<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 1998
REGISTRATION NO. 333-50053
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
PNC MORTGAGE SECURITIES CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2528990
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
75 NORTH FAIRWAY DRIVE
VERNON HILLS, ILLINOIS 60061
(847) 549-6500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------
THOMAS G. LEHMANN, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
PNC MORTGAGE SECURITIES CORP.
75 NORTH FAIRWAY DRIVE
VERNON HILLS, ILLINOIS 60061
(847) 549-6500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
Mark R. Levie, Esq.
Orrick, Herrington & Sutcliffe LLP
400 Sansome Street
San Francisco, CA 94111
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALES TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE(1)
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(2) PER UNIT OFFERING PRICE(3) FEE(4)
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates.......... $6,444,381,170.73 100% $6,444,381,170.73 $1,770,000.00
</TABLE>
(1) This Registration Statement also registers an indeterminate amount of
securities to be sold by PNC Capital Markets, Inc. in secondary market
transactions, where required.
(2) Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Prospectus included in this Registration Statement relates to
$444,381,170.73 of securities previously registered pursuant to a
Registration Statement on Form S-3 (Registration No. 333-38121), as to which
this Registration Statement constitutes a Post-Effective Amendment.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a), exclusive of accrued interest, if any, on the
Mortgage Pass-Through Certificates.
(4) Registration fee of $1,770,000.00 previously paid in connection with
original Registration Statement filed on April 14, 1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PRELIMINARY PROSPECTUS SUPPLEMENT DATED , 199[ ]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED __________, 199[__])
[LOGO]
PNC MORTGAGE SECURITIES CORP.
Depositor and [Master Servicer][Certificate Administrator]
Mortgage Pass-Through Certificates
Series 199[__]-[__][, Class __]
[Principal and interest payable on the 25th day of
each month beginning in __________, 199[__]]
$_____ [(Approximate)]
------------------------
THESE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN PNC
MORTGAGE SECURITIES CORP. OR ANY OF ITS AFFILIATES. 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 199[__]-__, offered hereby
will [consist of] [include] __________ classes: [list classes] (the
"Certificates"). [The issuance of the Certificates is subject to the condition
that they be rated at least [__________] by [__________].]
Distributions to Certificateholders will be made on the 25th day of each
month or, if such 25th day is not a Business Day, on the immediately succeeding
Business Day, commencing in [__________] 199[__] (each, a "Distribution Date").
Distributions of principal of and interest on [each Class of] Certificates will
be distributed on each Distribution Date to the extent described herein. See
"Description of the Certificates -- Distributions of Interest" and "--
Distributions of Principal" herein. [listing of classes, with principal
balances, remittance rates and other applicable information]
(CONTINUED ON NEXT PAGE)
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 SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC(1) COMMISSIONS(2) COMPANY(1,2)
<S> <C> <C> <C>
Per Certificate.................................... %
Total.............................................. (3) (4) $
</TABLE>
(1) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED TO BE $_____.
(2) PLUS ACCRUED INTEREST AT THE REMITTANCE RATE FROM THE CUT-OFF DATE.
(3) TO BE DETERMINED AT THE TIME OF SALE IN NEGOTIATED TRANSACTIONS OR
OTHERWISE.SALES MAY BE MADE TO INVESTORS AT THE SAME PRICE OR AT DIFFERENT
PRICES. SEE METHOD OF DISTRIBUTION HEREIN.
(4) THE DIFFERENCE BETWEEN THE PURCHASE PRICE FOR THE CERTIFICATES PAID TO THE
COMPANY AND THE PROCEEDS FROM THE SALE OF THE CERTIFICATES REALIZED BY THE
UNDERWRITER(S) WILL CONSTITUTE UNDERWRITING DISCOUNTS AND COMMISSIONS. SEE
METHOD OF DISTRIBUTION HEREIN.]
UNDERWRITER & CO., INC.
The date of this Prospectus Supplement is __________, 199[__].
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
[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 CERTIFICATES.]
[This Prospectus Supplement and the related Prospectus may be used by PNC
Capital Markets, Inc., an affiliate of the Depositor, in connection with offers
and sales related to secondary market transactions in the Certificates. PNC
Capital Markets, Inc. may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.]
[The Certificates are being offered by the Underwriter(s) from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Sales may be made to investors at the same price or at
different prices. See "Method of Distribution" herein. The aggregate proceeds
(excluding accrued interest)to PNC Mortgage Securities Corp. (the "Company")
from the sale of the Certificates, before deducting expenses estimated to be
$_____, will be __% of the initial aggregate Certificate Principal Balance. The
difference between the consideration received by the Company in payment for the
Certificates and the aggregate proceeds from the sale of the Certificates
realized by the Underwriter(s) will constitute underwriting discounts and
commissions. The Company has agreed to indemnify the Underwriter(s) against
certain liabilities, including liabilities under the Securities Act of 1933. See
"Method of Distribution" herein.]
[The Certificates are offered by the Underwriter(s), as specified herein,
subject to receipt and acceptance by them, and subject to [its] [their]right to
reject any order in whole or in part and to certain other conditions. It is
expected that delivery of the Certificates will be made [at the offices of
__________, New York, New York] [through the facilities of __________] on or
about ___________, 199[__].] (Additional cover page information is contained on
the reverse side of this page.)
The Certificates[, together with the "residual interest" evidenced by the
Class R Certificate (which is not offered hereby),] will evidence all the
beneficial ownership interest in a trust (the "Trust") established by the
Company. The Trust will contain a pool (the "Mortgage Pool") of one- to
four-family residential mortgage loans (the "Mortgage Loans") deposited into the
Trust [and master serviced] by the Company [and serviced by
__________________________________ ([in its capacity as servicer,] the
"Servicer")] [or certificates of interest or participations therein] [, a
mortgage pool insurance policy issued by [__________], a [reserve fund] [letter
of credit] [insurance policy] [bond] covering up to a specified amount of losses
arising from special hazards, certain mortgage repurchase defaults by the
[Master] Servicer and Mortgagor bankruptcy,] and certain other assets, all as
described herein. [All of the Mortgage Loans will be acquired by the Company
from _____________________ ([in its capacity as seller,] the "Seller"). The
Company will calculate amounts distributable to the Certificateholders, prepare
tax returns on behalf of the Trust Fund and provide certain administrative
services specified in the Pooling Agreement (in such capacity, the "Certificate
Administrator").]
The Company intends to cause an election to be made to treat the Trust as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. The Certificates will represent ownership of REMIC "regular
interests". The Class R Certificate will represent ownership of a REMIC
"residual interest". See "Certain Federal Income Tax Consequences" in the
Prospectus.
The Certificates evidence interests in the Trust only 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 of the Trust" herein.
[MORTGAGORS MAY PREPAY THE MORTGAGE LOANS AT ANY TIME WITHOUT PENALTY. THE
YIELD ON THE INTEREST STRIP CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE
AND TIMING OF PRINCIPAL PREPAYMENTS ON THE MORTGAGE LOANS AND MAY FLUCTUATE
SIGNIFICANTLY FROM TIME TO TIME. PROSPECTIVE INVESTORS SHOULD FULLY CONSIDER THE
RISKS ASSOCIATED WITH AN INVESTMENT IN THE INTEREST STRIP CERTIFICATES,
INCLUDING THE POSSIBILITY THAT IF THE RATE OF PRINCIPAL PREPAYMENTS IS EXTREMELY
RAPID, SUCH INVESTORS MAY NOT FULLY
<PAGE>
RECOUP THEIR INITIAL INVESTMENTS. IN ADDITION, IF THE PASS-THROUGH RATES ON THE
MORTGAGE LOANS WHICH PREPAY ARE HIGHER THAN THE WEIGHTED AVERAGE PASS-THROUGH
RATE ON THE MORTGAGE LOANS, DISTRIBUTIONS TO THE INTEREST STRIP CERTIFICATES
(WHICH ARE SOLELY ATTRIBUTABLE TO THE EXCESS OF INTEREST AT THE WEIGHTED AVERAGE
PASS-THROUGH RATE ON THE MORTGAGE LOANS THEN OUTSTANDING OVER __% PER ANNUM)
WILL DECREASE TO A GREATER EXTENT THAN IF THE PREPAYMENTS ARE ON MORTGAGE LOANS
WITH PASS-THROUGH RATES WHICH ARE EQUAL TO OR BELOW THE WEIGHTED AVERAGE
PASS-THROUGH RATE. SEE "YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN.]
The Certificates will represent undivided interests in the principal and
interest payments on the Mortgage Loans in the Mortgage Pool. The Certificates
are offered in denominations equivalent to not less than [$100,000]initial
Certificate Principal Balance each and multiples of [$1,000] in excess thereof,
except that one Certificate will be issued in a different amount as to each
Class having an initial Class Principal Balance that is not a multiple of
$1,000. [Interest Strip Certificates are offered in denominations equivalent to
not less than __________, and multiples of _____ in excess thereof.] There is at
present no market for [any Class of] [the] Certificates and there can be no
assurance that a secondary market for [any Class of] [the] 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] [the] Certificates.
The 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 ________, 199[__], 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 90 DAYS AFTER THE DATE OF THIS SUPPLEMENT, ALL DEALERS EFFECTING
TRANSACTIONS IN THE 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 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
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.
<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>
Certificates...................... Mortgage Pass-Through Certificates, Series 199[__]-__ [,
issuable in __ classes] (the "Certificates"). The
Certificates will[, together with the Class R
Certificate, which is not offered hereby,] evidence
beneficial ownership of a trust (the "Trust") into which
the Mortgage Loans will be deposited. The Company will
cause an election to be made to treat the Trust as a
real estate mortgage investment conduit (a "REMIC"). See
"Description of the Certificates" herein.[List of Class
Principal Balances]
[Initial Aggregate Certificate $_____ (approximate, subject to an upward or a downward
Principal Balance of the variance of no more than __%).]
Certificates....................
The Trust......................... The primary assets of the Trust will consist of a pool
(the Mortgage Pool of [conventional] one- to four-family
residential mortgage loans (the "Mortgage Loans") [or
certificates of interest or participations therein],
with an aggregate outstanding principal balance as of
________ 1, 199[__] (the "Cut-Off Date") of
approximately $_____. The trust will also contain [(i) a
mortgage pool insurance policy (the "Mortgage Pool
Insurance Policy") issued by __________ and other]
insurance policies related to the Mortgage Loans, [(ii)]
a reserve fund (the "Reserve Fund") [a letter of credit
(the "Letter of Credit"] [an insurance policy] [a Bond]
[covering up to a specified amount of losses arising
from special hazards, certain mortgage repurchase
defaults by the [Master] Servicer and Mortgagor
bankruptcy,] [(iii)] real property which secured a
Mortgage Loan and which is acquired by foreclosure or by
deed in lieu of foreclosure after the Cut-Off Date, and
[(iv)] amounts held in an account or accounts
established by the [Master] Servicer. See "The Trust"
herein.
[Remittance Rate.................. __%.]
[Initial Weighted Average Mortgage __% (approximate).]
Interest Rate (as of the Cut-Off
Date)...........................
The Mortgage Loans................ [Conventional] Mortgage Loans, secured by one- to
four-family residential properties [and, in the case of
__ Mortgage Loans, an interest in shares issued by a
cooperative apartment corporation and the related
proprietary lease]. [All of the Mortgage Loans will be
acquired by the Company from the Seller (as defined
below).] [additional description of Mortgage Loan
characteristics, including whether Mortgage Interest
Rates are fixed or adjustable and whether the Mortgage
Loans are fully amortizing, have graduated payments
and/or provide for negative amortization]
</TABLE>
S-4
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<TABLE>
<S> <C>
Depositor [and Master Servicer]... PNC Mortgage Securities Corp.
[Seller........................... ________________________________. See "Description of
the Mortgage Loans -- The Seller" herein.]
[Servicer......................... ________________________________. See "Description of
the Certificates -- The Servicer" herein.]
[Certificate Administrator........ PNC Mortgage Securities Corp.]
Trustee........................... _________________ Bank.
[Certificate Registrar and Paying ___________.]
Agent...........................
Cut-Off Date...................... __________ 1, 199[__].
Closing Date...................... On or about __________, 199[__].
[Last Scheduled Distribution __________, 20__.]
Date............................
[Rating........................... It is a condition to the issuance of the Certificates
that they be rated __________ and __________ by
__________ (the "Rating Agencies"). The ratings on the
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 do not address the likely actual rate of Principal
Prepayments, which rate could, if different than
originally anticipated, adversely impact the yield
realized by Certificateholders or cause
Certificateholders to fail to recoup their underlying
investments. [The ratings also do not address the
likelihood that the [Master] Servicer will be able to
repurchase any Mortgage Loan which has been converted
from an adjustable-rate loan to a fixed-rate loan.] See
"Certificate Rating" and "Yield and Prepayment
Considerations" herein.]
[Compensating Interest/No [The [Master] Servicer will/will not be obligated to
Compensating Interest].......... pass through a full month's payment of interest to the
Certificateholders with respect to either full or
partial principal prepayments on the Mortgage Loans]
[Advances......................... [description of obligation, if any, of Master Servicer
or Servicer, as applicable, to make advances to cover
shortfalls in payments due on Mortgage Loans]
Interest.......................... Passed through monthly on the 25th day of each month at
1/12 of the Remittance Rate of __%, commencing in
__________ 199[__].[additional description of allocation
of interest among Classes, as applicable and method of
allocation of losses on the Mortgage Loans among the
Certificates]
Principal (including Principal Passed through monthly on the 25th day of each month,
Prepayments).................... commencing in ________199[__]. [additional description
of allocation of principal among Classes, as applicable]
</TABLE>
S-5
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<TABLE>
<S> <C>
[Subordination and Allocation of The rights of holders of Subordinated Certificates to
Losses.......................... receive certain distributions are subordinated to such
rights of the holders of Senior Certificates to the
extent described below. [descriptions of subordination
feature, as applicable and method of allocation of
losses on the Mortgage Loans among the Certificates]
Yield and Prepayment The effective yield to maturity of the Certificates will
Considerations.................. depend upon, among other things, the price at which the
Certificates are purchased, the applicable Remittance
Rate and the rate of principal payments on the Mortgage
Loans. A higher than anticipated rate of Principal
Prepayments 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 Prepayments could result in a lower than
expected yield to investors in Classes of Certificates
purchased at a premium. Conversely, a lower than
anticipated rate of Principal Prepayments could reduce
the return to investors on any Classes of Certificates
purchased at a discount, in that payments of principal
with respect to the Mortgage Loans would occur later
than anticipated.
The actual rate of payments of principal and Principal
Prepayments on the Mortgage Loans may be influenced by a
variety of economic, geographic, social and other
factors.In general, if prevailing interest rates fall
significantly below the interest rates on the Mortgage
Loans, the Mortgage Loans are likely to be subject to
higher prepayment rates than if prevailing rates remain
at or above the interest rates on the Mortgage Loans.
Conversely, if interest rates generally rise above the
interest rates on the Mortgage Loans, the rate of
prepayment would be expected to decrease. See "Yield and
Prepayment Considerations" herein. [additional
description of sensitivity to and effect of principal
prepayments on each Class of Certificates as follows, as
applicable]
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
[Special Prepayment Risks......... [Adjustable Interest Strip Certificates: The yield on
the Interest Strip Certificates will be extremely
sensitive to the rate and timing of Principal
Prepayments on the Mortgage Loans and may fluctuate
significantly from time to time. Prospective investors
should fully consider the risks associated with an
investment in the Interest Strip Certificates, including
the possibility that if the rate of Principal
Prepayments is extremely rapid, such investors may not
fully recoup their initial investments. In addition, if
the Pass-Through Rates on the Mortgage Loans which
prepay are higher than the weighted average Pass-Through
Rate on the Mortgage Loans, distributions to the
Interest Strip Certificates (which are solely
attributable to the excess of interest at the weighted
average Pass-Through Rate on the Mortgage Loans then
outstanding over __% per annum) will decrease to a
greater extent than if the prepayments are on Mortgage
Loans with Pass-Through Rates which are equal to or
below the weighted average Pass-Through Rate.]
[Sequential Pay Certificates: [All] Classes of the
Certificates are subject to various priorities for
payment of principal as described herein.Distributions
on Classes having an earlier priority of payment will be
directly affected by the rate of prepayment of the
Mortgage Loans early in the life of the Mortgage Pool.
Distributions on Classes with a later priority of
payment will not be affected by the prepayment rate
until such time as principal is distributable on such
Classes; however, the timing of commencement of
principal distributions and the weighted average lives
of such Classes will be affected by the prepayment rate
experienced both before and after the commencement of
principal distributions on such Classes.]
[PAC Certificates: Principal distributions on the PAC
Certificates will be payable in amounts determined based
on schedules as described herein, provided that the
prepayment rate of the Mortgage Loans each month remains
between approximately __% and __% of [the Basic
Prepayment Assumption ("BPA")]. However, as discussed
herein, actual principal distributions may be greater or
less than the described amounts. If the prepayment rate
of the Mortgage Loans is consistently higher than __% of
[BPA], then the Companion Certificates will be retired
before all of the PAC Certificates are retired, and the
rate of principal distributions and the weighted average
lives of the remaining PAC Certificates will become
significantly more sensitive to changes in the
prepayment rate of the Mortgage Loans, and principal
distributions thereon will be more likely to deviate
from the described amounts.]
</TABLE>
S-7
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<TABLE>
<S> <C>
[TAC Certificates: Principal distributions on the TAC
Certificates will be payable in amounts determined based
on schedules as described herein, if the prepayment rate
of the Mortgage Loans were to remain at a constant level
of approximately __% [BPA]. However, as discussed
herein, actual principal distributions are likely to
deviate from the described amounts, because it is highly
unlikely that the actual prepayment rate of the Mortgage
Loans each month will remain at or near such level. If
the Companion Certificates are retired before all of the
TAC Certificates are retired, the rate of principal
distributions and the weighted average lives of the
remaining TAC Certificates will become significantly
more sensitive to changes in the prepayment rate of the
Mortgage Loans, and principal distributions thereon will
be more likely to deviate from the described amounts.]
[Companion Certificates: Because of the application of
amounts available for principal distributions among the
Certificates in any given month, first to the [PAC]
[TAC] Certificates up to the described amounts and then
to the Companion Certificates, the rate of principal
distributions and the weighted average lives of the
Companion Certificates will be extremely sensitive to
changes in the prepayment rate of the Mortgage Loans.
The sensitivity of the Companion Certificates to changes
in the prepayment rate will be significantly greater
than that of the [PAC] [TAC] Certificates or than the
sensitivity that a fractional undivided interest in the
Mortgage Loans would have.] [Subordinated Certificates:
As described herein, during certain periods all or a
disproportionately large percentage of Principal
Prepayments on the Mortgage Loans will be allocated
among the Senior Certificates, and during certain
periods none, or a disproportionately small or large
percentage, of such prepayments will be distributed on
the Subordinated Certificates. As a result, the weighted
average lives of the Subordinated Certificates will be
extended and, as a relative matter, the subordination
afforded the Senior Certificates by the Subordinated
Certificates will be increased.]
See "Yield and Prepayment Considerations" herein.]
