (c) as of the Put Date, the difference between the put
purchase price and the portion of the put purchase price, if any, paid by PNC
Bank, National Association, of any Related Class A Certificates with respect to
which the Put Option or Clean-up Option has been exercised.
"EXCESS INTEREST AMOUNT" means with respect to the related Loan Group, the
Excess Interest for such Loan Group minus the sum of (1) the amount of Excess
Interest for such Loan Group required to be distributed to the other Loan Group
and (2) the amount of Excess Interest for such Loan Group required to be used to
increase the amount on deposit in the Yield Supplement Account.
"INSURED PAYMENT" means (i) as of any Distribution Date or the Put Date, as
applicable, any Deficiency Amount and (ii) any Preference Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Certificate Insurance Policy, the original of which is subsequently delivered by
registered or certified mail, from the Trustee specifying the Insured Payment
which shall be due and owing on the applicable Distribution Date or Put Date, as
applicable.
"OWNER" means each Holder (as defined in the Agreement) of an Insured
Certificate who, on the applicable Distribution Date or Put Date, as applicable,
is entitled under the terms of Insured Certificates to payment thereunder.
"PREFERENCE AMOUNT" means any amount previously distributed to an Owner on
the Insured Certificates that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with a
final nonappealable order of a court having competent jurisdiction.
"RELATED CLASS A CERTIFICATES" means the Class I-A Certificates or the Class
II-A Certificates, as applicable.
"RELATED INSURED CERTIFICATES" means the Class I-A Certificates and the
Class I-R Certificates with respect to Loan Group I and the Class II-A
Certificates and the Class II-R Certificates with respect to Loan Group II, as
applicable.
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<PAGE>
"RELATED RESIDUAL CERTIFICATES" means the Class I-R Certificates or the
Class II-R Certificates, as applicable.
Capitalized terms used in the Certificate Insurance Policy and not otherwise
defined in the Certificate Insurance Policy shall have the respective meanings
set forth in the Agreement as of the date of execution of the Certificate
Insurance Policy, without giving effect to any subsequent amendment or
modification to the Agreement unless such amendment or modification has been
approved in writing by the Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of process on
the Fiscal Agent may be made at the address listed below for the Fiscal Agent or
such other address as the Certificate Insurer shall specify in writing to the
Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New York,
New York 10006, Attention: Municipal Registrar and Paying Agency, or such other
address as the Fiscal Agent shall specify to the Trustee in writing.
The Certificate Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to maturity of the
Insured Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Certificate Insurer. The Certificate Insurer is
domiciled in the State of New York and licensed to do business in and is subject
to regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. The
Certificate Insurer has two European branches, one in the Republic of France and
the other in the Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentrations of investments and requiring
the approval of policy rates and forms. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by the Certificate Insurer, changes in control and transactions among
affiliates. Additionally, the Certificate Insurer is required to maintain
contingency reserves on its liabilities in certain amounts and for certain
periods of time.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1996 and
December 31, 1995 and for each of the three years in the period ended December
31, 1996, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1996 and the consolidated financial statements of the Certificate
Insurer and its subsidiaries for the six months ended June 30, 1997 and for the
periods ending June 30, 1997 and June 30, 1996 included in the Quarterly Report
on Form 10-Q of MBIA Inc. for the period ending June 30, 1997, are hereby
incorporated by reference into this Prospectus Supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated by
reference herein shall be modified or superseded for purposes of this Prospectus
Supplement to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
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<PAGE>
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
-----------------------------------
JUNE 30, 1997
--------------
DECEMBER 31, 1996 (UNAUDITED)
-------------------
(AUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets.......................................... $ 4,476 $ 4,824
Liabilities.............................................. 3,009 3,259
Capital and Surplus...................................... 1,467 1,565
</TABLE>
<TABLE>
<CAPTION>
GAAP
-----------------------------------
JUNE 30, 1997
--------------
DECEMBER 31, 1996 (UNAUDITED)
-------------------
(AUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets................................................... $ 5,066 $ 5,408
Liabilities.............................................. 2,262 2,412
Shareholder's Equity..................................... 2,804 2,996
</TABLE>
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1996 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Certificate Insurance Policy and Certificate
Insurer set forth under the heading "Credit Enhancements--The Certificate
Insurance Policy and the Certificate Insurer." Additionally, the Certificate
Insurer makes no representation regarding the Insured Certificates or the
advisability of investing in the Insured Certificates.