[Special Yield Risks.............. [Interest Strip and Inverse Floater Certificates: The
yield to investors on the Interest Strip Certificates
and Inverse Floater Certificates will be extremely
sensitive to the rate and timing of principal payments
on the Mortgage Loans (including prepayments, defaults
and liquidations), which may fluctuate significantly
over time. A rapid rate of principal payments on the
Mortgage Loans could result in the failure of investors
in the Interest Strip Certificates and Inverse Floater
Certificates to recover their initial investments, and a
slower than anticipated rate of principal payments on
the Mortgage Loans could adversely affect the yield to
investors of the [Non-strip Inverse Floater
Certificates].
</TABLE>
S-8
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<TABLE>
<S> <C>
[Adjustable Strip Certificates: In addition to the
foregoing, the yield on the Adjustable Strip
Certificates will be materially adversely affected to a
greater extent than the yields on the other Certificates
if the Mortgage Loans with higher Mortgage Interest
Rates prepay faster than the Mortgage Loans with lower
Mortgage Interest Rates, because holders of the
Adjustable Strip Certificates generally have rights to
relatively larger portions of interest payments on the
Mortgage Loans with higher Mortgage Interest Rates than
on Mortgage Loans with lower Mortgage Interest Rates.]
[Adjustable Rate (including Inverse Floater)
Certificates: The yield on the Adjustable Rate
Certificates will be sensitive, and the yield on the
Inverse Floater Certificates will be extremely
sensitive, to fluctuations in the level of the Index.
The Pass-Through Rate on the Inverse Floater
Certificates will vary inversely with, and at a higher
multiple of, the Index.]
[Inverse Floater Companion Certificates: In addition to
the foregoing, in the event of relatively low prevailing
interest rates (including the Index) and relatively high
rates of Principal Prepayments over an extended period,
while investors in the Inverse Floater Companion
Certificates may then be experiencing a higher current
yield on such Certificates, such yield may be realized
only over a relatively short period, and it is unlikely
that such investors would be able to reinvest such
Principal Prepayments on such Certificates at a
comparable yield.]
[Subordinated Certificates: The yield to maturity on the
Subordinated Certificates will be extremely sensitive to
losses due to defaults on the Mortgage Loans (and the
timing thereof) to the extent that such losses are borne
by the Subordinated Certificates, because the entire
amount of such losses (rather than a pro rata portion
thereof) will be allocable to the Subordinated
Certificates, as described herein.]
[Residual Certificates: Holders of the Class R
Certificates are entitled to receive distributions of
principal and interest as described herein; however,
holders of such Certificates may have tax liabilities
with respect to their Certificates during the early
years of their term that substantially exceed the
principal and interest payable thereon during such
periods. [In addition, such distributions will be
reduced to the extent that they are subject to United
States federal income tax withholding.]]
See "Yield and Prepayment Considerations herein."]
[Index]........................... [description of index used to determine Mortgage
Interest Rate on adjustable rate Mortgage Loans]
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
[Special Considerations Relating Since transactions in the Certificates (collectively,
to Book-Entry Certificates...... the "Book- Entry Certificates") 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 in respect of such Certificates, may be
limited due to lack of a physical certificate
representing the Book-Entry Certificates.
In addition, 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 Paying Agent (as
defined below) to DTC, and DTC will credit such
distributions to the accounts of its Participants (as
defined herein) which will thereafter credit them to the
accounts of Certificateholders either directly or
indirectly through indirect participants. See
"Description of the Certificates -- Book-Entry
Registration" herein.]
Certain Federal Income Tax [The Certificates may be issued with original issue
Consequences.................... discount for federal income tax purposes. The prepayment
assumption that will be used in determining the rate of
accrual of original issue discount for federal income
tax purposes is __% of the Basic Prepayment Assumption.
See "Yield and Prepayment Considerations" herein.]
For federal income tax purposes, the Company will cause
an election to be made to treat the Trust as a REMIC.
The Certificates will be designated as REMIC regular
interests. As REMIC regular interests, the Certificates
will generally be treated as debt for federal income tax
purposes. Certificateholders will be required to include
in income all interest on the Certificates in accordance
with the accrual method of accounting regardless of the
Certificateholders' usual methods of accounting.
[The Certificates will generally be treated as
"qualifying real property loans" for mutual savings
banks and domestic building and loan associations,
"loans secured by an interest in real property" for
domestic building and loan associations, and "real
estate assets" for real estate investment trusts
("REITs") in the same proportion that the assets in the
REMIC would be so treated. In addition, interest on the
Certificates will generally be treated as "interest on
obligations secured by mortgages on real property" for
REITs to the extent that such Certificates are treated
as "real estate assets. See "Certain Federal Income Tax
Consequences" in the Prospectus.]
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
Termination....................... The Company may at its option repurchase the Mortgage
Loans and thereby effect the retirement of the
Certificates at any time after the principal balances of
the Mortgage Loans aggregate less than __% of the
aggregate principal balance of the Mortgage Loans in the
Mortgage Pool as of the Cut-Off Date. The amount
distributed to Certificateholders by the Company in
connection with any such repurchase will equal [the
aggregate outstanding principal amount of the Mortgage
Loans, plus accrued interest from the first day of the
month of repurchase through the last day of such month
at the applicable Remittance Rate and after subtracting
unreimbursed advances]. See "Description of the
Certificates -- Optional Termination of the Trust"
herein.
[Legal Investment................. Institutions whose investment activities are subject to
review by certain regulatory authorities hereafter may
become subject to restrictions on investment in the
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 and the Office
of Thrift Supervision have adopted guidelines, and have
proposed policies, regarding the suitability of
investments in various types of derivative
mortgage-backed securities, which may encompass [some or
all Classes of] the Certificates. In addition, several
states have adopted regulations that would prohibit
regulated institutions subject to their jurisdiction
from holding mortgage-backed securities, including
securities previously purchased. Investors should
consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal
investments for such investors.
At the time of their issuance, the Certificates will
constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984.
See "Certain Legal Investment Aspects" herein.]
ERISA Considerations.............. Any Plan fiduciary that proposes to cause a Plan to
purchase Certificates should consult with its counsel
with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of
the Certificates. See ERISA Considerations herein and in
the Prospectus.
</TABLE>
S-11
<PAGE>
RISK FACTORS
[Discussion, as applicable, of risk factors, including prepayment risk,
adjustable-rate Mortgage Loans, conversion of adjustable rate Mortgage Loans to
fixed rate Mortgage Loans, subordination and allocation of losses among Classes
of Certificates, interest-only or principal-only certificates, book-entry system
of registration]
THE TRUST
The primary assets in the Trust will consist of Mortgage Loans secured by
one- to four-family residential properties [or certificates of interest or
participations therein]. The Trust will also include: [(i) the Mortgage Pool
Insurance Policy issued by __________ and other] insurance policies related to
the Mortgage Loans, [(ii)] [the Reserve Fund] [Letter of Credit] [Insurance
Policy] [Bond] covering up to a specified amount of certain losses arising from
special hazards, certain Mortgage repurchase defaults by the [Master] Servicer
and Mortgagor bankruptcy,] [(iii)] property which secured a Mortgage Loan and
which is acquired by foreclosure or by deed in lieu of foreclosure after the
Cut-Off Date, and [(iv)] amounts held from time to time in an account or
accounts established by the [Master] Servicer. The Mortgage Loans will be
assigned to the Trustee, together with all principal and interest due on the
Mortgage Loans [other than the Retained Yield] after the Cut-Off Date. The
Trustee will, concurrently with such assignment, authenticate and deliver the
Certificates. Each Mortgage Loan will be identified in a schedule appearing as
an exhibit to the Pooling Agreement (the "Mortgage Loan Schedule") which will
specify with respect to each Mortgage Loan, among other things, the original
principal balance and the outstanding principal balance as of the close of
business on the Cut-Off Date, the term of the Mortgage Note and the Mortgage
Interest Rate.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans having an [approximate]
aggregate principal balance outstanding as of __________1, 199[__] (the "Cut-Off
Date"), after deducting payments due on or before that date, of $_____. Certain
of the risks of loss on the Mortgage Loans will be covered up to specified
limits by the following:
[(a)] Primary Insurance Policies[;]
[(b)] a Mortgage Pool Insurance Policy;
(c) an Advance Claims Endorsement;
(d) a Special Hazard [Reserve Fund] [Letter of Credit] [Insurance Policy];
(e) a Mortgage Repurchase [Reserve Fund] [Letter of Credit] [Bond]; and
(f) a Bankruptcy [Reserve Fund] [Letter of Credit] [Bond].]
See "Credit Enhancements" herein and "Description of Credit Enhancements" in
the Prospectus.
The Mortgage Loans are secured by [(a)] first mortgages or first deeds of
trust or other similar security instruments creating first liens on one- to
four-family residential properties, which may include detached homes, duplexes,
townhouses, condominiums, 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 (b) in the case of ___
Mortgage Loans, security interests in shares issued by private housing
corporations and in the related proprietary leases] (the "Mortgaged Property").
The Mortgage Loans will have the additional characteristics described below and
in the Prospectus. [All of the Mortgage Loans will be acquired by the Company
from the Seller.]
S-12
<PAGE>
[All of the Mortgage Loans will be screened and underwritten in accordance
with standards set forth in the Prospectus.] Each Mortgage Loan will have been
originated during the period from __________ through __________, 19__. Each of
the Mortgage Loans will have an original term to maturity of __________ to [30]
years.
As of the Cut-Off Date, the Mortgage Interest Rate on each Mortgage Loan
will be not less than __% and not more than __% per annum. As of the Cut-Off
Date, the weighted average (by principal balance) of the Mortgage Interest Rates
on the Mortgage Loans will be approximately __% per annum.
[Each Mortgage Loan has a pass-through rate (the "Pass-Through Rate") equal
to the Mortgage Interest Rate for such Mortgage Loan less the sum of the
[Seller/Servicer Fee and the Master Servicing Fee] [Servicing Fee and the
Certificate Administrator Fee] for such Mortgage Loan. As of the Cut-Off Date,
the Pass-Through Rate for each Mortgage Loan will be not less than __% and not
more than __% per annum. As of the Cut-Off Date, the weighted average (by
principal balance) of the Pass-Through Rates for the Mortgage Loans will be
approximately __% per annum.]
[All of the Mortgage Loans will have principal and interest payable on the
first day of each month. __% of the Mortgage Loans will be Buydown Loans. __% of
the Mortgage Loans will have been originated as adjustable-rate mortgage loans
but converted to fixed-rate mortgage loans prior to inclusion in the Mortgage
Pool. The latest original scheduled maturity of any Mortgage Loan will be
__________. As of the Cut-Off Date, the weighted average (by principal balance)
remaining term to maturity of the Mortgage Loans (adjusted for Curtailments
received prior to the Cut-Off Date) will be approximately _____ months. At
origination, based upon an appraisal of the Mortgaged Property securing each
Mortgage Loan, approximately __% of the Mortgage Loans (by principal balance)
will have had Loan-to-Value Ratios greater than or equal to 80%, and
approximately __% of the Mortgage Loans (by principal balance) will have had
Loan-to-Value Ratios greater than 80% but less than or equal to 95%. __% of the
Mortgage Loans had a Loan-to-Value Ratio greater than 95%. As of the Cut-Off
Date, the weighted average (by principal balance) of the Loan-to-Value Ratios of
the Mortgage Loans will be approximately __%. Approximately __% of the Mortgage
Loans (by principal balance) were covered by Primary Insurance Policies as of
the Cut-Off Date. At origination, each Mortgage Loan will have had a principal
balance of not less than $_____ nor more than $_____, and the average principal
balance of the Mortgage Loans as of the Cut-Off Date will be approximately
$_____. All of the Mortgage Loans will have been secured by owner-occupied
Mortgaged Properties, based solely on representations of the Mortgagors obtained
at the origination of the related Mortgage Loans. Approximately __% of the
Mortgage Loans (by principal balance) will have been originated as Limited
Documentation Origination Program loans, and Mortgage Loans constituting __% of
the Mortgage Pool (by principal balance) will have been originated with no
income and no asset verification.
No more than __% of the Mortgage Loans (by principal balance) will be
secured by Mortgaged Properties located in any one zip code area. Approximately
__% of the Mortgage Loans (by principal balance) will have been originated for
the purpose of refinancing existing mortgage debt, including cash-out
refinancings. Approximately __% of the Mortgage Loans (by principal balance)
will have been originated for the purpose of purchasing the Mortgaged Property.]
[Certain aspects of the Cooperative Loans included in the Mortgage Pool
differ from those of other types of Mortgage Loans. See "Certain Legal Aspects
of the Mortgage Loans-- Cooperative Loans" in the Prospectus.]
[additional description of Mortgage Loans as applicable, i.e. number of
Mortgage Loans that provide for the payment of the unamortized principal balance
of the Mortgage Loan in a single payment at maturity ("Balloon Loans") and
particular characteristics thereof]
S-13
<PAGE>
[THE SELLER
Description, as applicable, of Seller's underwriting criteria and loan
documentation standards.]
ADDITIONAL INFORMATION
A Current Report on Form 8-K containing a detailed description of the
Mortgage Loans in the Mortgage Pool will be available to purchasers of the
Certificates at or before the time of initial issuance of the Certificates and
will be filed with the Securities and Exchange Commission within 15 days
thereafter. The Current Report on Form 8-K will specify [the aggregate principal
balance of the Mortgage Loans in the Mortgage Pool outstanding as of the Cut-Off
Date, will set forth on a precise basis the other information presented on an
approximate basis in this Prospectus Supplement and will also include the
following information as of the Cut-Off Date regarding the Mortgage Loans: the
number of Mortgage Loans, the range of Mortgage Interest Rates and Pass-Through
Rates, the range of Mortgage Loan principal balances, the years of origination
of the Mortgage Loans, the range of Loan-to-Value Ratios of the Mortgage Loans,
the types of Mortgaged Properties, the geographic distribution by state of the
Mortgage Loans, the adjusted maturity years of the Mortgage Loans, the weighted
average remaining term of the Mortgage Loans (adjusted for Curtailments received
prior to the Cut-Off Date), the number of Limited Documentation Origination
Program loans, and the number of Buydown Loans]. [The Current Report on Form 8-K
will also describe the coverage of each instrument providing credit enhancement
for the Mortgage Pool.]
[DESCRIPTION OF ARMS]
[description of features of adjustable-rate mortgage loans, including
adjustment date, index, gross margin, adjustment limits, interest ceilings and
floors, method of establishing initial Mortgage Interest Rate and historical
index tables]
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling Agreement") to be dated as of the Cut-Off Date
[between][among] the Company, as Depositor and [Master Servicer][Certificate
Administrator], [the Servicer, as servicer,] and __________ Bank, 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. The issuance of the
Certificates is subject to the condition that they be rated ["---"] by
__________[.] [and will otherwise qualify as "mortgage related securities"
within the meaning of the Secondary Mortgage Market Enhancement Act of
1984.][The Certificates will be freely transferable and exchangeable at the
office of __________, the Certificate Registrar and Paying Agent, in __________,
__________.] The net proceeds of the offering will be held in trust by the
Company for the benefit of Certificateholders, subject to release to the Company
simultaneously with receipt by the Trustee of the Mortgage Loans.
[BOOK-ENTRY REGISTRATION
Certificateholders may hold their Book-Entry Certificates through DTC if
they are Participants, or indirectly through organizations which are
Participants. Transfers between Participants will occur in the ordinary way in
accordance with DTC rules. Cede, as nominee of DTC, will hold the global
Certificate for each Class of Book-Entry Certificates.
DTC has advised the Company that it is a limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code (the "UCC") and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating
S-14
<PAGE>
organizations ("Participants") and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include the Underwriter,
securities brokers and dealers, banks, trust companies and clearing corporations
and may include 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
Participant, either directly or indirectly ("Indirect Participants").
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, unless Definitive Certificates are issued,
Certificateholders will receive all distributions of principal of and interest
on the Book-Entry Certificates through 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 its Participants which
thereafter will be required to forward them to Indirect Participants or
Certificateholders. It is anticipated that the sole "Certificateholder" (as such
term is used in the Pooling Agreement) of the 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
Participants, who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Certificates and is
required to receive and transmit distributions of principal and interest on the
Book-Entry Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Book-Entry Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
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 Certificates, may be limited due to the lack of a physical certificate for
such Certificates.
DTC has advised the Company that it will take any action permitted to be
taken by a Certificateholder under the Pooling Agreement only at the direction
of one or more Participants to whose account with DTC the Certificates are
credited. Additionally, DTC has advised the Company that it will take such
actions with respect to a Certificate only at the direction of and on behalf of
the Participant whose holdings include that Certificate. DTC may take
conflicting actions with respect to other Certificates to the extent that such
actions are taken on behalf of Participants whose holdings include such
Certificates.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Book-Entry Certificates among 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 Certificates, and the Trustee
or the Company is unable to locate a qualified successor, (ii) the Company, at
its option, elects to terminate the book-entry system through DTC or (iii) after
the occurrence of an Event of Default, Certificateholders of Certificates
evidencing not less than 66% of the aggregate outstanding Certificate Principal
Balance of the Book-Entry Certificates advise
S-15
<PAGE>
the Trustee and DTC through 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 Participants of
the availability through DTC of Definitive Certificates. Upon surrender by DTC
of the definitive certificates representing each Class of the Book-Entry
Certificates and instructions for 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.
Distribution of principal and interest on the Certificates will be made by
the Paying Agent directly to holders of Definitive Certificates in accordance
with the procedures set forth herein and in the Pooling Agreement. Interest and
principal payments on each Distribution Date will be made to holders in whose
names the Definitive Certificates were registered at the close of business on
the related Record Date. Distributions will be made by check mailed to the
address of such holder as it appears on the register maintained by the
Registrar. The final payment on any Certificate (whether Definitive Certificates
or the Certificates registered in the name of Cede representing each Class of
the Book-Entry Certificates) will be made only upon presentation and surrender
of such Certificate at the offices of the Transfer Agent and Registrar, which
shall initially be __________, or such office or agency as is specified in the
notice of final distribution to holders of Certificates of the Class being
retired. The Trustee will provide such notice to registered Certificateholders
not later than the fifth day of the month in which all remaining outstanding
Certificates of the applicable Class will be retired.
Definitive Certificates will be transferable and exchangeable at the offices
of the Transfer Agent and Registrar. No service charge will be imposed for any
registration of transfer or exchange, but the Transfer Agent and Registrar may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.]
ADVANCES
The [Master] Servicer will [not] make Advances resulting from delinquent
payments on Mortgage Loans as described in the Prospectus under "Description of
the Certificates-- Advances".
DISTRIBUTIONS OF INTEREST
[description of amounts passed through to Certificateholders as interest and
allocation of such amounts among Classes, if any]
DISTRIBUTIONS OF PRINCIPAL
[description of amounts passed through to Certificateholders as principal
and allocation of such amounts among Classes, if any]
[SUBORDINATION AND ALLOCATION OF LOSSES
[description of subordination features, as applicable] and allocation of
losses on the Mortgage Loans among the various Classes of Certificates]
THE CLASS R CERTIFICATE
On each Distribution Date, any amounts remaining in the Certificate Account
after distributions of interest and principal on the Certificates and payment of
expenses, if any, of the Trust will be distributed to the holder of the Class R
Certificate together with Excess Liquidation proceeds (as defined below), if
any. Distributions of such excess amounts to the holder of the Class R
Certificate will be subordinate to all payments required to be made on the
Certificates on any Distribution Date.
S-16
<PAGE>
Any amounts remaining in the Certificate Account upon reduction of the
principal balance of the Certificates to zero, payment of any outstanding
expenses and termination of the Trust will be distributable to the holder of the
Class R Certificate. Such remaining assets are expected to be minimal. See
"Optional Termination of the Trust" herein.
AVAILABLE DISTRIBUTION AMOUNT
On each Distribution Date, the Available Distribution Amount, which
generally includes scheduled principal and interest payments on the Mortgage
Loans due on the related Due Date, Principal Prepayments received thereon in the
previous calendar month (as set forth below) and amounts received with respect
to liquidations and repurchases upon conversions thereof, will be distributed by
or on behalf of the Trustee to the related Class of Certificateholders.
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.
The "Available Distribution Amount" will equal the sum of the following
amounts with respect to the Mortgage Loans:
(1) the total amount of all cash received by the [Master Servicer][Certificate
Administrator] by the Determination Date for such Distribution Date
(including [Advances made by the Seller/Servicers,] [Advances made by the
Servicer,] proceeds of the Mortgage Pool Insurance Policy and withdrawals
from the Reserve Fund), except:
(a) all scheduled payments of principal and interest collected but due on a
date subsequent to the related Due Date;
(b) all Principal Prepayments received after the previous calendar month
(together with any interest payment received with such prepayments to the
extent that it represents the payment of interest accrued on the related
Mortgage Loans for the period subsequent to the previous calendar month);
(c) Liquidation Proceeds, [proceeds of Mortgage Loans repurchased following
conversion to fixed Mortgage Interest Rates] and Insurance proceeds
(exclusive of withdrawals from the Reserve Fund) received after the
previous calendar month;
(d) all amounts in the Certificate Account which are due and reimbursable to
the [Seller/Servicer or the Master] Servicer pursuant to the terms of the
Pooling Agreement;
(e) the sum of [the Master Servicing Fee and] the Servicing Fee [and the
Certificate Administrator Fee] for each Mortgage Loan; and
(f) with respect to a Mortgage Loan, the excess, if any, of aggregate
Liquidation Proceeds received during the previous calendar month over the
amount that would have been received if a Payoff had been made with
respect to the related Mortgage Loan on the date such Liquidation
Proceeds are received ("Excess Liquidation Proceeds")[.][; and
(2) all Advances made by the Master Servicer to the Trustee with respect to such
Distribution Date.]
LAST SCHEDULED DISTRIBUTION TO CERTIFICATEHOLDERS
Scheduled distributions on the Mortgage Loans, assuming defaults or losses
on the Mortgage Loans do not exceed amounts that are covered by the credit
enhancements described elsewhere herein, will be sufficient to make timely
distributions of interest on the Certificates and to reduce the Class Principal
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<PAGE>
Balance of each Class of Certificates to zero not later than its "Last Scheduled
Distribution Date" set forth below:
<TABLE>
<CAPTION>
LAST SCHEDULED
CLASS DISTRIBUTION DATE
- ------------------------------------------ --------------------------------------------------
<S> <C>
[List of Classes of Certificates [List of Last Scheduled Distribution Dates for
each Class of Certificates]
</TABLE>
The Last Scheduled Distribution Date is the Distribution Date that occurs in
the month of the latest scheduled maturity date of any of the Mortgage Loans.
The determination of such date assumes, among other things, timely payments,
without prepayments, of principal of and interest on the Mortgage Loans
underlying the Certificates, [no conversions to fixed Mortgage Interest Rates]
and no optional termination of the Trust. Since the rate of payment (including
prepayments) of the Mortgage Loans can be expected to exceed the scheduled rate
of payments, and could exceed the scheduled rate by a substantial amount, the
actual final Distribution Date may be earlier, and could be substantially
earlier, than the Last Scheduled Distribution Date indicated.
[THE SERVICER
Description, as applicable, of Servicer's business and delinquency,
foreclosure and loss experience with respect to comparable mortgage loans
serviced by the Servicer.]
SERVICING COMPENSATION[, RETAINED YIELD] AND PAYMENT OF EXPENSES
[The Seller/Servicer Fee with respect to each Mortgage Loan [is expected to]
[will] range from a minimum of __% to a maximum of __% per annum.]The [initial
weighted average] [Master] Servicing Fee with respect to each Mortgage Loan [is
expected to] [will] be approximately __% per annum. [The Certificate
Administrator Fee with respect to each Mortgage Loan [is expected to] [will] be
approximately __% per annum.] [The Retained Yield for any Mortgage Loan will be
the percentage calculated by subtracting the sum of the Pass-Through Rate, [the
Seller/Servicer Fee for such Mortgage Loan and the Master Servicing Fee][the
Servicing Fee and the Certificate Administrator Fee]from the Mortgage Interest
Rate for such Mortgage Loan.] [The Retained Yield for each Mortgage Loan will be
the percentage specified by the Company for such Mortgage Loan.] [The Retained
Yield [is expected to] [will] range from __% to __%, with an initial Weighted
Average Retained Yield of approximately __%. The Retained Yield [is expected to
be] [may be] [sold] [transferred to the Underwriter for resale] to a third
party.] See "Description of Certificates--Retained Yield" and "-- Servicing
Compensation and Payment of Expenses" in the Prospectus for information
regarding other possible compensation to the Company and the
[Seller/Servicers][Servicer]. The [Master] Servicer will pay [all][certain]
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 [(i)] the premiums on the Mortgage Pool Insurance Policy, [(ii)
the fees of the Trustee] and [(ii)] [(iii)] certain other fees and expenses of
the Trust, as prescribed by the Pooling Agreement. Such fees and expenses are
expected to aggregate not more than __% per annum. [The Certificate
Administrator will pay the fees and expenses of the Trustee.]
OPTIONAL TERMINATION OF THE TRUST
On any Distribution Date after the first date on which the aggregate
outstanding principal balance of the Mortgage Loans is less than 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-Off Date, the
Company may repurchase the Mortgage Loans and any other property remaining in
the Trust, and thereby effect the termination of the Trust and the retirement of
the Certificates. The repurchase price will equal the sum of (1) 100% of the
aggregate outstanding principal balances of such Mortgage Loans, plus accrued
interest thereon at the applicable Pass-Through Rates through the last day
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<PAGE>
of the month of such repurchase, and (2) the fair market value of all other
property remaining in the Trust. The proceeds of such repurchase will be treated
as a prepayment of the Mortgage Loans for purposes of distributions to
Certificateholders. Accordingly, an optional termination of the Trust will cause
the outstanding principal balance of the Certificates to be paid in full. 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 the Certificates will depend upon, among
other things, the price at which the Certificates are purchased, the applicable
Remittance Rate and the rate of principal payments on the Mortgage Loans. The
effective yield to Certificateholders will be lower than the yield otherwise
produced by the applicable Remittance Rate and purchase price of such
Certificates because principal and interest distributions will not be payable to
such Certificateholders until the 25th day of the month following the month of
accrual (without any additional distribution of interest or earnings thereon
with respect to such delay). [Because the [Master] Servicer will not be
obligated to pass through a full month's payment of interest with respect to
Principal Prepayments, the effective yield may also be reduced in the event of
interest shortfalls attributable to a Payoff of, or Curtailment with respect to,
one or more Mortgage Loans.]
The rate of principal payments on the Certificates is directly related to
the rate of payments of principal on the Mortgage Loans, which may be in the
form of scheduled payments or Principal Prepayments. See "Yield Considerations"
in the Prospectus. 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 such
Mortgage Loans could be substantially less than expected. Therefore, a higher
rate of Principal Prepayments could result in a lower than expected yield to
investors in Classes of Certificates purchased at a premium. Conversely, a lower
than anticipated rate of Principal Prepayments could reduce the return to
investors on any Classes of Certificates purchased at a discount, in that
payments of principal with respect to the Mortgage Loans would occur later than
anticipated.
The actual rate of payments of principal and Principal Prepayments on the
Mortgage Loans may be influenced by a variety of economic, geographic, social
and other factors, including general economic conditions and homeowner mobility.
In general, if prevailing interest rates fall significantly below the interest
rates on the Mortgage Loans, the Mortgage Loans are likely to be subject to
higher prepayment rates than if prevailing rates remain at or above the interest
rates on the Mortgage Loans. Conversely, if interest rates rise above the
interest rate on the Mortgage Loans, the rate of prepayment would be expected to
decrease. 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 "Descriptions of Certificates -- Termination" in the
Prospectus and "Description of the Certificates -- Optional Termination of the
Trust" herein. In such event, the repurchase price paid by the Company would be
passed through to Certificateholders in accordance with their respective
interests.
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 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.
S-19
<PAGE>
[The Mortgage Loans comprising the Mortgage Pool are adjustable-rate
mortgage loans. The Company is not aware of any publicly available statistics
that set forth principal prepayment experience or prepayment forecasts of
adjustable-rate mortgage loans over an extended period of time, and its
experience with respect to such loans is insufficient to draw any conclusions
with respect to the expected prepayment rates on the adjustable-rate mortgage
loans comprising the Mortgage Pool. The rate of principal prepayments with
respect to adjustable-rate mortgage loans has fluctuated in recent years. As is
the case with conventional fixed-rate mortgage loans, adjustable-rate mortgage
loans may be subject to a greater rate of principal prepayment in a declining
interest rate environment. For example, if prevailing interest rates fall
significantly, adjustable-rate mortgage loans could be subject to higher
prepayment rates 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 adjustable-rate mortgage loans to "lock
in" a lower fixed interest rate. The features of the 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.]
[With respect to Balloon Loans, payment of the unamortized principal balance
at maturity (which, based on the amortization schedule of such Mortgage Loans,
is expected to be a substantial amount) will generally depend on the Mortgagor's
ability to obtain refinancing of such Mortgage Loan or to sell the Mortgaged
Property prior to the maturity of the Balloon Loan. The ability to obtain
refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, 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.]
[Because distributions on the Adjustable Strip Certificates [consist
primarily of distributions of interest] [are based upon the excess of interest
at the weighted average Pass-Through Rate on the Mortgage Loans over % per
annum], the yield to maturity on the Adjustable Strip Certificates will be
extremely sensitive to the level of Principal Prepayments on the Mortgage Loans,
and may fluctuate significantly from time to time. The yield to maturity on such
Class will be particularly sensitive to the rate of prepayments on Mortgage
Loans bearing higher interest rates, which could be significantly higher than
the prepayment rates on Mortgage Loans bearing lower interest rates, since the
rate of interest payable on the Adjustable Strip Certificates will decrease as a
result of Principal Prepayments on Mortgage Loans with Gross Margins that are
higher than the weighted average Gross Margin from time to time on the Mortgage
Loans. Investors should fully consider all of the associated risks, including
the risk that an extremely rapid rate of principal prepayments on the Mortgage
Loans could result in the failure of investors in Adjustable Strip Certificates
to fully recoup their initial investments. For information regarding yield
considerations on the Adjustable Strip Certificates, see "-- Yield
Considerations With Respect to the Adjustable Strip Certificates" herein.]
[Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement [(the
"Basic Prepayment Assumption" or "BPA")] assumes a per annum rate of prepayment
of 0.2% of the then outstanding principal balance of a pool of mortgages in the
first month after origination, that this annual prepayment rate increases by
0.2% each month until the 30th month after origination and remains constant at
6% per annum in that month and in each month thereafter. 0% of the [Basic
Prepayment Assumption] indicates no prepayments are received; 150% of the [Basic
Prepayment Assumption] indicates prepayments at 1.5 times the [Basic Prepayment
Assumption]; 300% of the [Basic Prepayment Assumption] indicates prepayments at
3.0 times the [Basic Prepayment Assumption]; 400% of the [Basic Prepayment
Assumption] indicates prepayments at 4.0 times
S-20
<PAGE>
the [Basic Prepayment Assumption]; and 500% of the [Basic Prepayment Assumption]
indicates prepayments at 5.0 times the [Basic Prepayment Assumption].
The [Basic Prepayment Assumption] does not purport to be either an
historical description of the prepayment experience of any pool of mortgage
loans or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans, and there is no assurance that the
Mortgage Loans will prepay at any given percentage of the [Basic Prepayment
Assumption].
The table set forth below has been prepared on the basis of the
characteristics of the Mortgage Loans that are expected to be included in the
Mortgage Pool and the respective expected initial Class Principal Balances of
the Certificates as set forth herein. The figures shown for 0% of the [Basic
Prepayment Assumption] were calculated assuming, among other things, that the
Mortgage Loans have Mortgage Interest Rates of %, Pass-Through Rates of %
and remaining terms to maturity of months. In connection with calculating
the figures shown for the other percentages of the [Basic Prepayment
Assumption], it was assumed that the Mortgage Loans have Mortgage Interest Rates
and original and remaining terms to maturity which fall within the parameters
set forth beginning on page under "Description of the Mortgage Pool" herein.
The table further assumes, among other things, that the Mortgage Loans have an
aggregate principal balance of $ , the Mortgage Loans have Pass-Through
Rates which fall within the parameters set forth beginning on page under
"Description of the Mortgage Pool" herein, each monthly payment is received on
its Due Date commencing , 199[ ], the first monthly payment on
the Certificates is received on , 199[ ], no optional termination
of the Trust occurs, no default in the payment of any Mortgage Loan occurs,
prepayments on the Mortgage Loans are received on the last day of each month
commencing , 19 at the various percentages of the [Basic Prepayment
Assumption]specified in the table, all prepayments will be prepayments in full
and 30 days of interest is received in connection with such prepayments.
(Certificateholders generally will receive less than 30 days of interest on
prepayments. See "Description of the Certificates -- Distributions of Interest"
herein.) Any discrepancy between the characteristics of the Mortgage Loans
actually included in the Mortgage Pool and the characteristics of the Mortgage
Loans expected to be so included may affect the percentages of the outstanding
Class Principal Balances set forth in the table and the weighted average lives
of the Certificates. In addition, to the extent that the Mortgage Loans that are
actually included in the Mortgage Pool have characteristics that differ from
those assumed in preparing the following table, the outstanding Class Principal
Balance of any Class of Certificates may be reduced to zero earlier or later
than indicated by the table.
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 following table. Such variations may occur
even if the average prepayment experience of all the Mortgage Loans equals the
indicated percentage of the [Basic Prepayment Assumption]. There is no
assurance, however, that prepayment of the Mortgage Loans will conform to any
given percentage of the [Basic Prepayment Assumption].
Based on the foregoing assumptions, the following table indicates the
projected weighted average life of each Class of Certificates (other than the
Class Certificates) and sets forth the percentages of the initial outstanding
Class Principal Balance of each such Class of Certificates that would be
outstanding after each of the dates shown at various constant percentages of the
[Basic Prepayment Assumption].
[Prepayment Table]
[YIELD CONSIDERATIONS WITH RESPECT TO THE ADJUSTABLE STRIP CERTIFICATES
The following table illustrates the significant effect that Principal
Prepayments on the Mortgage Loans have upon the pre-tax yield to maturity of the
Adjustable Strip Certificates. The actual prices to be paid on the Adjustable
Strip Certificates have not been determined and will be dependent on the
characteristics of
S-21
<PAGE>
the Mortgage Pool as ultimately constituted. The table shows hypothetical
pre-tax yields to maturity for the Adjustable Strip Certificates, stated on a
corporate bond equivalent basis, under five different prepayment assumptions
based on the [Basic Prepayment Assumption] described above. The table has been
prepared based on the same assumptions underlying the table on page relating
to percentages of the [Basic Prepayment Assumption] other than 0% of the [Basic
Prepayment Assumption], and the additional assumption that the Adjustable Strip
Certificates are purchased on the Closing Date at the purchase prices stated in
the table, including accrued interest from the Cut-Off Date.
<TABLE>
<CAPTION>
PRE-TAX
CERTIFICATES YIELD TO MATURITY
CLASS PRICE [BASIC PREPAYMENT ASSUMPTION]
------------- ----------------------------------
<S> <C> <C>
------------- -----------
</TABLE>
The yields set forth in the preceding table were calculated by initially
determining, for each prepayment assumption shown in the table, the monthly
discount rate which, when applied to the assumed stream of cash flows to be paid
to the Adjustable Strip Certificateholders, would cause the discounted present
value of such assumed stream to equal the assumed purchase price including
accrued interest for the Adjustable Strip Certificates. These monthly discount
rates were then converted to corporate bond equivalent yields, which are higher
than the monthly discount rates because they are based on semiannual
compounding.
On the basis of a constant prepayment rate of approximately % of the
[Basic Prepayment Assumption], a purchase price of $ including accrued
interest, and the assumptions described above, the pre-tax yield to maturity of
the Adjustable Strip Certificates would be approximately 0%. If the actual
prepayment rate were to exceed the rate assumed above, an investor in the
Adjustable Strip Certificates would not fully recoup the initial purchase price
of such Certificates.
It is unlikely that the characteristics of the Mortgage Loans will
correspond exactly to those assumed in preparing the tables above. The yields to
maturity of the Adjustable Strip Certificates therefore will differ even if all
the Mortgage Loans prepay monthly at the related assumed prepayment rate. In
addition, it is not likely that the Mortgage Loans will prepay at a constant
percentage of the [Basic Prepayment Assumption] until maturity or that all of
the Mortgage Loans will prepay at the same percentage of the [Basic Prepayment
Assumption], and the timing of changes in the rate of prepayments may affect
significantly the yield to maturity received by a holder of the Adjustable Strip
Certificates. There are no historical prepayment data available for the Mortgage
Pool, and comparable data are not available because the Mortgage Loans do not
constitute a representative sample of mortgage loans generally. In addition,
historical data available with respect to mortgage loans underlying mortgage
pass-through certificates issued by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home
Loan Mortgage Corporation ("FHLMC") may not be comparable to prepayments
expected to be experienced by the Mortgage Pool, because the Mortgage Loans may
have characteristics which differ from mortgage loans underlying certificates
issued by GNMA, FNMA and FHLMC.
The Company makes no representation that the Mortgage Loans will prepay in
the manner or at any of the rates assumed above. Each investor must make its own
decision as to the appropriate prepayment assumptions to be used in deciding
whether or not to purchase any of the Certificates. Since the rate of principal
payments (including prepayments) with respect to, and repurchases of, the
Mortgage Loans will significantly affect the yield to maturity on the
Certificates, prospective investors are urged to consult their investment
advisors as to both the anticipated rate of future principal payments (including
prepayments) on the Mortgage Loans and the suitability of the Certificates to
their investment objectives.]
S-22
<PAGE>
[INVERSE FLOATER CERTIFICATE YIELD CONSIDERATIONS
The yield to investors in the Inverse Floater Certificates will be extremely
sensitive to the level of [COFI]. The remittance rate on the Inverse Floater
Certificates will vary inversely with, and at a multiple of, [COFI].
Changes in [COFI] may not correlate with changes in prevailing mortgage
interest rates. It is possible that lower prevailing mortgage interest rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increased rate of [COFI].