Moody's rates the claims paying ability of the Certificate Insurer "Aaa."
S&P rates the claims paying ability of the Certificate Insurer "AAA." Fitch
Investors Service, L.P. rates the claims paying ability of the Certificate
Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Insured
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Insured
Certificates. The Certificate Insurer does not guaranty the market price of the
Insured Certificates nor does it guaranty that the ratings on the Insured
Certificates will not be revised or withdrawn.
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<PAGE>
RESERVE FUNDS
GENERAL
The Class I-A and Class II-A Certificates will each have the benefit of a
reserve fund (the "CLASS I-A RESERVE FUND" and "CLASS II-A RESERVE FUND",
respectively, and collectively, the "RESERVE FUNDS") maintained by the Trustee
into which $5,713,731 and $8,199,965, respectively, will be deposited by the
Bank on the Closing Date. On each Distribution Date, amounts on deposit in each
Reserve Fund will be available for distributions on the related Class of
Certificates to cover certain shortfalls and losses in respect of interest and
principal (including shortfalls with respect to amounts available to pay the
Excess Interest Amount).
PERIODIC REDUCTIONS IN THE RESERVE FUNDS
On each Distribution Date, an amount equal to the applicable Reserve Fund
Release Amount (as defined below) will be released from each Reserve Fund to the
Bank; provided, however, that on any Distribution Date on which the respective
Reserve Fund Percentage (as defined below) (before giving effect to any
distributions or releases) is less than the respective initial Reserve Fund
Percentage, the related Reserve Fund Prepayment Percentage (as defined below)
will be zero, unless the distributions of principal to the related Class of
Offered Certificates on that Distribution Date would raise the related Reserve
Fund Percentage above its initial Reserve Fund Percentage, in which case the
applicable Reserve Fund Release Amount will be the lesser of (i) the amount that
would otherwise be released to the Bank and (ii) the amount necessary to lower
the related Reserve Fund Percentage to its initial level.
The "RESERVE FUND RELEASE AMOUNT" for a Reserve Fund for any Distribution
Date will be equal to the sum of (i) the related Reserve Fund Percentage of the
related Principal Payment Amount distributed on such date, (ii) the related
Reserve Fund Prepayment Percentage (as defined herein) of the related Principal
Prepayment Amount distributed on such date and (iii) the related Reserve Fund
Liquidation Amount (as defined below). The "RESERVE FUND PERCENTAGE" for each
Class of Offered Certificates will equal on any Distribution Date the amount in
the related Reserve Fund, before giving effect to any withdrawals therefrom on
such Distribution Date, divided by the related Class Principal Balance of such
Class of Offered Certificates, before giving effect to distributions on such
Distribution Date. The initial Class I-A Reserve Fund Percentage will equal
2.00% and the initial Class II-A Reserve Fund Percentage will equal 2.00%.
The "RESERVE FUND PREPAYMENT PERCENTAGE" for any Class of Offered
Certificates for any Distribution Date occurring during the ten years beginning
on the first Distribution Date will equal zero percent. The Reserve Fund
Prepayment Percentage for any Class of Offered Certificates on the Distribution
Date in each of the months of the tenth through fourteenth anniversaries of the
first Distribution Date will be as follows: (i) for any Distribution Date in or
after the month of the tenth anniversary of the first Distribution Date but
before the eleventh anniversary of the month of the first Distribution Date, 30%
of the related Reserve Fund Percentage for such Distribution Date; (ii) for any
Distribution Date in or after the month of the eleventh anniversary of the first
Distribution Date but before the twelfth anniversary of the month of the first
Distribution Date, 40% of the related Reserve Fund Percentage for such
Distribution Date; (iii) for any Distribution Date in or after the month of the
twelfth anniversary of the first Distribution Date but before the thirteenth
anniversary of the month of the first Distribution Date, 60% of the related
Reserve Fund Percentage for such Distribution Date; and (iv) for any
Distribution Date in or after the month of the thirteenth anniversary of the
first Distribution Date but before the fourteenth anniversary of the month of
the first Distribution Date, 80% of the related Reserve Fund Percentage for such
Distribution Date. For any Distribution Date in or after the fourteenth
anniversary of the month of the first Distribution Date, the Reserve Fund
Prepayment Percentage for each Class of Offered Certificates will be the related
Reserve Fund Percentage for such Distribution Date. However, on any Distribution
Date on which the Reserve Fund Prepayment Percentage otherwise may increase as
described above, if the delinquencies or losses on the Mortgage Loans in the
related Loan Group exceed the limits set forth in clause (b) and (c)
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<PAGE>
below, the related Reserve Fund Prepayment Percentage for such Distribution Date
will not increase and will be equal to the percentage in effect prior to such
Distribution Date until such loss and delinquency percentages are satisfied.
Notwithstanding the above, if on any Distribution Date on or after the month
of the third anniversary of the first Distribution Date (a) a Reserve Fund
Percentage relating to a Mortgage Loan Group equals at least twice its initial
Reserve Fund Percentage, (b) aggregate realized losses on the Mortgage Loans in
the related Loan Group from the Closing Date up to such Distribution Date (i) if
such Distribution Date is during the twelve month period commencing on the
third, fourth, fifth or sixth anniversary of the month of the first Distribution
Date, have not exceeded 10%, 15%, 20% or 25%, respectively, of the initial
amount deposited in the related Reserve Fund on the Closing Date, (ii) if such
Distribution Date is during the period commencing on the seventh anniversary of
the month of the first Distribution Date and ending prior to the tenth
anniversary of the month of the first Distribution Date, have not exceeded 30%
of the initial amount deposited in the related Reserve Fund on the Closing Date
and (iii) if such Distribution Date is during the twelve month period commencing
on the tenth, eleventh, twelfth, thirteenth or fourteenth anniversary of the
month of the first Distribution Date (or any Distribution Date thereafter) have
not exceeded 30%, 35%, 40%, 45% or 50%, respectively, of the initial amount
deposited in the related Reserve Fund on the Closing Date and (c) over the prior
6 months, the average aggregate outstanding principal balance of the Mortgage
Loans in the related Loan Group delinquent 60 days or more (including for this
purpose any such Mortgage Loans in foreclosure and Mortgage Loans with respect
to which the related Mortgaged Property has been acquired by the Trust) does not
exceed 2.00% of the average aggregate outstanding principal balance of all
Mortgage Loans in the related Loan Group, then the related Reserve Fund
Prepayment Percentage for such Distribution Date will be the related Reserve
Fund Percentage for such Distribution Date.
The "RESERVE FUND LIQUIDATION AMOUNT" for any Loan Group is the aggregate
of, for each Mortgage Loan in such Loan Group which became a Liquidated Mortgage
Loan (as defined below) during the calendar month preceding the month of the
Distribution Date, the excess, if any, of the Liquidation Principal with respect
to such Mortgage Loan over the lesser of (a) the product of (x) the Stated
Principal Balance of such Mortgage Loan and (y) the difference between 100% and
the related Reserve Fund Percentage and (b) the product of (x) the Liquidation
Principal with respect to such Mortgage Loan and (y) the difference between 100%
and the related Reserve Fund Prepayment Percentage. "LIQUIDATION PRINCIPAL" is
the principal portion of Liquidation Proceeds 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. 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 "STATED PRINCIPAL BALANCE" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-Off Date,
after application of all scheduled principal payments paid or advanced on or
before the Cut-Off Date, reduced by all amounts allocable to principal that have
been distributed to Certificateholders with respect to such Mortgage Loan on or
before such date of determination, and as further reduced to the extent that any
realized loss thereon has been allocated to one or more Classes of Certificates
on or before the date of determination.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, two separate "real estate mortgage
investment conduit" ("REMIC") elections will be made in connection with the
Trust. The Class I-A and Class II-A Certificates issued by the Trust generally
should represent ownership of (i) REMIC regular interests in REMIC I and REMIC
II, respectively, (ii) the right to receive payments from the related Excess
Interest and the Yield Supplement Account, which rights generally will be
treated as interests in notional principal contracts
S-50
<PAGE>
and (iii) put options with respect to the related regular interests. Under such
characterization each Certificateholder will be required to allocate its
purchase price among such instruments based on their respective relative fair
market values as of the date of purchase. Other characterizations of the Class
I-A and Class II-A Certificates are possible. Such Certificates could be deemed
to represent an interest in regular interests, notional principal contracts and
put options subject to a call option written by the holder in favor of the Bank.