To illustrate the significance of changes in [COFI] and prepayments on the
distributions on the Inverse Floater Certificates, the following table indicates
the approximate pre-tax yields to maturity (on a corporate bond equivalent
basis) under the different percentages of [BPA] and varying levels of [COFI]
indicated. Because the rate of distribution of principal on the Certificates
will be directly related to the actual amortization (including prepayments) of
the Mortgage Loans, which will include Mortgage Loans that have remaining terms
to maturity shorter or longer than those assumed and Mortgage Interest Rates
higher or lower than those assumed, the pre-tax yields to maturity on the
Inverse Floater Certificates are likely to differ from those shown in the
following table, even if all the Mortgage Loans prepay at the indicated
percentages of [BPA] and the weighted average remaining term to maturities of
the Mortgage Loans is as assumed. Any differences between such assumptions and
the actual characteristics and performance of the Mortgage Loans and of the
Certificates may result in yields being different from those shown in such
table. Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of the table, which is provided only to give
a general sense of the sensitivity of yields in varying prepayment scenarios and
different levels of [COFI]. In addition, it is highly unlikely that the Mortgage
Loans will prepay at a constant level of [BPA] until maturity, that all of such
Mortgage Loans will prepay at the same rate, or that the level of [COFI] will
remain constant. The timing of changes in the rate of prepayments may
significantly affect the actual yield to maturity to an investor, even if the
average rate of principal prepayments is consistent with an investor's
expectation. In general, the earlier the payment of principal of the Mortgage
Loans, the greater the effect on an investor's yield to maturity. As a result,
the effect on an investor's yield of Principal Prepayments occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificates will not be equally
offset by a subsequent like reduction (or increase) in the rate of Principal
Prepayments.
The table set forth below is based on the assumptions described in clauses
in the paragraph on page S- (including the assumptions regarding the
characteristics and performance of the Mortgage Loans and the Certificates which
differ from the actual characteristics and may differ from the actual
performance thereof), and assuming further that (i) on and on each Rate
Adjustment Date thereafter, [COFI] will be at the rate shown, (ii) the aggregate
purchase price of the Inverse Floater Certificates is $ (which includes
accrued interest from the Cut-Off Date through but not including ) and
(iii) the initial Inverse Floater Remittance Rate is % per annum. There can
be no assurance that the Mortgage Loans will have the assumed characteristics,
will prepay at any of the rates shown in the table or at any other particular
rate, that the pre-tax yield to maturity on the Inverse Floater Certificates
will correspond to any of the pre-tax yields shown herein, that the rate of
[COFI] will correspond to the levels shown herein or that the aggregate purchase
price of the Inverse Floater Certificates will be as assumed. In addition to any
other factors an investor may deem material, each investor must make its own
decision as to the appropriate prepayment assumption to be used and the
appropriate rates of [COFI] to be assumed in deciding whether or not to purchase
an Inverse Floater Certificate.
S-23
<PAGE>
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE INVERSE FLOATER
CERTIFICATES TO PREPAYMENTS AND [COFI]
<TABLE>
<CAPTION>
PERCENTAGE OF [BPA]
-----------------------------------------------------
[COFI] % % % % %
- --------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
%
%
%
%
%
</TABLE>
This table has been prepared based on the assumptions described on page S-
(including the assumptions regarding the characteristics and the performance of
the Mortgage Loans and the Certificates which differ from the actual
characteristics and performance thereof) and should be read in conjunction
therewith.
The pre-tax yields to maturity set forth in the preceding table were
calculated by determining the monthly discount rates which, when applied to the
assumed streams of cash flows to be paid on the Inverse Floater Certificates,
would cause the discounted present values of such assumed streams of cash flows
to equal the assumed purchase price listed in the table. Accrued interest is
included in the purchase price shown and is used in computing the corporate bond
equivalent yields shown. These yields do not take into account the different
rates at which investors may be able to reinvest funds received by them as
distributions on the Inverse Floater Certificates, and thus do not reflect the
return on any investment in the Inverse Floater Certificates when any
reinvestment rates other than the discount rates are considered.]
[RESIDUAL CERTIFICATE YIELD CONSIDERATIONS
Any distributions payable on the Residual Certificates may be subject to
United States federal income tax withholding in an amount equal to the total
distributions paid thereon which would result in a zero after-tax rate of
return. The Residual Certificates bear a greater risk of loss than the other
Classes of Senior Certificates because of their later priority for distributions
of principal and because the interest thereon is added to the Certificate
Principal Balances thereof until such principal distributions commence.
The Residual Certificateholders should consult their own tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" in the Prospectus.]
[ADDITIONAL INFORMATION]
The Company intends to file with the Securities and Exchange Commission
certain additional yield tables and other computational materials with respect
to one or more classes of the [Offered] Certificates on a Current Report on Form
8-K to be dated [ ]. Such tables and materials were prepared by
the Underwriter at the request of certain prospective investors, based on
assumptions provided by, and satisfying the special requirements of, such
prospective investors. Such tables and materials are preliminary in nature, and
the information contained therein is subject to, and superseded by, the
information in this Supplement.
CREDIT ENHANCEMENTS
[THE MORTGAGE POOL INSURANCE POLICY
The Mortgage Pool Insurance Policy for the Certificates will be issued by
the Insurer, . Claims under the Mortgage Pool Insurance Policy will be
limited to an aggregate initial amount [(to be specified in
S-24
<PAGE>
the Current Report on Form 8-K referred to above under "Description of the
Mortgage Pool -- Additional Information")] [equal to not less than % of the
aggregate principal balance of the Mortgage Loans that are not covered as to
their entire outstanding principal balances by Primary Insurance Policies as of
the Cut-Off Date.] [The Mortgage Pool Insurance Policy will include an Advance
Claims Endorsement.] [The Mortgage Pool Insurance Policy will [also] include an
endorsement which provides that the insurer will pay claims presented thereunder
although claims against the applicable Primary Insurance Policy have not been
settled due to insolvency, bankruptcy, receivership or assignment for the
benefit of creditors of the issuer of the Primary Insurance Policy.] The
coverage provided by the Mortgage Pool Insurance Policy may be cancelled or
reduced, provided that the then current rating of the Certificates assigned by
will not be adversely affected thereby.
The Insurer is a[n] corporation engaged principally in the business of
insuring mortgage loans on residential properties against default in payment by
the mortgagor. At December 31, 199 , the Insurer had at risk $ billion
covering approximately $ billion of residential mortgages. At such date,
the Insurer had total assets of approximately $ million, capital and
surplus aggregating $ million and statutory contingency reserves of
$ million, resulting in total policyholders' reserves of approximately
$ million. The information set forth in this paragraph has been provided by
the Insurer. The Company makes no representation as to the accuracy or
completeness of such information.]
[THE SPECIAL HAZARD [RESERVE FUND] [LETTER OF CREDIT] [INSURANCE POLICY]
[The Special Hazard Reserve Fund for the Mortgage Pool will be established
with a financial institution[, the debt obligations of which are rated at least
" " by ] [acceptable to the Rating Agencies] to cover a specified
amount of certain losses arising from special hazards. The initial coverage
amount of the Special Hazard Reserve Fund is expected to be approximately
, which is equal to the greatest of (a) the aggregate principal
balance of the Mortgage Loans located in the single California zip code zone
that has the largest aggregate principal balance of Mortgage Loans, (b) % of
the aggregate unpaid principal balance of the Mortgage Loans or (c) twice the
unpaid principal balance of the largest single Mortgage Loan, in each case
calculated as of the Cut-Off Date. On each anniversary of the Cut-Off Date, the
amount of such Special Hazard Reserve Fund will be reduced to an amount equal to
the greatest of (a), (b) and (c), calculated as of the preceding 1.
However, if the balance of the Special Hazard Reserve Fund as of 1 has
been reduced by payment of special hazard losses to an amount less than the
greatest of (a), (b) and (c), the Company will not be obligated to deposit
additional amounts in the Special Hazard Reserve Fund on such anniversary of the
Cut-Off Date. The coverage provided by the Special Hazard Reserve Fund may be
cancelled or further reduced, provided that the then current rating of the
Certificates obtained by will not be adversely affected thereby.]
[The Special Hazard Letter of Credit will be issued by , in an
amount equal to the greatest of (a) the aggregate principal balance of the
Mortgage Loans located in the single California zip code zone that has the
largest aggregate principal balance of Mortgage Loans, (b) % of the aggregate
unpaid principal balance of the Mortgage Loans or (c) twice the unpaid principal
balance of the largest single Mortgage Loan, in each case calculated as of the
Cut-Off Date. On each anniversary of the Cut-Off Date, the amount available
under the Special Hazard Letter of Credit will be reduced to an amount equal to
the greatest of (a), (b) and (c), calculated as of the preceding 1.
Moreover, the amount available as of each anniversary of the Cut-Off Date will
in no event be greater than the coverage amount on the immediately preceding
anniversary, reduced by all payments made in respect of special hazard losses
during such year. The coverage provided by the Special Hazard Letter of Credit
may be cancelled or reduced, provided that the then current rating of the
Certificates obtained from will not be adversely affected thereby. At
December 31, 199 , had total assets of approximately $ and total
policyholders' surplus of $ . The information set forth in the preceding
sentence has been provided by , and the Company makes no representation
as to the accuracy or completeness of such information.]
S-25
<PAGE>
[The Special Hazard Insurance Policy for the Mortgage Pool will be issued by
the Special Hazard Insurer, , a[n] corporation. Claims under
such policy initially will be limited to an amount equal to the greatest of (a)
the aggregate principal balance of the Mortgage Loans located in the single
California zip code zone that has the largest aggregate principal balance of
Mortgage Loans, (b) % of the aggregate unpaid principal balance of the
Mortgage Loans or (c) twice the unpaid principal balance of the largest single
Mortgage Loan, in each case calculated as of the Cut-Off Date. On each
anniversary of the Cut-Off Date, the amount of coverage will be reduced to an
amount equal to the greatest of (a), (b) and (c), calculated as of the preceding
1. Moreover, the coverage amount of the Special Hazard Insurance Policy
as of each anniversary of the Cut-Off Date will in no event be greater than the
balance on the immediately preceding anniversary, reduced by all payments made
in respect of claims thereunder during such year. The coverage provided by the
Special Hazard Insurance Policy may be cancelled or reduced, provided that the
then current rating of the Certificates obtained from will not be
adversely affected thereby. At December 31, 199 , had total assets of
approximately $ and total policyholders' surplus of $ . The
information set forth in the preceding sentence has been provided by
, and the Company makes no representation as to the accuracy or
completeness of such information.]]
[THE MORTGAGE REPURCHASE [RESERVE FUND] [LETTER OF CREDIT] [BOND]
Some or all of the Primary Insurance Policies may contain an exclusion from
coverage for circumstances involving fraudulent conduct or negligence by the
Seller, the [Servicer][Seller/Servicer] or the Mortgagor. The [Master] Servicer
will agree to repurchase any such Mortgage Loan for which Primary Insurance
Policy coverage is ultimately not available solely by reason of such exclusion.
A Mortgage Repurchase [Reserve Fund] [Letter of Credit] [Bond] will be
[obtained] [established] for the Mortgage Pool to support the [Master]
Servicer's repurchase obligation.
The Mortgage Repurchase [Reserve Fund] [Letter of Credit] [Bond] will be in
an aggregate amount of $ , which is equal to % of the aggregate
outstanding principal balance of the Mortgage Loans as of the Cut-Off Date. This
coverage amount will be maintained during the first year of the Mortgage Pool
and will thereafter be reduced on [the first anniversary of the Cut-Off Date to
% of the aggregate outstanding principal balance of the Mortgage Loans on
such date, and thereafter on] each anniversary of the Cut-Off Date to an amount
equal to % of the then aggregate outstanding principal balance of the
Mortgage Loans. In addition, the coverage provided by the Mortgage Repurchase
[Reserve Fund] [Letter of Credit] [Bond] may be cancelled or reduced, provided
that the then current rating of the Certificates obtained from will not be
adversely affected thereby. Coverage provided by the Mortgage Repurchase
[Reserve Fund] [Letter of Credit] [Bond] will terminate five years after the
Cut-Off Date.
[The Mortgage Repurchase Reserve Fund for the Mortgage Pool will be
established and maintained with a financial institution, the debt obligations of
which are rated at least " " by . Amounts placed in such Reserve Fund
may be invested for the benefit of the [Master] Servicer in instruments rated
not less than " " by . Such Reserve Fund will initially be established
at , , , with a cash deposit by the [Master] Servicer.]
[The Mortgage Repurchase Letter of Credit will be issued by . As of
December 31, 199 , had total assets of approximately $ and total
liabilities of approximately $ .] [The information set forth in this
paragraph concerning has been provided by . The Company makes no
representation as to the accuracy or completeness of such information.
[The Mortgage Repurchase Bond will be issued by ,
a[n] corporation. At December 31, 199 , had total assets of
approximately $ and total policyholders' surplus of $ .]]
S-26
<PAGE>
[THE BANKRUPTCY [RESERVE FUND] [LETTER OF CREDIT] [BOND]
Under the terms of the Pooling Agreement, the [Master] Servicer will agree
to pay to the Trustee for the benefit of Certificateholders any portion of the
principal balance of a Mortgage Loan that becomes unsecured pursuant to a ruling
under the federal Bankruptcy Code. The [Master] Servicer 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 Pooling Agreement. The [Master] Servicer 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 obligation to make the payments
described above, [a Bankruptcy [Letter of Credit] [Bond] will be issued by
.] [The [Master] Servicer will establish and maintain a Bankruptcy Reserve
Fund with a financial institution, the debt obligations of which are rated at
least " " by . Amounts placed in such Reserve Fund may be invested for
the benefit of the [Master] Servicer in instruments rated not less than " " by
.]
The [Master] Servicer's payment obligations and the related coverage under
the Bankruptcy [Reserve Fund] [Letter of Credit] [Bond] shall in no event exceed
the Bankruptcy coverage. The Bankruptcy Coverage shall be reduced by the amount
of any payment by the [Master] Servicer in accordance with the preceding
paragraph. The [Master] Servicer's payment obligations and the coverage amount
of the Bankruptcy [Reserve Fund] [Letter of Credit] [Bond] may be cancelled or
reduced, provided that the then current rating of the Certificates obtained from
will not be adversely affected thereby. [See "-- The Mortgage
Repurchase [Reserve Fund] [Letter of Credit] [Bond]" above for certain financial
information regarding .] [At December 31, 199 , had total assets
of approximately $ , and total liabilities of $ . The information set
forth in the preceding sentence has been provided by , and the Company
makes no representation as to the accuracy or completeness of such
information.]]
CERTAIN LEGAL INVESTMENT ASPECTS
At the time of their issuance, the Certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act ("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 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 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 Certificates
without limitation as to the percentage of their assets represented thereby,
federal credit unions may invest in Certificates and national banks may purchase
Certificates for their own accounts without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. Section 24 (Seventh),
subject in each case to such regulations as the applicable federal regulatory
authority may prescribe.
Institutions whose investment activities are subject to review by certain
regulatory authorities hereafter may become subject to restrictions on
investment in the Certificates, and such restrictions may be
S-27
<PAGE>
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 and the Office of
Thrift Supervision have adopted guidelines regarding the suitability of
investments in various types of derivative mortgage-backed securities, including
securities such as the Certificates. In addition, several states have adopted
regulations that would prohibit regulated institutions subject to their
jurisdiction from holding mortgage-backed securities, such as the Certificates,
including securities previously purchased. Investors should consult their own
legal advisors in determining whether and to what extent the Certificates
constitute legal investments for such investors.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of such
investors' assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.]
ERISA CONSIDERATIONS
Any Plan fiduciary that proposes to cause a Plan to purchase Certificates
should consult with its counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of Certificates. See
"ERISA Considerations" in the Prospectus.
[discussion of PTCE 83-1, Underwriter's PTCE, and/or other prohibited
transaction class exemptions or prohibited transaction exemptions relevant or
potentially relevant to the Certificates]
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
[The Certificates may be issued with original issue discount for federal
income tax purposes. The prepayment assumption that will be used in determining
the rate of accrual of original issue discount for federal income tax purposes
is % of the Basic Prepayment Assumption. See "Yield and Prepayment
Considerations" herein.]
For federal income tax purposes, the Company will cause an election to be
made to treat the Trust as a REMIC. The Certificates will be designated as REMIC
regular interests. As REMIC regular interests, the Certificates will generally
be treated as debt for federal income tax purposes. Certificate-holders will be
required to include in income all interest on the Certificates in accordance
with the accrual method of accounting regardless of the Certificateholders'
usual methods of accounting.
[The Certificates will generally be treated as "qualifying real property
loans" for mutual savings banks and domestic building and loan associations,
"loans secured by an interest in real property" for domestic building and loan
associations, and "real estate assets" for real estate investment trusts
("REITs") in the same proportion that the assets in the REMIC would be so
treated. In addition, interest on the Certificates will generally be treated as
"interest on obligations secured by mortgages on real property" for REITs to the
extent that such Certificates are treated as "real estate assets". See "Certain
Federal Income Tax Consequences" in the Prospectus.]
[additional discussion of applicable income tax matters]
METHOD OF DISTRIBUTION
[Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase, all of the Certificates. The aggregate
proceeds (excluding accrued interest) to the Company from the sale of the
Certificates, before deducting expenses estimated to be $ , will be
approximately % of the initial aggregate Certificate Principal Balance of the
Certificates. Under the terms and conditions of the Underwriting Agreement, the
Underwriter is committed to take and pay for all of such Certificates if any are
taken. Distribution of such Certificates will be made by the Underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.]
S-28
<PAGE>
The Certificates are being offered by [the Company in a direct placement]
[ , acting as] [placement agent on an agency basis][Underwriter(s) on a
firm commitment underwriting basis] [the Underwriters named below, for whom
is acting as Representative.]. [The [placement agent] [Underwriter] will
receive compensation in the form of a[n] [selling commission] [underwriting
discount] equal to % of the adjusted aggregate principal balance of the
Mortgage Loans as of the Cut-Off Date.] [The Underwriter has agreed, subject to
the terms and conditions of its Underwriting Agreement with the Company, to
purchase from the Company all of the Certificates constituting at a price equal
to % of the adjusted aggregate outstanding principal balances of the Mortgage
Loans evidenced thereby. The Underwriter is obligated to purchase all of such
Certificates if any are purchased.] [The Certificates will be acquired by the
Underwriter[s] for [its] [their] own account and may be resold at the same time
or 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.]
[After the initial offering to the public, the offering price and selling
terms may be changed from time to time by the Underwriter[s].]
[The difference between the purchase price for the Certificates paid to the
Company and the proceeds from the sale of these Certificates realized by the
Underwriter[s] will constitute underwriting discounts and commissions.]
[The Underwriting Agreement contains provisions whereby, if any Underwriter
defaults in its obligation to purchase Certificates, the commitments of
nondefaulting Underwriters may be increased].
<TABLE>
<CAPTION>
ADJUSTED PRINCIPAL BALANCE
----------------------------------------------------------------------
NAME
- --------------------------------------------
<S> <C> <C>
$
------
Total $
------
</TABLE>
[The Representative has advised the Company that sales of Certificates to
certain dealers may be made at a concession of % of the adjusted aggregate
principal balance evidenced thereby and that the Underwriters may allow, and
such dealers may reallow, discounts not in excess of % of the adjusted
aggregate principal balance evidenced thereby on sales to certain other
dealers.]