So characterized, the amount allocable as purchase price among the regular
interest, the notional principal contract and the put option could be increased
above the cash purchase price for such Certificates to account for a payment
deemed to have been made from the Bank to the Certificateholder for such written
call option. Alternatively, the Class I-A and Class II-A Certificates could be
treated as regular interests subject to a joint ownership arrangement between
the purchaser and the Bank. For federal income tax purposes, the Master Servicer
intends to treat as DE MINIMUS any portion of a Class I-A and Class II-A
Certificateholder's purchase price allocable to the related notional principal
contract and any call option, and to treat all of such purchase price as
allocable to a directly owned regular interest which will be treated as a debt
instrument and a directly owned put option. Class I-A and Class II-A
Certificateholders should be aware that the effect of allocating a portion of
their purchase price to the put option would be to increase the amount of
original issue discount ("OID"). Under applicable Treasury Regulations, that
allocation will bind a holder of a Class I-A and Class II-A Certificate who does
not properly report use of a different allocation to the Internal Revenue
Service ("IRS") for purposes of determining the Certificate's issue price and
amount of OID for the portion representing ownership of regular interests.
Purchasers of Class I-A and Class II-A Certificates similarly will be required
to allocate their purchaser price between the underlying regular interests and
the related put option for purposes computing any market discount or premium, as
well as gain or loss on disposition. Holders of such Certificates will be
required to include in income all interest and OID attributable to its
investment in REMIC regular interests in accordance with the accrual method of
accounting regardless of the certificateholders' usual methods of accounting.
For federal income tax purposes, the Class I-R and Class II-R Certificates will
be the "residual interests" in REMIC I and REMIC II, respectively.
The portions of the Class I-A and Class II-A Certificates treated as regular
interests will not be treated as having been issued with OID for federal income
tax reporting purposes. Certain Classes of Certificates may be treated for
federal income tax purposes as having been purchased 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 15% CPR
as described herein under "Yield and Prepayment Consideration". No
representation is made that the Mortgage Loans will prepay at any given CPR
percentage.
A portion of certain Classes of Certificates may be treated for federal
income tax purposes as having been purchased 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 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 portion of the Certificates treated as regular interests 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 such portion
of the 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". Moreover, the portion of a
Class I-A or Class II-A Certificate allocable to regular interests will
constitute "qualified mortgages" within the meaning of Section 860G(a)(3) of the
Code if transferred to another REMIC on its startup day in exchange for a
regular or residual interest
S-51
<PAGE>
therein. Any portion of a Class I-A or Class II-A Certificate, or any payments
with respect thereto, allocable to the right to payments from the Excess
Interest, Yield Supplement Account, or the put options would not qualify for the
foregoing treatments; further, the sale of a Class I-A or Class II-A Certificate
by a purchaser which itself is a REMIC pursuant to the put option or the call
option may give rise to prohibited transaction taxes applicable to such
purchaser. 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.
CERTAIN LEGAL INVESTMENT ASPECTS
As of the date of their issuance, the Offered 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, corporations, partnerships, associations, business trusts and
business entities (including depository institutions, life insurance companies,
and pension funds) created pursuant to or existing under the laws of the United
States or of any state whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any 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 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 without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in the Offered Certificates and
national banks may purchase the Offered 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.
S-52
<PAGE>
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 ownership of such Certificates
by, on behalf of or with "plan assets" of any Plan. See "ERISA Considerations"
in the Prospectus.
UNDERWRITER'S PTE
Goldman, Sachs & Co. 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. Plans (or persons using "plan assets" of any Plan)
that acquire Offered Certificates may be eligible for exemptive relief if all
applicable conditions of the Underwriter's PTE are satisfied, including the
following:
(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 Underwriters 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 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 Underwriters, 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.
S-53
<PAGE>
Whether the conditions of the Underwriter's PTE will be satisfied with
respect to Offered Certificates of a particular Class 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. 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 EXEMPTION 83-1
It is uncertain whether the Offered Certificates will qualify for the
exemptive relief available under PTCE 83-1. See "ERISA Considerations --
Prohibited Transaction Class Exemption 83-1" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to the Underwriters, and each of the Underwriters
has severally agreed to purchase, the principal amount of the Offered
Certificates set forth opposite its name:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF
CLASS I-A CLASS II-A
UNDERWRITERS CERTIFICATES CERTIFICATES
- --------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Goldman, Sachs & Co.................................................. $ 207,549,250 $ 324,998,606
Donaldson, Lufkin & Jenrette Securities Corporation.................. $ 57,137,312 $ 81,999,652
PNC Capital Markets, Inc............................................. $ 21,000,000 $ 3,000,000
-------------------- --------------------
Total........................................................ $ 285,686,562 $ 409,998,258
-------------------- --------------------
-------------------- --------------------
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any of such Certificates are purchased.
The Underwriters propose initially to offer the Offered Certificates to the
public at the price set forth on the cover page hereof and to certain dealers at
such price less concessions not in excess of 0.150% of the principal amount of
the Offered Certificates. The Underwriters may allow, and such dealers may
reallow, concessions not in excess of 0.075% of the principal amount of the
Offered Certificates to certain brokers and dealers. After the initial public
offering, the public offering price and other selling terms may be changed by
the Underwriters.
The Company will indemnify the Underwriters against liabilities relating to
the adequacy of disclosure to investors, including liabilities under the
Securities Act, or contribute to payments the Underwriters may be required to
make in respect thereof. Certain expenses of the Underwriters incurred in
connection with this offering will be paid for by the Bank.
In connection with the offering, the Underwriters may purchase and sell the
Offered Certificates in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Offered
Certificates; and short positions created by the Underwriters involve the sale
by the Underwriters of a greater number of Offered Certificates than they are
required to purchase from the Company in the offering. The Underwriters also may
impose a penalty bid, whereby selling concessions allowed to other
broker-dealers in respect of the securities sold in the offering for their
account may be reclaimed by the Underwriters if such Offered Certificates are
repurchased by the Underwriters in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise
S-54
<PAGE>
affect the market price of the Offered Certificates, which may be higher than
the price that might otherwise prevail in the open market; and these activities,
if commenced, may be discontinued at any time.
PNC Capital Markets, Inc., an Underwriter, is an affiliate of the Company
and the Bank.
The Underwriters or agents and their associates may be customers of
(including borrowers from), engage in transactions with, and/or perform services
for, the Company, the Bank, their respective affiliates and the Trustee, in the
ordinary course of business.
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 Underwriters. Kutak Rock, Omaha, Nebraska, will pass
upon certain legal matters on behalf of the Certificate Insurer.
CERTIFICATE RATINGS
It is a condition to the issuance of the Certificates that the Offered
Certificates each be rated "AAA" by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P"), and "Aaa" by Moody's
Investors Service, Inc. ("Moody's"). 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 and of the payment of the
Put Option, Clean-Up Option and Certificate Insurer Clean-Up Option, if
exercised. 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 ratings assigned to the Offered Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Offered Certificates may result in a reduction
of one or more of the ratings assigned to the Offered Certificates.
The Depositor has not requested a rating on the Offered Certificates by any
rating agency other than S&P and Moody's. 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 Moody's.
EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, incorporated by reference into this
Prospectus Supplement have been audited by Coopers & Lybrand, L.L.P.,
independent accountants, as set forth in their report thereon incorporated by
reference herein in reliance upon the authority of such firm as experts in
accounting and auditing.