[The Company has agreed to indemnify the Underwriter[s] against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.]
[PNC Capital Markets, Inc., an Underwriter, is an affiliate of the
Depositor.]
[This Prospectus Supplement and the related Prospectus may be used by PNC
Capital Markets, Inc., an affiliate of the Depositor, in connection with offers
and sales related to secondary market transactions in the Certificates. PNC
Capital Markets, Inc. may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.]
[See "The Company -- Relationships with Affiliates" in the Prospectus for a
description of the affiliation between the Underwriter and the Company.][Pending
final sale of the Certificates, the Company may cause the Certificates to be
issued to itself and may enter into repurchase agreements or secured lending
arrangements for purposes of financing the holding of Certificates by the
Company.]
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.
[ , , will pass upon certain legal matters on behalf of
the Underwriter(s).]
S-29
<PAGE>
[CERTIFICATE RATING
It is a condition to the issuance of the Certificates that they be rated
["---"] by . A security rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or withdrawal at any time by
the assigning rating organization. Each security rating should be evaluated
independently of any other security rating.]
The ratings on the Certificates address the likelihood of the receipt by
Certificateholders of all distributions on the underlying Mortgage Loans, in
light of the structural and legal aspects associated with the Certificates and
the nature of the underlying Mortgage Loans. The ratings do not represent any
assessment of the likelihood that Principal Prepayments by Mortgagors might
differ from those originally anticipated. As a result of such differences in
Principal Prepayments, Certificateholders might suffer a lower than anticipated
yield. [The ratings also do not address the likelihood that the [Master]Servicer
will be able to repurchase any Mortgage Loan which has been converted from an
adjustable-rate loan to a fixed-rate loan.] See "Yield and Prepayment
Considerations" herein.]
S-30
<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. PNC CAPITAL MARKETS, INC., AN
AFFILIATE OF THE COMPANY, MAY FROM TIME TO TIME ACT AS AGENT OR UNDERWRITER IN
CONNECTION WITH THE SALE OF THE CERTIFICATES. THIS PROSPECTUS AND THE RELATED
PROSPECTUS SUPPLEMENT MAY BE USED BY PNC CAPITAL MARKETS, INC. IN CONNECTION
WITH OFFERS AND SALES RELATED TO SECONDARY MARKET TRANSACTIONS IN ANY SERIES OF
CERTIFICATES. PNC CAPITAL MARKETS, INC. MAY ACT AS PRINCIPAL OR AGENT IN SUCH
TRANSACTIONS. SUCH SALES WILL BE MADE AT PRICES RELATED TO PREVAILING MARKET
PRICES AT THE TIME OF SALE OR OTHERWISE.
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.
APRIL 14, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- -------------------------------------------------------------------------- ----
<S> <C>
Summary of Prospectus..................................................... 3
Risk Factors.............................................................. 10
The Mortgage Pools........................................................ 11
Use of Proceeds........................................................... 16
Yield Considerations...................................................... 16
Maturity, Average Life and Prepayment Assumptions......................... 18
The Company............................................................... 19
Description of Certificates............................................... 22
Primary Insurance, FHA Mortgage Insurance, VA Mortgage Guaranty, Hazard
Insurance; Claims Thereunder............................................. 44
Description of Credit Enhancements........................................ 48
Certain Legal Aspects of the Mortgage Loans............................... 57
ERISA Considerations...................................................... 64
Certain Federal Income Tax Consequences................................... 69
Methods of Distribution................................................... 87
Transferability of Certificates........................................... 87
Legal Matters............................................................. 87
Financial Information..................................................... 88
Additional Information.................................................... 88
Glossary.................................................................. 89
</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 leaseholds in the
underlying real property or 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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
guaranteed by any governmental agency. Additional
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 with respect to each Series, the
Company, another entity set forth in the related
Prospectus Supplement (who will generally be a
Seller) (a "Servicing Entity") or the Company
together with such Servicing Entity will be
responsible for the servicing and administration
of the Mortgage Loans (in such capacity, each of
the Company and/or such Servicing Entity, a
"Master Servicer") and the Sellers will perform
certain servicing functions with respect to the
Mortgage Loans (in such capacity,
"Seller/Servicers"). In the event that both the
Company and a Servicing Entity are acting as
Master Servicers with respect to a single Series,
(i) each of the Company and such Servicing Entity
will act as Master Servicer only for a specific
group or groups of Mortgage Loans in the related
Mortgage Pool (a "Mortgage Loan Servicing Group")
as set forth in the related Prospectus
Supplement,(ii) the duties, liabilities and
obligations of each of the Company and such
Servicing Entity shall relate only to its
respective Mortgage Loan Servicing Group, and
(iii) the Company, unless otherwise specified in
the related Prospectus Supplement, will calculate
amounts distributable to the Certificateholders,
prepare tax returns on behalf of the Trust Fund
and provide certain other services specified in
the Pooling Agreement (in such capacity, the
"Certificate Administrator"). Unless otherwise
specified in the related Prospectus Supplement, in
the event that a Servicing Entity is the only
Master Servicer with respect to any Series, such
Serving Entity will be the Certificate
Administrator with respect to such Series. 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 act
as the Certificate Administrator.
Interest.................... Except as otherwise specified in the applicable
Prospectus Supplement, interest payments will be
passed through on the
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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 and/or a Servicing Entity will act as
Master Servicer and except as otherwise specified
in the applicable Prospectus Supplement, the
Company or such Servicing Entity, as applicable,
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 (and, in the event
that both the Company and a Servicing Entity are
Master Servicers, only to the extent that such
delinquencies arise from its respective Mortgage
Loan Servicing Group), to the extent the Company
or such Servicing Entity, as applicable,
determines such advances are recoverable from
future payments or collections on the Mortgage
Loans or, if applicable, in its respective
Mortgage Loan Servicing Group, amounts available
as a result of any subordination feature or from
applicable credit enhancements. Similarly, with
respect to Series of Certificates as to which
there will be no 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;
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
(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
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, the Servicing Entity or the Servicer,
as applicable, may obtain for certain Mortgage
Pools (or, if applicable, the related Mortgage
Loan Servicing Group in such Mortgage Pool) a
mortgage pool insurance policy (a "Mortgage Pool
Insurance Policy"), limited in scope, covering
defaults on the Mortgage Loans in such Mortgage
Pool or, if applicable, the related Mortgage Loan
Servicing Group 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, the Servicing Entity or the Servicer,
as applicable, may also obtain for certain
Mortgage Pools (or, if applicable, the related
Mortgage Loan Servicing Group in such Mortgage
Pool) a fraud bond (a "Fraud Bond"), limited in
scope, insuring Certificateholders against losses
on any Mortgage Loan (or, if applicable, any
Mortgage Loan in the
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related Mortgage Loan Servicing Group) 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, the Servicing Entity or
the Servicer, as applicable, may obtain for
certain Mortgage Pools (or, if applicable, the
related Mortgage Loan Servicing Group in such
Mortgage Pool) 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 (or,
if applicable, a Mortgage Loan in the related
Mortgage Loan Servicing Group).
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, the Servicing Entity 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".
In addition to the credit enhancements described
above, the Company, the Servicing Entity 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.
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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").
See "Certain Federal Income Tax Consequences".
Optional Termination........ For each Series of Certificates, any of the
Company, the Master Servicers, the Servicing
Entity or the Servicer, as set forth in the
applicable Prospectus Supplement, will have the
option to repurchase the related Mortgage Loans
(or, if applicable, the related Mortgage Loan
Servicing Group) 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.
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Optional Redemption......... If so specified in the Prospectus Supplement for a
Series, the related Trust Fund will enter into a
redemption agreement pursuant to which the
counterparty to the agreement will have the right
to cause a redemption of the outstanding
Certificates of such Series, beginning on the
Distribution Date and subject to payment of the
redemption price and other conditions specified in
the Prospectus Supplement. See "Risk Factors",
"Yield Considerations", "Maturity, Average Life
and Prepayment Assumptions", and "Description of
the Certificates-Redemption Agreement" herein.
Put Option.................. If so specified in the Prospectus Supplement for a
Series, each Certificateholder of such Series, of
a Class of such Series or of a group for such
Series will have the option to require the entity
named in such Prospectus Supplement to purchase
such Certificates in full on the date, at the
purchase price and on the terms specified in such
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".
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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., a Servicing Entity, a Servicer or any
of their respective affiliates. The obligations of the Company, a Servicing
Entity or a Servicer, as applicable, 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 and/or a
Servicing Entity will act as Master Servicer, will consist primarily of the
obligation under certain circumstances of the Company or Servicing Entity, as
applicable, 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 Company or Servicing Entity, as 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 related 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
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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 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 and, if applicable, to the occurrence of a redemption
or other call feature of the Certificates or the 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".
REDEMPTION OF CERTIFICATES OR UNDERLYING MORTGAGE LOANS. If the
Certificates of a Series or the underlying Mortgage Loans are subject to
redemption or other call feature, the average life and yield of each Class of
such Series will also be affected by the occurrence of such a redemption as
described under "Yield Considerations", "Maturity, Average Life and Prepayment
Assumptions" and "The Mortgage Pools--General" herein.
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) leasehold in the
underlying Mortgaged Property and such
- --------------
* 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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other types of homes or dwellings as are set forth in the related Prospectus
Supplement. In the case of leasehold interests, the term of the leasehold will
exceed the scheduled maturity of the Mortgage Loan by at least five years,
unless otherwise specified 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.
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, with respect to each Series, the Company,
another entity set forth in the related Prospectus Supplement (who will
generally be a Seller) (a "Servicing Entity) or the Company together with such
Servicing Entity will be responsible for the servicing and administration of the
Mortgage Loans (in such capacity, each of the Company and/or such Servicing
Entity, a "Master Servicer") 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. In the event that both the
Company and a Servicing Entity are acting as Master Servicers with respect to a
single Series, (i) each of the Company and such Servicing Entity will act as
Master Servicer only for a specific group or groups of Mortgage Loans in the
related Mortgage Pool (a "Mortgage Loan Servicing Group") as set forth in the
related Prospectus Supplement,(ii) the duties, obligations and liabilities of
each the Company and such Servicing Entity shall relate only to its respective
Mortgage Loan Servicing Group, and (iii) the Company, unless otherwise specified
in the related Prospectus Supplement, will calculate amounts distributable to
the Certificateholders, prepare tax returns on behalf of the Trust Fund and
provide certain other services specified in the Pooling Agreement (in such
capacity, the "Certificate Administrator"). Unless otherwise specified in the
related Prospectus Supplement, in the event that a Servicing Entity is the only
Master Servicer with respect to any Series, such Servicing Entity will be the
Certificate Administrator with respect to such Series. 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 act as 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 or a
Servicing Entity, as applicable, as Master Servicer, 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
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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
(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
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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.
The Company and/or a Servicing Entity, as applicable, as Master Servicer,
has entered or will enter into a contract with each related Seller/Servicer to
perform, as an independent contractor, certain servicing functions for such
Master Servicer subject to its supervision and may enter into a contract with an
independent entity to perform administration functions for the Mortgage Pools
(or, if applicable, the Mortgage Loan Servicing Group), subject to such Master
Servicer's supervision. Unless otherwise specified in the applicable Prospectus
Supplement, such Master Servicer will reserve the right to remove any related
Seller/Servicer of any Mortgage Loan at any time if such Master Servicer
considers such removal to be in the best interests of Certificateholders. In
such event, such Master Servicer would continue to be responsible for servicing
such Mortgage Loan and may designate a replacement Seller/Servicer (which may
include the Company or the related Servicing Entity, as applicable, or an
affiliate of the Company or Servicing Entity, as applicable). Each 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. Each Master Servicer will
receive a fee (the "Master Servicing Fee") for its services. In the event that
both the Company and a Servicing Entity are acting as Master Servicers for a
Series, unless otherwise specified in the related Prospectus Supplement, the
Master Servicing Fee for each of the Company and such Servicing Entity will only
relate to its respective Mortgage Loan Servicing Group. The Seller/Servicers
will perform certain servicing functions for the Company pursuant to servicing
contracts (the "Servicing Contracts") with a Master Servicer and will receive a
fee for acting as the primary servicer of the related Mortgage Loans (the
"Servicing Fee"). The fees to a Master Servicer and the Seller/Servicers will be
paid from the difference between the Mortgage Interest Rates on each Mortgage
Loan (or Mortgage Loan Servicing Group, if applicable) and the Remittance Rate
with respect to such Mortgage Loan.
If so specified in the applicable Prospectus Supplement, there will be no
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, with
respect to each such Series and each Series in which both the Company and a
Servicing Entity are acting as Master Servicers, 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
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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. With respect to Series of
Certificates as to which the Company and/or a Servicing Entity 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 (or the related Mortgage Loan Servicing Group for such Series
if both the Company and a Servicing Entity are acting as Master Servicers), 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 and, if the Company and a Servicing Entity are acting as Master
Servicers for such Series, to the extent that such Advances relate to a Mortgage
Loan in their respective Mortgage Loan Servicing Group. Any such Advances by a
Master Servicer will be limited to amounts which, in the judgment of such Master
Servicer, ultimately will be reimbursable with respect to such Mortgage Pool (or
the related Mortgage Loan Servicing Group for such Series if both the Company
and a Servicing Entity are acting as Master Servicers) 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 (or the related Master Servicer if
both the Company and a Servicing Entity are acting as Master Servicers),
ultimately will be reimbursable from the sources stated above. If so specified
in the applicable Prospectus Supplement, neither a Master Servicer nor any
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". A Master Servicer is obligated to remit to
Certificateholders of a Series all amounts relating to the Mortgage Loans (or
the related Mortgage Loan Servicing Group for such Series if both the Company
and a Servicing Entity are acting as Master Servicers) to the extent such
amounts have been collected or advanced by the Seller/Servicers or advanced by
such 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 there will be no 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 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 Company or the Servicing Entity, as
applicable, as Master Servicer, or the Seller with respect to Series of
Certificates as to which there will be no Master Servicer, will repurchase the
Mortgage Loan from the Mortgage Pool at its then outstanding principal balance,
plus
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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, 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) or, if applicable,
the occurrence of a redemption or other call feature of the Certificates of a
Series or the underlying Mortgage Loans 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 (including, if applicable, the occurrence of a redemption or
other call feature of the Certificates of a Series or the underlying 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 prepayment of principal on
the underlying Mortgage Loans or a repurchase thereof (including, if applicable,
the occurrence of a redemption or other call feature of the Certificates of a
Series or the underlying Mortgage Loans), 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
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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 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
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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 or, if
applicable, the occurrence of a redemption or other call feature of the
Certificates of a Series or the underlying Mortgage Loans 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 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
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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.
REDEMPTION OF CERTIFICATES OR UNDERLYING MORTGAGE LOANS
If so specified in the Prospectus Supplement for a Series, the Certificates
of such Series or the underlying Mortgage Loans may be subject to redemption at
the direction of the holder of certain redemption rights, beginning on the
Distribution Date and subject to payment of the redemption price and other
conditions specified in the related Prospectus Supplement. A redemption would
result in the concurrent retirement of all outstanding Certificates of the
Series and would decrease the average lives of such Certificates, perhaps
significantly. The earlier after the Closing Date that a redemption occurs, the
greater would be such effect. In general, a redemption is most likely to occur
if prevailing interest rates have declined. The holder of the redemption right
may also be a Holder of one or more Classes of the related Series, which may
affect such holder's decision whether to direct a redemption. The effect of a
redemption of the Certificates or underlying Mortgage Loans on interest payments
on the Classes of Certificates of a Series will be described in the related
Prospectus Supplement. See "Description of the Certificates-Redemption
Agreement" and "The Mortgage Pools--General".
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
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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-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
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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 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 be the
only Master Servicer or with respect to each Series as to which the Company and
a Servicing Entity will act as Master Servicers, each Seller generally will make
representations and warranties with respect to Mortgage Loans or the Mortgage
Loans in the Company's Mortgage Loan Servicing Group, respectively, 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 there will be no 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. With respect to each Series of Certificates as to which a Servicing
Entity will be a Master Servicer, such Servicing Entity which sold the Mortgage
Loans or the Mortgage Loan Servicing Group, as applicable, to the Company for
inclusion in the Trust Fund will make representations and warranties to the
Company with respect to such Mortgage Loans or Mortgage Loans in the related
Mortgage Loan Servicing Group, as applicable, 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 or Servicing Entity that materially and adversely affects the
interests of the Certificateholder in a Mortgage Loan (other than those breaches
which have been cured), the Seller or Servicing Entity 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 there will be a
Master Servicer, the Pooling Agreement will be between the Company, as Depositor
and, if applicable, as Master Servicer, the Servicing Entity, if applicable, as
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 or
the Servicing Entity, as applicable, and such Seller/Servicers, or will be
serviced by servicers pursuant to servicing arrangements approved by the Company
or the Servicing Entity, as applicable. With respect to Series of Certificates
as to which there will be no 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
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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 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 or a
Servicing Entity, as applicable, 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
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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 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, a Servicing Entity or a Servicer, as the case may
be, 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, such Servicing Entity or
such Servicer will deliver such documents to the Trustee within 270 days
thereafter unless, as set forth in the Pooling Agreement, the county recorder
has not yet returned such Mortgage Loan. 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, such Servicing Entity
or such Servicer 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 and/or a Servicing Entity 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 (or the
related Mortgage Loan Servicing Group for such Series if both the Company and a
Servicing Entity are acting as Master Servicers) identified in the Pooling
Agreement, the Trustee will notify the Company or such Servicing Entity, as
applicable. If the Company or such Servicing Entity, as applicable, cannot cure
such defect, the Company or such Servicing Entity, as applicable, 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 there will
be no 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
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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, the Servicing Entity 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 Company or
Servicing Entity, as applicable, as Master Servicer, (ii) within FDIC insured
accounts (or other insured accounts acceptable to the rating agency 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 and/or a
Servicing Entity will act as Master Servicer, the Company or the Servicing
Entity, as applicable, may substitute an eligible mortgage loan for a defective
Mortgage Loan (or, if applicable, a Mortgage Loan in its related Mortgage Loan
Servicing Group) 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 there will be no 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
Unless otherwise stated in the applicable Prospectus Supplement, in the
Pooling Agreement for each Series of Certificates as to which the Company will
act as a Master Servicer, the Company will represent and warrant to the Trustee
with respect to (a) all Mortgage Loans if it is the only Master Servicer and (b)
the Mortgage Loans in its Mortgage Loan Servicing Group if both the Company and
a Servicing Entity are acting as Master Servicers, 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
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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 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 a Master Servicer, the Seller or the Servicing Entity, as applicable, 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, the Servicing Entity and/or the
Company.
In the event of the discovery by the Company, the Servicing Entity 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,
the Servicing Entity 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 Company or a Servicing Entity, as Master
Servicer, or the Servicer with respect to Series of Certificates for which there
will be no Master Servicer, will have the right, but not the obligation, to
purchase any Mortgage Loan (or, if applicable, Mortgage Loan in the Company's or
Servicing Entity's Mortgage Loan Servicing Group), subject to the limitations
set forth in the Pooling Agreement, from the applicable Mortgage Pool in the
event that such Mortgage Loan
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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 and/or a
Servicing Entity will act as Master Servicer, pursuant to the Pooling Agreement
the Company or Servicing Entity, as applicable, as Master Servicer, will be
responsible for servicing and administering the Mortgage Loans, or the Mortgage
Loans in its respective Mortgage Loan Servicing Group, as applicable, 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 Company or Servicing Entity, as applicable, as Master Servicer, or its
respective agent, to perform diligently all services and duties customary to the
servicing of mortgage loans. Such Master Servicer or its agent will monitor each
Seller/Servicer's performance and, unless otherwise specified in the applicable
Prospectus Supplement, such 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 or Servicing Entity, as
applicable, as Master Servicer, for any reason, such Master Servicer may procure
a substitute Seller/Servicer, which may be an affiliate of such 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 such Master Servicer. In such event, such 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 there will be no 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. With respect to a
Series as to which the Company and the Servicing Entity will act as Master
Servicers, unless otherwise specified in the applicable Prospectus Supplement,
the Company will also act as the Certificate Administrator. Unless otherwise
specified in the related Prospectus Supplement, with respect to a Series as to
which a Servicing Entity is the only Master Servicer, such Servicing Entity
shall act as the Certificate Administrator. 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 a 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 and/or a
Servicing Entity will act as Master Servicer, each Seller/Servicer will retain
as its Servicing Fee a portion of the interest payable
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on each Mortgage Loan serviced by it. The Servicing Fee will be established by
the Company or a Servicing Entity, as applicable, 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 Company or
Servicing Entity, as applicable, as 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, each of the Company and Servicing Entity, as
applicable, as 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 Company or Servicing Entity, as
applicable, as 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 there will be no 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 with respect to each such Series and each
Series as to which both the Company and a Servicing Entity are acting as Master
Servicers, 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, a Servicing Entity 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 Prospectus Supplement, any
such Retained Yield and any earnings from reinvestments thereof will not be part
of the Trust Fund. The Company, the Servicing Entity 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 and/or a
Servicing Entity will act as Master Servicer, pursuant to the Servicing Contract
each Seller/Servicer will agree to establish and maintain for the Master
Servicer (or for the related Master Servicer if both the Company and a Servicing
Entity are acting as Master Servicers for such Series) 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
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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 (or the
related Master Servicer if both the Company and a Servicing Entity are acting as
Master Servicers), 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 (or the related Master Servicer if both the Company and a Servicing
Entity are acting as Master Servicers) has determined to be otherwise
nonrecoverable; and
(iii) Amounts in respect of Servicing Fees previously deposited.
The Company and/or the Servicing Entity, as applicable, 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 Company or Servicing Entity, as applicable, as Master Servicer,
such that the rights of the Company or Servicing Entity, as applicable, as
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 Company or Servicing Entity, as applicable, for deposit in the
Investment Account described below.
With respect to Series of Certificates as to which the Company and/or the
Servicing Entity, as applicable, will act as Master Servicer and unless
otherwise specified in the related Prospectus Supplement, not later than the
20th day of each month (or the preceding business day if such 20th day is not a
business day) (the "Withdrawal Date"), the Company or Servicing Entity, as
applicable, will withdraw or direct the withdrawal from any funds in the
Custodial Account for P&I maintained by each related Seller/Servicer an amount
representing:
(i) Scheduled installments of principal and interest on the Mortgage
Loans received or advanced by such 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 Company or
Servicing Entity, as applicable, 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 such Seller/Servicer
and less any amounts to be withdrawn later by the Company or Servicing
Entity, as applicable, 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
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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 Company or Servicing Entity, as applicable, from any
applicable Buydown Fund Account; and
(iv) Curtailments received by such 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 (or if both the Company and a Servicing Entity are acting as Master
Servicers, the related 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
Company or Servicing Entity, as applicable, as Master Servicer, may invest funds
withdrawn from the Custodial Accounts for P&I each month and remitted to the
related 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"). Notwithstanding the foregoing, in the event that
both the Company and a Servicing Entity are acting as Master Servicers with
respect to any Series, each of the Company and such Servicing Entity may only
invest funds described in the preceding sentence to the extent that such funds
relate to Mortgage Loans in its respective Mortgage Loan Servicing Group.
Investment of such funds shall be made through an account in the name of the
Company or Servicing Entity, as applicable, as Master Servicer, and the Trustee
(an "Investment Account") (or, if both the Company and a Servicing Entity are
acting as Master Servicers, to the extent that such funds relate to Mortgage
Loans in its respective Mortgage Loan Servicing Group), 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 Company or
Servicing Entity, as applicable, as 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.
On the last day of the Investment Period, the Company or Servicing Entity,
as applicable, as Master Servicer, will withdraw from the Investment Account
(or, if both the Company and a Servicing Entity are acting as Master Servicers,
the related 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.
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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 and/or a Servicing Entity will act as Master Servicer, the
Company or Servicing Entity, as applicable, will withdraw from the Investment
Account (or, if both the Company and a Servicing Entity are acting as Master
Servicers, the related 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.
Under the Pooling Agreement for each Series of Certificates as to which the
Company and/or a Servicing Entity will act as Master Servicer, the Company or
Servicing Entity, as applicable, will be authorized to make the following
withdrawals from the Certificate Account (provided, however, that if
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both the Company and a Servicing Entity are acting as Master Servicers, each of
the Company's and Servicing Entity's right to any such withdrawals will be
limited to proceeds received in respect of Mortgage Loans in its respective
Mortgage Loan Servicing Group):
(i) To reimburse the Company or Servicing Entity, as applicable, as
Master Servicer, or the applicable Servicer for Advances made pursuant to
the Pooling Agreement or a Selling and Servicing Contract, the Company's or
Servicing Entity'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 the Company or Servicing Entity, as applicable, as
Master Servicer, or the applicable Servicer for amounts expended by or for
the account of the Company or Servicing Entity, as applicable, as 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 the Company or Servicing Entity, as applicable, as Master
Servicer, 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 the Company or Servicing Entity, as applicable, as
Master Servicer, or the applicable Servicer for advances which the Company
or Servicing Entity, as applicable, has determined to be Nonrecoverable
Advances;
(v) To pay to the Company or Servicing Entity, as applicable, as Master
Servicer, reinvestment earnings deposited or earned in the Certificate
Account (net of reinvestment losses) to which the Company or Servicing
Entity, as applicable, is entitled and to reimburse the Company or Servicing
Entity, as applicable, for expenses incurred by and reimbursable to the
Company or Servicing Entity, as applicable, 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.
Each of the Company and Servicing Entity, as applicable, may also establish
with the Trustee for a Series of Certificates as to which it is acting as a
Master Servicer 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 there will be no 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
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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
For each Series, 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 Trustee, the Master Servicer
(if there will be only one 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 Company or
Servicing Entity, as applicable, 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 Company or Servicing
Entity, as applicable, as 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 Company or Servicing
Entity, as applicable, as 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;
PROVIDED, HOWEVER, that in the event that both the Company and a Servicing
Entity are acting as Master Servicers for any Series, any amounts retained on
behalf of any of the Company, such Servicing Entity or a related Seller/Servicer
pursuant to clauses (a), (b) and (c) above shall be limited to amounts received
in respect of any Mortgage Loans in its related Mortgage Loan Servicing Group.
In addition, if the Master Servicer with respect to Series of Certificates
as to which the Company and/or a Servicing Entity will act as Master Servicer,
or the Servicer with respect to Series of Certificates as to which there will be
no Master Servicer, is obligated to do so under the applicable Pooling
Agreement, such 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
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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 (if there will be only one 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 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 there will be only one
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"), such 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 there will be no Master Servicer,
or as to which both the Company and a Servicing Entity will act as Master
Servicers, 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 (if there will be only one Master Servicer) or Certificate
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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
(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 there will be
only one Master Servicer, or the Certificate Administrator with respect to
Series of Certificates as to which there will be no Master Servicer or as to
which both the Company and a Servicing Entity will act as Master Servicers, 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 and/or a
Servicing Entity will act as Master Servicer and unless otherwise stated in the
applicable Prospectus Supplement, the Company or Servicing Entity, as
applicable, will be obligated under the Pooling Agreement to make Advances (to
the extent not previously advanced by the Seller/Servicers as described below).
In the event that both the Company and a Servicing Entity are acting as Master
Servicers for any Series, unless otherwise specified in the applicable
Prospectus Supplement, each of the Company's and such Servicing Entity's
obligation to make Advances shall be limited to Mortgage Loans in its respective
Mortgage Loans Servicing Group. Such Advances shall be 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
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Company or Servicing Entity, as applicable, will be obligated to make such
Advances only to the extent any such Advance, in the judgment of the Company or
Servicing Entity, as applicable, 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 Company or Servicing Entity,
as applicable, 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". If an Advance made by a Master Servicer later proves unrecoverable,
such Master Servicer will be reimbursed from funds in the Certificate Account.
Notwithstanding the foregoing, if both the Company and a Servicing Entity are
acting as Master Servicers for any Series, such right of reimbursement shall be
limited to amounts received in respect of Mortgage Loans in its respective
Mortgage Loan Servicing Group.
With respect to Series of Certificates as to which the Company and/or a
Servicing Entity 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 Company or Servicing Entity, as applicable, 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 Company or Servicing
Entity, as applicable, 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 Company or Servicing Entity, as applicable, will cause such
Seller/ Servicer to be reimbursed from funds in the Certificate Account.
Notwithstanding the foregoing, if both the Company and a Servicing Entity are
acting as Master Servicers, such right of reimbursement shall be limited to
amounts received in respect of Mortgage Loans in its respective Mortgage Loan
Servicing Group.
With respect to Series of Certificates as to which there will be no 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 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 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". If an Advance made by the Servicer later proves to be
unrecoverable, the Servicer will be reimbursed from funds in the Certificate
Account.
COLLECTION AND OTHER SERVICING PROCEDURES
With respect to Series of Certificates as to which the Company and/or a
Servicing Entity 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 there will be no 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.
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Consistent with the above, each Seller/Servicer with respect to Series of
Certificates as to which the Company and/or a Servicing Entity will act as
Master Servicer, or the Servicer with respect to Series of Certificates as to
which there will be no 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 Company or Servicing Entity, as applicable, as 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 Company's or Servicing Entity's, as
applicable, 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 and/or a
Servicing Entity 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 Company or Servicing Entity, as applicable, 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 there will be no 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 and/or a
Servicing Entity will act as Master Servicer, the Company or Servicing Entity,
as applicable, may, or upon receiving authorization from the Company or
Servicing Entity, as applicable, as Master Servicer, a Seller/ Servicer may, 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 Company or Servicing Entity, as applicable,
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 there will be
no 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 Company or Servicing Entity, as
applicable, as Master Servicer.
With respect to Series of Certificates as to which the Company and/or a
Servicing Entity 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
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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 there will be no
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 and/or a
Servicing Entity 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 Company's or Servicing Entity's, as applicable, 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 (or a Mortgage
Loan in its respective Mortgage Loan Servicing Group) 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, a Servicing Entity 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 there will be no 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 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 there will be no Master
Servicer and the servicing of the Mortgage Loans will be performed by the
Servicer or with respect to each Series as to which both the Company and a
Servicing Entity will act as Master Servicers, 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 related Master Servicer, or to the Servicer and the
Certificate Administrator with respect to Series of Certificates for which there
will be no Master Servicer or both the Company and a Servicing Entity will act
as Master Servicers, 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
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compensation to the Seller/Servicers and the Company and/or Servicing Entity, as
applicable, as 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 and/or a
Servicing Entity will act as Master Servicer, the Company or Servicing Entity,
as applicable, 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 there will be no 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, each 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
related 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
each such 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, each 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 related damaged
Mortgaged Property, such right of reimbursement being prior to the rights of
Certificateholders to receive any related Insurance Proceeds or Liquidation
Proceeds.
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 Company and/or Servicing Entity,
as Master Servicer, or the Servicer, as applicable, as of the previous December
31, nothing came to such firm's attention that indicated that the Company or
Servicing Entity, as applicable, as 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 Company and/or Servicing Entity, as Master
Servicer, or the Servicer, as applicable, to the effect that, based on a review
of the Company's and/or Servicing Entity's, as Master Servicer, or the
Servicer's activities during the preceding calendar year, to the best of such
officer's knowledge the Company and/or
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Servicing Entity, as 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 neither the
Company nor a Servicing Entity, as applicable, may resign from its obligations
and duties thereunder as Master Servicer or, if applicable, Certificate
Administrator, 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
or Servicing Entity's, as applicable, 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 any Master Servicer, or that, where applicable, neither the Servicer nor the
Certificate Administrator, nor any director, officer, employee or agent of the
Company, any 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 any 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, where
applicable, a Master Servicer or 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 therefrom will be expenses, costs and liabilities of the
Trust Fund, and the Company or, where applicable, a Master Servicer, the
Servicer or the Certificate Administrator, will be entitled to be reimbursed
therefor and to charge the Certificate Account.
Any person into which a 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 such Master Servicer, the
Servicer or the Certificate Administrator is a party, or any person succeeding
to the business of such Master Servicer, the Servicer or the Certificate
Administrator, will be the successor of such 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 and/or a
Servicing Entity will act as Master Servicer, Events of Default under the
Pooling Agreement for each such Series (but, in the event that both the Company
and a Servicing Entity are acting as Master Servicers for a Series, such Event
of Default shall apply only to the defaulting Master Servicer), unless otherwise
specified in the
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applicable Prospectus Supplement, will include, without limitation, (i) any
failure by the Company or Servicing Entity, as applicable, as Master Servicer,
to make a required deposit to the Certificate Account or, if the Company or
Servicing Entity, as applicable, as 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 Company or Servicing Entity, as applicable, as Master Servicer,
by the Trustee, or to the Company or Servicing Entity, as applicable, as 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 Company or Servicing Entity, as applicable, as Master
Servicer, duly to observe or perform in any material respects any other of the
covenants or agreements on the part of the Company or Servicing Entity, as
applicable, as 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 Company or Servicing Entity, as
applicable, as Master Servicer, by the Trustee, or to the Company or Servicing
Entity, as applicable, as 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
Company or Servicing Entity, as applicable, as Master Servicer, indicating
insolvency, reorganization or inability to pay its obligations and (iv) any
failure of the Company or Servicing Entity, as applicable, 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 there will be
no 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 as will constitute
Events of Default by a Master Servicer under the Pooling Agreement for each
Series of Certificates for which the Company and/or a Servicing Entity will act
as Master Servicer, except that an Event of Default created by a failure of a
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
Company or Servicing Entity, as applicable, immediately suspend all of the
rights and obligations of the Company or Servicing Entity, as applicable,
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 Company or Servicing Entity, as applicable,
to resume its rights and obligations as Master Servicer under the Pooling
Agreement if the Company or Servicing Entity, as applicable, 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 Company or Servicing Entity, as applicable, 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 defaulting Master Servicer, the Servicer or
the Certificate Administrator, as applicable, under such Pooling Agreement and
in and to the Trust Fund, whereupon 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 defaulting Master Servicer, the Servicer or the
Certificate Administrator, as applicable, under such Pooling Agreement. Pending
any such appointment, the
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Trustee is obligated to act in such capacity. In the event the Trustee acts as
successor to such 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 or Servicing Entity, as
applicable, as initial Master Servicer, or with respect to a Series of
Certificates as to which there will be no 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/or a
Servicing Entity and the Trustee, with respect to Series of Certificates as to
which the Company and/or a Servicing Entity will act as Master Servicer (and in
the case where both the Company and a Servicing Entity are acting as Master
Servicers, the Certificate Administrator), and by the Company, the Servicer, the
Certificate Administrator and the Trustee with respect to Series of Certificates
as to which there will be no 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.
The Prospectus Supplement for a particular Series may describe other or
different provisions concerning conditions to the amendment of the related
Pooling Agreement.
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LIST OF CERTIFICATEHOLDERS
With respect to Series of Certificates as to which the Company will act as a
Master Servicer or with respect to a Series where a Servicing Entity is the only
Master Servicer, upon written request of the Trustee, the Company or Servicing
Entity as applicable, 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 there will be no 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.
REDEMPTION AGREEMENT
If so specified in the Prospectus Supplement for a Series, the related Trust
Fund will enter into a redemption agreement pursuant to which the counterparty
to the agreement will have the right to cause a redemption of the outstanding
Certificates of such Series, beginning on the Distribution Date and subject to
payment of the redemption price and other conditions specified in the Prospectus
Supplement. In general, the redemption price will equal the aggregate
outstanding principal balance of all Certificates of such Series(other than such
Certificates with a notional principal balance), plus any interest described in
the Prospectus Supplement. Payment of the redemption price will be in lieu of
any distribution of principal and interest that would otherwise be made on that
Distribution Date. Upon a redemption, the holder of the redemption right will
receive the assets of the Trust Fund and each Certificateholder will receive the
outstanding principal balance of its Certificate(other than a holder of
Certificates with a notional principal balance), plus any interest specified in
the Prospectus Supplement. See "Yield, Prepayment and Maturity Considerations"
for a discussion of the effects of such a redemption of an investor's yield to
maturity. In the case of a Trust Fund for which a REMIC election or elections
have been made, the transaction by which the Certificates are retired and the
related redemption is conducted will constitute a "qualified liquidation" under
Section 860F of the Code.
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PUT OPTION
If so specified in the Prospectus Supplement for a Series, each
Certificateholder of such Series, of a Class of such Series or of a group for
such Series will have the option to require the entity named in such Prospectus
Supplement to purchase such Certificates in full on the date, at the purchase
price and on the terms specified in such Prospectus Supplement.
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.
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.
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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 as to which the Company and/or a
Servicing Entity will act as Master Servicer, the Company or Servicing Entity,
as applicable, will cause each Servicer to maintain, or with respect to a Series
of Certificates as to which there will be no Master Servicer, the 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 or
Servicing Entity, as applicable, had knowledge of such Primary Insurance Policy.
With respect to Series of Certificates as to which the Company and/or a
Servicing Entity will act as Master Servicer, in the event that the Company or
Servicing Entity, as applicable 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 Company
or Servicing Entity, as applicable 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 there will be no 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 Company or Servicing Entity, as
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 and/or a
Servicing Entity will act as Master Servicer, under the Selling and Servicing
Contract each Seller/Servicer, on behalf of itself, the Company, the related
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 Company or Servicing
Entity, as applicable, will agree to cause each Seller/
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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 there will be no 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 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
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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
and/or a Servicing Entity will act as Master Servicer, or the Servicer with
respect to Series of Certificates as to which there will be no 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 Company or Servicing Entity, as applicable, as 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 Company or
Servicing Entity, as applicable, as Master Servicer, or the Seller/ Servicer, or
the 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 Company or
Servicing Entity, as applicable, as 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 Company or Servicing Entity, as applicable, as Master Servicer,
and each of the Seller/Servicers with respect to Series of Certificates as to
which the Company and/or a Servicing Entity will act as Master Servicer, or the
Servicer with respect to Series of Certificates as to which there will be no
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 or Servicing Entity, as applicable, 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
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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 Company or Servicing Entity, as applicable, as 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 and/or a Servicing Entity will act as Master Servicer, or the
Servicer with respect to Series of Certificates as to which there will be no
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
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 a 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
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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 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.