S-55
<PAGE>
APPENDIX A
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS PERCENTAGES OF THE CPR+
<TABLE>
<CAPTION>
CLASS I-A CLASS II-A
IF THE PUT OPTION IS EXERCISED IF THE PUT OPTION IS EXERCISED
------------------------------------- -------------------------------------
DISTRIBUTION DATE 10% 15% 25% 10% 15% 25%
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------- ------------------------------------- -------------------------------------
Initial Percentage 100% 100% 100% 100% 100% 100%
September 25, 1998.................................. 89 84 74 89 84 74
September 25, 1999.................................. 79 71 55 79 71 55
September 25, 2000.................................. 0 0 0 71 59 41
September 25, 2001.................................. 0 0 0 63 50 30
September 25, 2002.................................. 0 0 0 0 0 0
September 25, 2003.................................. 0 0 0 0 0 0
September 25, 2004.................................. 0 0 0 0 0 0
September 25, 2005.................................. 0 0 0 0 0 0
September 25, 2006.................................. 0 0 0 0 0 0
September 25, 2007.................................. 0 0 0 0 0 0
September 25, 2008.................................. 0 0 0 0 0 0
September 25, 2009.................................. 0 0 0 0 0 0
September 25, 2010.................................. 0 0 0 0 0 0
September 25, 2011.................................. 0 0 0 0 0 0
September 25, 2012.................................. 0 0 0 0 0 0
September 25, 2013.................................. 0 0 0 0 0 0
September 25, 2014.................................. 0 0 0 0 0 0
September 25, 2015.................................. 0 0 0 0 0 0
September 25, 2016.................................. 0 0 0 0 0 0
September 25, 2017.................................. 0 0 0 0 0 0
September 25, 2018.................................. 0 0 0 0 0 0
September 25, 2019.................................. 0 0 0 0 0 0
September 25, 2020.................................. 0 0 0 0 0 0
September 25, 2021.................................. 0 0 0 0 0 0
September 25, 2022.................................. 0 0 0 0 0 0
September 25, 2023.................................. 0 0 0 0 0 0
September 25, 2024.................................. 0 0 0 0 0 0
September 25, 2025.................................. 0 0 0 0 0 0
September 25, 2026 and thereafter................... 0 0 0 0 0 0
Weighted Average Life (Years) (1)................... 2.4 2.3 1.9 3.3 2.9 2.4
<CAPTION>
IF THE PUT OPTION IS NOT EXERCISED IF THE PUT OPTION IS NOT EXERCISED
------------------------------------- -------------------------------------
DISTRIBUTION DATE 10% 15% 25% 10% 15% 25%
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------- ------------------------------------- -------------------------------------
Initial Percentage 100% 100% 100% 100% 100% 100%
September 25, 1998.................................. 89 84 74 89 84 74
September 25, 1999.................................. 79 71 55 79 71 55
September 25, 2000.................................. 70 59 41 71 59 41
September 25, 2001.................................. 62 50 30 63 50 30
September 25, 2002.................................. 55 42 22 56 42 22
September 25, 2003.................................. 49 35 16 49 35 17
September 25, 2004.................................. 44 29 12 44 29 12
September 25, 2005.................................. 39 24 9 39 25 9
September 25, 2006.................................. 34 20 7 34 21 7
September 25, 2007.................................. 30 17 5 30 17 5
September 25, 2008.................................. 26 14 4 27 14 4
September 25, 2009.................................. 23 12 3 23 12 3
September 25, 2010.................................. 20 10 2 20 10 2
September 25, 2011.................................. 18 8 1 18 8 1
September 25, 2012.................................. 15 6 1 16 7 1
September 25, 2013.................................. 13 5 1 13 5 1
September 25, 2014.................................. 11 4 1 12 4 1
September 25, 2015.................................. 10 3 0 10 4 0
September 25, 2016.................................. 8 3 0 8 3 0
September 25, 2017.................................. 7 2 0 7 2 0
September 25, 2018.................................. 6 2 0 6 2 0
September 25, 2019.................................. 5 1 0 5 1 0
September 25, 2020.................................. 4 1 0 4 1 0
September 25, 2021.................................. 3 1 0 3 1 0
September 25, 2022.................................. 2 0 0 2 1 0
September 25, 2023.................................. 1 0 0 2 0 0
September 25, 2024.................................. 1 0 0 1 0 0
September 25, 2025.................................. 0 0 0 1 0 0
September 25, 2026 and thereafter................... 0 0 0 0 0 0
Weighted Average Life (Years) (1)................... 7.8 5.6 3.4 7.9 5.6 3.4
</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.
(1) The weighted average life of any Class of Offered Certificates is determined
by (i) multiplying the amount of each assumed principal distribution on such
Class of Offered Certificates by the number of years from the date of
issuance of the Offered 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 Offered Certificates.
S-56
<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:
</TABLE>
<TABLE>
<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.
</TABLE>
<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
</TABLE>
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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".
</TABLE>
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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.
</TABLE>
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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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<PAGE>
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
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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
<PAGE>
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>
<CAPTION>
PAGE
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<S> <C>
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 1997-6
CLASS I-A
CLASS II-A
$695,684,820
(APPROXIMATE)
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PROSPECTUS SUPPLEMENT
---------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PNC CAPITAL MARKETS, INC.
SEPTEMBER 18, 1997
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