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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, 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 Company or a Servicing Entity, as applicable, as Master
Servicer, or the Servicer with respect to Series of Certificates for which there
will be no 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 Company or a Servicing, as
applicable, as 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.
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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.
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, a Servicing Entity, 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
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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, a Servicing Entity 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 or the Servicing
Entity, as applicable, with respect to Series of Certificates as to which the
Company and/or a Servicing Entity will act as Master Servicer, or the Seller
with respect to Series of Certificates as to which there will be no 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 Company
and/or a Servicing Entity, as Master Servicer, or the Servicer with respect to
Series of Certificates as to which there will be no 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 Company and/or a Servicing Entity,
as 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 Company and/or Servicing Entity, as 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 Company's or Servicing Entity's, as Master
Servicer, or the Servicer's obligation to make the payments described above, the
Company and/or a Servicing Entity, as 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 and/or a Servicing Entity will act as Master Servicer, or the
Servicer with respect to Series of Certificates as to which there will be no
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, Servicing Entity 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
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the application of the co-insurance clause typically contained in hazard
insurance policies. The Company and/or a Servicing Entity, as Master Servicer,
with respect to Series of Certificates as to which the Company and/or a
Servicing Entity will act as Master Servicer, or the Servicer with respect to
Series of Certificates as to which there will be no 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 Company and/or a Servicing Entity, as 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 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
Company or Servicing Entity, as applicable, as 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 there will be no
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, a
Servicing Entity, the Servicer or the Seller, as applicable, will deposit or
cause to be deposited in a Reserve Fund cash or
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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 Company or Servicing Entity, as applicable, as Master Servicer,
with respect to Series of Certificates as to which the Company and/or a
Servicing Entity will act as Master Servicer, or the Servicer with respect to
Series of Certificates as to which there will be no 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 Company or Servicing Entity, as applicable, as 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.
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 Company
and/or Servicing Entity, as 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 there will be no
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 Company and/or Servicing Entity, as 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 Company or Servicing Entity, as applicable, as
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.
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In addition, the Company and/or Servicing Entity, as 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 Company and/or Servicing Entity,
as 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
and/or a Servicing Entity will act as Master Servicer, or the Servicer with
respect to Series of Certificates as to which there will be no 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 Company and/or Servicing Entity, as Master Servicer with
respect to Series of Certificates as to which the Company and/or a Servicing
Entity will act as Master Servicer, or the Servicer with respect to Series of
Certificates as to which there will be no 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 Company and/or Servicing Entity, as 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 Company or Servicing Entity, as Master Servicer, or the
Servicer, as applicable, will agree to pay the premium for any Special Hazard
Insurance 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 Company, Servicing Entity 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 Company, Servicing Entity 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
Company and/or a Servicing Entity, as Master Servicer, with respect to Series of
Certificates as to which the Company and/or a Servicing Entity will act as
Master Servicer, or the Servicer with respect to Series of Certificates as to
which there will be no 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 Company, Servicing Entity or the Servicer, as applicable, will agree
to pay the premium for any Fraud Bond or Bankruptcy Bond on a timely basis.
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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
Company and/or a Servicing Entity, as 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 there will be no
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 Company, Servicing Entity or the Servicer, as applicable, will agree to pay
the premium for any certificate insurance policy on a timely basis.
The Company or Servicing Entity, as applicable, as 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 there will be no 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
Company or Servicing Entity, as applicable, as 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 Company or Servicing Entity, as applicable, as
Master Servicer, with respect to Series of Certificates as to which the Company
and/or Servicing Entity will act as Master Servicer, or the Servicer with
respect to Series of Certificates as to which there will be no 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
Certificateholders upon liquidation of the Mortgage Loan after reimbursement of
the Company, Servicing Entity 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 and/or a Servicing Entity will
act as Master Servicer, or the Servicer with respect to Series of Certificates
as to which there will be no 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 Company
or Servicing Entity, as applicable, as 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 Company or Servicing Entity, as applicable, as
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
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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 Company or
Servicing Entity, as applicable, as 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 Company or Servicing Entity, as
applicable, as 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 Company or
Servicing Entity, as applicable, as 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, 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.
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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
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
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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 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
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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 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
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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 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.
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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 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.
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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 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. The conduct which constitutes "participation in the
management", such 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
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1990, the United States 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.
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 restrictions on employee pension and welfare benefit plans
subject to ERISA ("ERISA Plans") and on certain other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans, bank collective investment funds and insurance company general and
separate accounts in which such ERISA Plans are invested. Section 4975 of the
Code imposes essentially the same prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code and on
individual retirement accounts described in Section 408 of the Code
(collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and, if no election has been under Section 410(d) of the
Code, church plans (as defined in Section 3(33) of ERISA), are not subject to
ERISA or Section 4975 of the Code. Accordingly, assets of such plans may be
invested in Certificates without regard to the ERISA considerations described
below, subject to the provisions of applicable federal and state law. However,
any such plan that is a tax-qualified plan and exempt from taxation under
Sections 401(a) and 501(a) of the Code is subject to the prohibited transaction
restrictions imposed under Section 503 of the Code.
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In addition to imposing general fiduciary standards, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "plan assets" of ERISA Plans and Tax-Favored Plans (collectively,
"Plans") and persons ("parties in interest" under ERISA or "disqualified
persons" under the Code (collectively, "Parties in Interest")) who have certain
specified relationships to the Plans, unless a statutory or administrative
exemption is available. Certain Parties in Interest that participate in a
prohibited transaction may be subject to penalties and/or excise taxes imposed
under ERISA and/or Section 4975 of the Code, unless a statutory or
administrative exemption is available with respect to any such transaction.
PLAN ASSET REGULATION
An investment of Plan Assets in Certificates may cause the underlying
Mortgage Loans, Cooperative Loans, Agency Securities, Private Securities, and/or
other assets held in a Trust Fund to be deemed "plan assets" of such Plan. The
U.S. Department of Labor (the "DOL") has issued a regulation (the "DOL
Regulation") concerning whether or not the assets of a Plan would be deemed to
include an interest in the underlying assets of an entity (such as a Trust
Fund), for purposes of applying the general fiduciary standards of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Code, when a
Plan acquires an equity interest (such as a Certificate) in such entity. Because
of the factual nature of certain rules in the DOL Regulation, the assets of a
Plan may be deemed to include either (i) an interest in the assets of a entity
in which the Plan holds an equity interest (such as a Trust Fund), or (ii)
merely the Plan's interest in the instrument evidencing such interest (such as a
Certificate). Therefore, neither Plans nor certain entities in which assets of
Plans are invested should acquire or hold Certificates in reliance upon the
availability of any exception under the DOL Regulation. For purposes of this
section, the term "plan assets" or "assets of a Plan" ("Plan Assets") has the
meaning specified in the DOL Regulation and includes an undivided interest in
the underlying assets of certain entities in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Company, the Master
Servicer, any other Servicer, the Trustee, the obligor under any credit
enhancement mechanism and certain of their affiliates to be considered or become
Parties in Interest with respect to a Plan investing in the Certificates,
whether directly or through an entity holding Plan Assets. In such
circumstances, the acquisition or holding of Certificates by or with Plan Assets
of the investing Plan could also give rise to a prohibited transaction under
ERISA and/or Section 4975 of the Code, unless a statutory or administrative
exemption is available. Under the DOL Regulation, the assets of a Plan which
holds a Certificate would include such Certificate and may also be deemed to
include the Mortgage Loans and/or other assets held in the related Trust Fund.
Special caution should be exercised before Plan Assets are used to acquire a
Certificate in such circumstances, especially if, with respect to such Plan
Assets, the Company, the Master Servicer, any other Servicer, the Trustee, the
obligor under any credit enhancement mechanism or any of their affiliates has
either (i) investment discretion with respect to such Plan Assets, or (ii)
authority or responsibility to give (or regularly gives) investment advice with
respect to such Plan Assets for a fee pursuant to an agreement or understanding
that such advice will serve as a primary basis for investment decisions with
respect to such Plan Assets.
Any person who has discretionary authority or control as to the management
or disposition of Plan Assets, or who provides investment advice with respect to
Plan Assets for a fee (in the manner described above), is a fiduciary with
respect to such Plan Assets. If the Mortgage Loans and/or other assets held in a
Trust Fund were to constitute Plan Assets, any party exercising management or
discretionary control with respect to such assets may be deemed to be a
"fiduciary" with respect to any investing Plan and subject to the fiduciary
requirements of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code. In addition, if the Mortgage Loans and/or other assets
held in a Trust Fund constitute Plan Assets, the acquisition or holding of
Certificates by, on behalf of or with Plan Assets of a Plan, and the operation
of such Trust Fund, may be deemed to constitute or result in a prohibited
transaction under ERISA and Section 4975 of the Code.
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UNDERWRITER'S EXEMPTION
The DOL has issued essentially identical individual exemptions to various
underwriters (collectively, as amended by Prohibited Transaction Exemption
("PTE") 97-34, 62 Fed. Reg. 39021 (July 21, 1997), the "Underwriter's
Exemption"), which generally exempt from the application of the prohibited
transaction provisions of ERISA and Section 4975 of the Code certain
transactions, among others, relating to (i) the servicing and operations of
pools of certain secured obligations (such as Mortgage Loans) that are held in a
trust, and (ii) the purchase, sale and holding of pass-through certificates
issued by such trust as to which an underwriter (or its affiliate) which has
received an Underwriter's Exemption is the sole underwriter or manager or
co-manager of the underwriting syndicate or a placement agent, provided that
certain conditions set forth in the Underwriter's Exemption are satisfied. For
purposes of this section, the term "Underwriter" includes both such an
underwriter (or affiliate) and any member of the underwriting syndicate or
selling group with respect to the Class of Certificates as to which such
underwriter (or affiliate) is the manager or a co-manager.
Each Underwriter's Exemption sets forth the following eight general
conditions, which must be satisfied in order for a transaction involving the
purchase, sale and holding of Certificates to be eligible for exemptive relief
under the Underwriter's Exemption:
FIRST, the acquisition of Certificates by a Plan or with Plan Assets
must be on terms that are at least as favorable to the Plan as they would be
in an arm's-length transaction with an unrelated party.
SECOND, the Certificates must not evidence rights or interests that are
subordinated to the rights and interests evidenced by the other Certificates
issued by the same trust.
THIRD, the Certificates, at the time of acquisition by a Plan or with
Plan Assets, must be rated in one of the three highest generic rating
categories by Standard & Poor's Ratings Services, Moody's Investors Service,
Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. (collectively, the
"Exemption Rating Agencies").
FOURTH, the Trustee must not be an affiliate of any other member of the
"Restricted Group," which consists of any Underwriter, the Company, the
Master Servicer, any other Servicer, the Trustee and any mortgagor with
respect to assets of a Trust Fund constituting more than 5% of the aggregate
unamortized principal balance of the assets held in the Trust Fund as of the
date of initial issuance of the Certificates.
FIFTH, the sum of all payments made to and retained by the Underwriters
must represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by the Company
pursuant to the assignment of the assets to the Trust Fund must represent
not more than the fair market value of such obligations; and the sum of all
payments made to and retained by the Master Servicer or any other Servicer
must represent not more than reasonable compensation for such person's
services under the related Pooling Agreement and reimbursement of such
person's reasonable expenses in connection therewith.
SIXTH, the Plan or other person investing Plan Assets in the
Certificates must be an accredited investor (as defined in Rule 501(a)(1) of
Regulation D under the Securities Act of 1933, as amended).
SEVENTH, (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) certificates
evidencing interests in such other investment pools must have been rated in
one of the three highest categories of one of the Exemption Rating Agencies
for at least one year prior to the acquisition of Certificates by or with
Plan Assets of a Plan; and (iii) certificates in such other investment pools
must have been purchased by investors (other than Plans) for at least one
year prior to any acquisition of Certificates by or with Plan Assets of a
Plan.
EIGHTH, the Trustee must not be an affiliate of any other member of the
Restricted Group.
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Any fiduciary or other person who proposes to use Plan Assets to acquire
Certificates in reliance upon the Underwriter's Exemption must make its own
determination as to whether the general conditions set forth above will be
satisfied with respect to its acquisition and holding of such Certificates.
If the general conditions of the Underwriter's Exemption are satisfied, the
Exemption may provide exemptive relief from:
(a) The restrictions imposed by Sections 406(a) and 407(a) of ERISA and
Sections 4975(c)(1) through (D) of the Code in connection with the direct or
indirect sale, exchange, transfer or holding, or the direct or indirect
acquisition or disposition in the secondary market, of Certificates by or
with Plan Assets of a Plan, provided that no exemptive relief is provided
from the restrictions of Sections 406(a)(1)(E) and 406(a)(2) of ERISA for
the acquisition or holding of a Certificate by or with Plan Assets of a Plan
sponsored by any member of the Restricted Group (an "Excluded Plan"), or by
any person who has discretionary authority or renders investment advice for
a fee (as described above) with respect to Plan Assets of such Excluded
Plan;
(b) The restrictions imposed by Sections 406(b)(1) and (b)(2) of ERISA
and Section 4975(c)(1)(E) of the Code in connection with (i) the direct or
indirect sale, exchange or transfer of Certificates in the initial issuance
of Certificates between the Company or an Underwriter and a Plan when the
person who has discretionary authority or renders investment advice for a
fee (as described above) with respect to the investment of the relevant Plan
Assets in the Certificates is a mortgagor with respect to 5% or less of the
fair market value of the assets of a Trust Fund (or its affiliate), (ii) the
direct or indirect acquisition or disposition in the secondary market of
Certificates by or with Plan Assets of a Plan, and (iii) the holding of
Certificates by or with Plan Assets of a Plan; and
(c) The restrictions imposed by Sections 406 and 407(a) of ERISA and
Section 4975(c) of the Code for certain transactions in connection with the
servicing, management and operation of the Mortgage Pools, subject to
certain specific conditions which the Company expects will be satisfied if
the general conditions of the Underwriter's Exemption are satisfied.
The Underwriter's Exemption also may provide exemptive relief from the
restrictions imposed by Sections 406(a) and 407(a) of ERISA and Sections
4975(c)(1)(A) through (D) of the Code if such restrictions would otherwise be
deemed to apply merely because a person is deemed to be a Party in Interest with
respect to a Plan investing in the Certificates (whether directly or through an
entity holding Plan Assets) by virtue of providing services to the Plan (or such
Plan Assets), or by virtue of having certain specified relationships to such a
person), solely as a result of the Plan's ownership of Certificates.
Before purchasing a Certificate, a fiduciary or other investor of Plan
Assets should itself confirm that (i) the Certificates constitute "certificates"
for purposes of the Underwriter's Exemption, and (ii) the specific and general
conditions and other requirements set forth in the Underwriter's Exemption would
be satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in the Underwriter's Exemption, the fiduciary
or other Plan Asset investor should consider its general fiduciary obligations
under ERISA in determining whether to purchase any Certificates with Plan
Assets.
OTHER EXEMPTIONS
Any fiduciary or other person who proposes to use Plan Assets to acquire
Certificates should consult with its legal counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
exemptive relief under the Underwriter's Exemption or any other prohibited
transaction exemption in connection therewith. In particular, in connection with
an acquisition of Certificates representing a beneficial ownership interest in a
pool of single-family residential first or second Mortgage Loans, such fiduciary
or other Plan Asset investor should also consider the availability of exemptive
relief under Prohibited Transaction Class Exemption ("PTCE") 83-1 for certain
transactions involving mortgage pool investment trusts. However, PTCE 83-1 does
not provide exemptive relief with respect to Certificates evidencing an interest
in a Trust Fund which includes Cooperative Loans, Private Securities or certain
other assets. In addition, such fiduciary or other Plan Asset investor should
consider the availability of other class exemptions granted by the
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DOL, which provide relief from certain of the prohibited transaction provisions
of ERISA and Section 4975 of the Code, including Sections I and III of PTCE
95-60, regarding transactions by insurance company general accounts. The
applicable Prospectus Supplement may contain additional information regarding
the application of the Underwriter's Exemption, PTCE 83-1, PTCE 95-60 or other
DOL class exemptions with respect to the Certificates offered thereby. There can
be no assurance that any of these exemptions will apply with respect to any
particular Plan's or other Plan Asset investor's investment in the Certificates
or, even if an exemption were applicable, that such exemption would apply to all
prohibited transactions that may occur in connection with such an investment.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemptive relief that may be available under PTCE 95-60
for the purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and Section 4975(c) of the
Code, for transactions involving an insurance company general account. Pursuant
to Section 401(c) of ERISA, the DOL was required to issue final regulations (the
"401(c) Regulations") no later than December 31, 1997 which are to provide
guidance for the purpose of determining, in cases where insurance policies or
annuity contracts supported by an insurer's general account are issued to or for
the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan Assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA or Section
4975 of the Code on the basis of a claim that the assets of an insurance company
general account constitute Plan Assets, (i) except as otherwise provided by the
Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations, or (ii) unless an action is brought by the Secretary of Labor for
certain breaches of fiduciary duty which would also constitute a violation of
federal or state criminal law. Any assets of an insurance company general
account that support insurance policies or annuity contracts issued to a Plan
(a) after December 31, 1998, or (b) issued to a Plan on or before December 31,
1998 and with respect to which the insurance company does not comply with the
401(c) Regulations, may be treated as Plan Assets. In addition, because Section
401(c) does not relate to insurance company separate accounts, assets of a
separate account are still treated as Plan Assets of any Plan invested in such
separate account. An insurance company contemplating the investment of general
account assets in Certificates should consult with its legal counsel with
respect to the applicability of Sections I and III of PTCE 95-60 and Section
401(c) of ERISA, including the general account's ability to continue to hold the
Certificates after the date which is 18 months after the date the 401(c)
Regulations become final.
REPRESENTATIONS FROM INVESTING PLANS
The exemptive relief afforded by the Underwriter's Exemption will not apply
to the purchase, sale or holding of Subordinated Certificates, REMIC Residual
Certificates or Certificates evidencing an interest in a Trust Fund which
contains a swap or other notional principal contract. Except as otherwise
specified in the applicable Prospectus Supplement, transfers of such
Certificates to a Plan, to a trustee or other person acting on behalf of any
Plan, or to any other person using Plan Assets to acquire such Certificates will
not be registered by the Trustee unless the transferee provides the Company and
the Trustee with an opinion of counsel satisfactory to the Company and the
Trustee, which opinion will not be at the expense of the Company, the Trustee or
the Master Servicer, that the acquisition of such Certificates by or on behalf
of such Plan or with Plan Assets is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4075 of the Code, and will not subject the Company, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Pooling
Agreement. In lieu of such opinion of counsel, except as otherwise specified in
the applicable Prospectus Supplement, the transferee may provide a certification
of facts substantially to the effect that the acquisition of Subordinated
Certificates by or on behalf of such Plan or with Plan Assets is permissible
under applicable law, will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code, will not subject the
Company, the Trustee or the Master Servicer to any obligation in addition to
those undertaken in the Pooling Agreement, and the following conditions are met:
(i) the source of
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funds used to purchase such Certificates is an insurance company general account
(as defined in PTCE 95-60), and (ii) the conditions set forth in Sections I and
III of PTCE 95-60 have been satisfied as of the date of the acquisition of such
Certificates.
TAX-EXEMPT PLAN INVESTORS
A Plan which is exempt from federal income taxation pursuant to Section 501
of the Code generally will be subject to federal income taxation to the extent
that its income constitutes unrelated business taxable income (or "UBTI") within
the meaning of Section 512 of the Code. Excess inclusions of a REMIC allocated
to a REMIC Residual Certificate held by such a Plan will be considered UBTI and
thus will be subject to federal income tax. See "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Excess
Inclusions" and "--Tax-Exempt Investors".
CONSULTATION WITH COUNSEL
There can be no assurance that the Underwriter's Exemption or any other
exemption granted by the DOL will apply with respect to any particular Plan that
acquires Certificates (whether directly or through an entity holding Plan
Assets) or, even if all of the conditions specified in the Underwriter's
Exemption were satisfied, that exemptive relief would be available for all
transactions involving a Trust Fund. Prospective Plan Asset investors should
consult with their legal counsel concerning the impact of ERISA and the Code and
the potential consequences to their specific circumstances prior to making an
investment in Certificates.
Any fiduciary or other person who proposes to acquire or hold Certificates
on behalf of a Plan or with Plan Assets should consult with its legal counsel
with respect to the potential applicability of the fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code to the proposed investment and the availability of
exemptive relief under the Underwriter's Exemption, PTCE 83-1, Sections I and
III of PTCE 95-60, and/or any other class exemption granted by the DOL.
ANY FIDUCIARY OR OTHER PERSON WHO PROPOSES TO USE PLAN ASSETS TO ACQUIRE
CERTIFICATES SHOULD CONSULT WITH ITS OWN LEGAL 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 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 Company, in the case where the Company will be a Master Servicer for a
Series or in the case where there will be no Master Servicer for a Series, or
the Servicing Entity, in the case where the Servicing Entity is the only Master
Servicer for a Series, 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
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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 LLP, 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) each Master Servicer or Servicing Entity, as applicable,
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,
(i) 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 (ii) REMIC Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(4)(A), and interest on 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)(5)(C) (or, as provided in the
Committee Report, as "real estate assets" as defined in Code Section
856(c)(5)(B)). 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 Section
856(c)(4)(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).
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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.
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
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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 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
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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 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.
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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 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.
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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
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
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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 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.
4. CALLABLE CLASS CERTIFICATES
An entity electing to be treated as a REMIC may either itself directly, or
indirectly through the use of a trust owned by such entity, enter into a
redemption agreement pursuant to which the counterparty will have the right to
cause a redemption of the outstanding Certificates (as used herein, each such
right a "Call Right", and each such Certificate, a "Callable Class Certificate")
beginning on the Distribution Date and subject to payment of the redemption
price and other conditions that may be specified in the applicable Prospectus
Supplement. See "Description of the Certificates-Redemption Agreement." In the
event the trust issues the Call Right, counsel to the Depositor will
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deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related Pooling Agreement, the trust will be treated as a
grantor trust under subpart E, part 1 of Subchapter J of the Code and, as a
result, the REMIC will be treated as having directly issued the Call Right.
The REMIC will be treated as (i) owning an interest in the underlying
Mortgage Loans and (ii) writing a call option on its interest in the underlying
Mortgage Loans, represented by the right of the holder of the Call Right to
direct the Depositor to redeem the outstanding Certificates as described under
"Description of the Certificates--Redemption Agreement."
Under these circumstances, the REMIC should be considered to have acquired
its interest in the underlying Mortgage Loans for an amount equal to its initial
aggregate basis in its assets, determined as described more fully hereunder,
PLUS the fair market value at the time of purchase of such REMIC's assets of the
call option the REMIC is deemed to have written, which amount the REMIC is
deemed also to have received. Accordingly, the REMIC's basis in its interest in
the underlying Mortgage Loans will actually be greater than the aggregate issue
price of the REMIC Certificates it issues, resulting in less discount income or
greater premium deductions to the REMIC than it would have recognized had the
call option not been written. Under current federal income tax law, the REMIC
will not be required to include immediately in income the amount of the option
premium it is deemed to have received. However, although the treatment of these
items is not entirely clear, it appears that as the REMIC receives principal
payments on the underlying Mortgage Assets, and if the REMIC sells or
distributes in kind any of the underlying Mortgage Loans, the REMIC will be
deemed to have received (in addition to the amount of such payment, the sales
price or the fair market value of the asset, as the case may be) an amount equal
to the corresponding portion of the payment it was deemed to receive at the time
the call option was originally written. Accordingly, the amount realized by the
REMIC with respect to its interest in the underlying Mortgage Loans, will be
greater than the amount of cash received by it, and over the life of the REMIC
the entire amount of the deemed payment received when the call option was
written will be reported by the REMIC, although not at the times that a
corresponding amount of income would be reported based on a constant yield
method. Investors should be aware that, subject to certain specific exceptions
in the REMIC regulations, it is not anticipated that the REMIC will sell or
transfer or otherwise dispose of any of the underlying Mortgage Loans except
pursuant to an exercise of the Call Right. See "Prohibited Transactions and
Other Possible REMIC Taxes." In the event that the holder of the Call Right
chooses to effect such a redemption of the underlying Mortgage Loans, the
transactions by which the Certificates are retired and the related Trust Fund
terminated will constitute a "qualified liquidation" of the REMIC within the
meaning of Section 860F(a)(4) of the Code.
TAXATION OF CALL OPTION PREMIUM. Under current federal income tax law, the
REMIC will not be required to include immediately in income the option premium
with respect to the Call Right that it is deemed to receive. Instead, such
premium will be taken into account when the Call Right lapses, is exercised or
is otherwise terminates with respect to the REMIC. As indicated above, an amount
equal to the option premium that is deemed to be received by the REMIC would be
included in the REMIC's basis in the Mortgage Loans. The REMIC's recovery of
such basis will not occur at the same rate as its inclusion in income of the
option premium.
As a grantor of an option, the REMIC must include the option premium in
income when the option lapses, which with respect to the REMIC is no later than
the redemption by a holder of the Call Right. Although the Call Right will not
expire by its terms during the period in which the Certificates remain
outstanding the Mortgage Assets to which the Call Right relates will be reduced
over time through principal payments. Although it is not entirely clear whether
the Call Right would thus be deemed to lapse as the Mortgage Loans are paid
down, and if so, at what rate, the Depositor intends to report income to the
REMIC based on the assumption that the Call Right lapses, and the related
premium is recognized by the REMIC, proportionately as principal is paid on the
Mortgage Loans (as prepayments prior to the date on which the Call Right may
first be exercised or as scheduled principal payments or prepayments after the
first date on which the Call Right may be exercised). There is no assurance that
the IRS would agree with this method of reporting income from the lapse of the
Call Right, and furthermore, it should be noted that the IRS currently is
examining the rules regarding the taxation of option premiums.
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If the Call Right is exercised, the REMIC will add an amount equal to the
unamortized portion of the option premium to the amount realized from the sale
of the underlying Mortgage Loans.
If the REMIC transfers one of the underlying Mortgage Loans, such transfer
will be treated as a "closing transaction" with respect to the option the REMIC
is deemed to have written. Accordingly, the REMIC will recognize gain or loss
equal to the difference between the unamortized amount of option premium and the
amount the REMIC is deemed to pay, under the rules discussed above, to be
relieved from its obligations under the option. However, as discussed above,
subject to certain specified exceptions (including in connection with the
issuance of the Call Right), it is not anticipated that the REMIC will transfer
any of the underlying Mortgage Loans. See "Prohibited Transactions and Other
Possible REMIC Taxes."
Certificateholders are urged to consult their tax advisors before purchasing
an interest in any Callable Class Certificate.
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.
If so specified in the applicable Prospectus Supplement for a Series, the
underlying Mortgage Loans may be subject to redemption at the direction of the
holder of certain redemption right. As a direct owner in the underlying Mortgage
Loans for federal income purposes, the REMIC will also be treated as having
written the call option on such underlying Mortgage Loans. See "Callable Class
Certificates."
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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 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
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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" (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.
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".
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. 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. 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 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
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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
Treasury regulations provide that any REMIC Residual Certificate acquired
after January 3, 1995 will not be treated as a security and therefore generally
may not be marked to market.
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
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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 distinction between a capital gain or loss and
ordinary income or loss is also 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 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 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
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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 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
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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 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
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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 (i) a citizen or resident of the United States, (ii) a
corporation or partnership (including any entity treated as a partnership or
corporation for federal income tax purposes) created or organized in or under
the laws of the United States, any state or the District of Columbia, or (iii)
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 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.
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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. NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations (the "New Regulations")
which make certain modifications to the withholding, backup withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their tax advisors regarding the New Regulations.
M. 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.
CALL RIGHT
The holder of the Call Right will be treated as having purchased a call
option on all the underlying Mortgage Loans. The price paid by the holder of the
Call Right to purchase such call option will be treated as an option premium and
accordingly will be added to the purchase price of the Mortgage Loans(in
addition to any exchange fee) if the Mortgage Loans are purchased upon exercise
of the Call Right, and will be treated as a loss as the Call Right lapses. For a
discussion of when the Call Right may be deemed to lapse, see "Callable Class
Certificates" above. Assuming that the underlying Mortgage Loans, if acquired,
would be a capital asset in such holder's hands, then loss recognized with
respect to such lapse will be treated as a capital loss.
In light of the above, a thrift, REMIC, real estate investment trust or
regulated investment company should consult its tax advisors before purchasing
any Call Class.
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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;
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.
PNC Capital Markets, Inc., an affiliate of the Company, may from time to
time act as agent or underwriter in connection with the sale of the
Certificates. This Prospectus and the related Prospectus Supplement may be used
by PNC Capital Markets, Inc. in connection with offers and sales related to
secondary market transactions in any Series of Certificates. PNC Capital
Markets, Inc. may act as principal or agent in such transactions. Such sales
will be made at prices related to prevailing market prices at the time of sale
or otherwise.
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 LLP, San Francisco,
California.
87
<PAGE>
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.
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.
88
<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
-----
<S> <C>
Act............................................ 87
Advance Claims Endorsement..................... 50
Advances....................................... 15
AFR............................................ 80
Agency Certificates............................ 8
Bankruptcy Bond................................ 7
Bankruptcy Instrument.......................... 49
Bankruptcy Loss................................ 49
Basic Prepayment Assumption.................... 19
BPA............................................ 19
Buydown Fund................................... 13
Buydown Fund Account........................... 25
Buydown Loans.................................. 6
Callable Class Certificate..................... 76
CERCLA......................................... 63
Certificate Account............................ 31
Certificate Administrator...................... 4
Certificate Administrator Fee.................. 14
Certificates................................... 1
Class.......................................... 1
Code........................................... 8
Commission..................................... 14
Company........................................ 1
Compensating Interest.......................... 18
Conversion Fee................................. 15
Cooperative.................................... 12
Cooperative Loan............................... 1
Cooperative Note............................... 12
Curtailment.................................... 17
Custodial Account for P&I...................... 28
Cut-Off Date................................... 8
Defaulted Mortgage Loss........................ 48
Determination Date............................. 34
Distribution Date.............................. 5
Distribution Period............................ 33
DOL............................................ 65
Eligible Investments........................... 31
ERISA.......................................... 9
Extraordinary Losses........................... 49
FDIC........................................... 19
FHA............................................ 12
FHA Approved Mortgagees........................ 20
FHA Insurance Policies......................... 12
FHLMC.......................................... 8
FHLMC Approved Mortgagees...................... 20
FNMA........................................... 8
FNMA Approved Mortgagees....................... 20
Fraud Bond..................................... 6
Fraud Instrument............................... 49
<CAPTION>
PAGE
-----
<S> <C>
Fraud Loss..................................... 49
Garn-St. Germain Act........................... 62
GNMA........................................... 8
Indemnified Parties............................ 40
Insurance Proceeds............................. 29
Investment Account............................. 30
Investment Period.............................. 30
IRS............................................ 71
Lenders........................................ 20
Letter of Credit............................... 7
Letter of Credit Bank.......................... 53
Liquidation Proceeds........................... 28
Loss........................................... 44
Master Servicer................................ 4
Master Servicing Fee........................... 14
Mortgage Loan Servicing Group.................. 4
Mortgage Loans................................. 1
Mortgage Notes................................. 11
Mortgage Pool.................................. 1
Mortgage Pool Insurance Policy................. 6
Mortgaged Properties........................... 11
Mortgages...................................... 11
Mortgagor...................................... 7
Net Rate....................................... 28
Non-U.S. Person................................ 83
OID Regulations................................ 70
Parties in Interest............................ 65
Paying Agent................................... 23
Payoff......................................... 17
Plans.......................................... 65
Pooling Agreement.............................. 15
Prepayment Assumption.......................... 71
Primary Insurance Policy....................... 6
Principal Prepayment........................... 19
Private Certificates........................... 8
PTCE 83-1...................................... 67
Record Date.................................... 23
Relief Act..................................... 62
REMIC.......................................... 1
REMIC Certificates............................. 69
REMIC Mortgage Pool............................ 69
REMIC Provisions............................... 69
REMIC Regulations.............................. 70
Remittance Rate................................ 1
Reserve Account................................ 51
Reserve Fund................................... 7
Residual Owner................................. 78
Retained Yield................................. 28
Sellers........................................ 4
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Seller/Servicers............................... 4
Selling and Servicing Contracts................ 22
Senior Certificates............................ 51
Series......................................... 1
Servicer....................................... 4
Servicing Contracts............................ 14
Servicing Entity............................... 4
Servicing Fee.................................. 14
Special Hazard Instrument...................... 49
Special Hazard Insurance Policy................ 7
Special Hazard Loss............................ 48
<CAPTION>
PAGE
-----
<S> <C>
Subordinated Certificates...................... 51
Title V........................................ 63
Title VIII..................................... 63
Trustee........................................ 15
Trust Fund..................................... 1
UCC............................................ 60
Underwriter's Exemption........................ 66
VA............................................. 12
VA Guaranties.................................. 12
VA Loans....................................... 12
Withdrawal Date................................ 29
</TABLE>
90
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C> <C>
Registration fee........................................... $ 1,770,000
Printing and engraving..................................... $ 1,000,000
Legal fees and expenses.................................... $ 770,000
Accounting fees and expenses............................... $ 300,000
Trustee's fees and expenses................................ $ 200,000
Blue Sky Qualification Fees and Expense
(including Counsel Fees)................................. $ 30,000
Rating Agency Fee.......................................... $ 1,500,000
Miscellaneous.............................................. $ 350,000
Total.................................................... $ 5,920,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware, as
amended, under which the Registrant is incorporated, empowers a corporation,
subject to certain limitations, to indemnify its directors and officers against
the actual and reasonable expenses of defending litigation against them in their
capacities as directors and officers.
Section 13 of Article III of PNC Mortgage Securities Corp.'s (formerly known
as "Sears Mortgage Securities Corporation") By-Laws provides as follows:
The provisions of this Section 13 shall apply to the directors and officers
of the corporation in accordance with Article III and V of these By-Laws as more
fully set forth herein.
(a) As used in this Article:
(i) "acted properly" as to any person shall mean that such person
(A) acted in good faith;
(B) acted in a manner not clearly opposed to any written policy of
the corporation or which he reasonably believed to be in the best
interests of the corporation; and
(C) with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.
The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act properly.
(ii) "agent" shall mean any person who is or was
(A) a director, officer or employee of the corporation and/or any
subsidiary;
(B) a trustee or a fiduciary under any employee pension, profit
sharing, welfare or similar plan or trust of the corporation and/or any
subsidiary;
(C) serving at the request of the corporation as a director, officer
and/or employee of or in a similar capacity in another corporation,
partnership, joint venture, trust or other enterprise (which shall, for
the purpose of this Article be deemed to include not-for-profit or
for-profit entities of any type), whether acting in such capacity or in
any other capacity including, without limitation, as a trustee or
fiduciary under any employee pension, profit sharing, welfare or similar
plan or trust.
(iii) "expenses" shall include attorneys' fees and any expenses of
establishing a right to indemnification under this Article.
(iv) "proceeding" shall mean any threatened, pending or completed action
or proceeding, whether civil or criminal, and whether judicial, legislative
or administrative and shall include investigative action by any person or
body.
II-1
<PAGE>
(v) "subsidiary" shall mean a corporation, 50% or more of the shares of
which at the time outstanding have voting power for the election of
directors, is owned directly or indirectly by the corporation or by one or
more subsidiaries or by the corporation and one or more subsidiaries.
(b) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any proceeding (other than an action by or in
the right of the corporation) by reason of the fact that such person is or was
an agent against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such proceeding if
such person acted properly.
(c) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any proceeding by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was an agent against amounts paid in settlement and against
expenses actually and reasonably incurred by him in connection with the defense
or settlement of such proceeding if he acted properly, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and only to
the extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(d) Expenses incurred in defending a proceeding shall be paid by the
corporation to or on behalf of an agent in advance of the final disposition of
such proceeding if:
(i) there is a reasonable basis to believe that such agent may be
entitled to indemnification under this Article;
(ii) such advance payments would not result in undue financial hardship
to the corporation; and
(iii) the corporation shall have received an undertaking by or on behalf
of such agent to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the corporation as authorized in
this Article.
(e) Any indemnification or advance under paragraph (b), (c) or (d) of this
Article (unless ordered by a court) shall be made by the corporation only as
authorized in the specific proceeding upon a determination that indemnification
or advancement to such person is proper in the circumstances. Such determination
shall be made
(i) by the Chairman of the Board so long as he was not made a party to
such proceeding;
(ii) if the Chairman of the Board were made a party by the Board of
Directors, by a majority vote of a quorum consisting of directors who were
not made parties to such proceeding;
(iii) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel
in a written opinion, or
(iv) by the shareholders.
(f) The corporation shall indemnify or advance funds to any person described
in Section (a)(ii)(C) only after such person shall have sought indemnification
or an advance from the corporation, partnership, joint venture, trust or other
enterprise in which he was serving at the corporation's request, shall have
failed to receive such indemnification or advance and shall have assigned
irrevocable to the corporation any right to receive indemnification which he
might be entitled to assert against such other corporation, partnership, joint
venture, trust or other enterprise.
(g) The indemnification provided to an agent by this Article
(i) shall not be deemed exclusive of any other rights to which such
agent may be entitled by law or under any articles of incorporation, By-Law,
agreement, vote of shareholders or disinterested directors or otherwise; and
(ii) shall inure to the benefit of the legal representatives of such
agent or his estate, whether such representatives are court appointed or
otherwise designated, and to the benefit of the heirs of such agent.
II-2
<PAGE>
(h) The indemnification and advances provided to an agent by this Article
shall extend to and include claims for such payments arising out of any
proceeding commenced or based on actions of an agent taken prior to the
effective date of this Article; provided that payment of such claims had not
been agreed to or denied by the corporation at the effective date.
(i) The invalidity or unenforceability of any provision in this Article
shall not affect the validity or enforceability of the remaining provisions
of this Article.
There is directors' and officers' liability insurance presently outstanding,
which insures directors and officers of PNC Mortgage Securities Corp. against
claims arising out of the performance of their duties.
The Pooling Agreement for each Series of Certificates will provide that no
director, officer, employee or agent of PNC Mortgage Securities Corp. is liable
to any holder of Certificates or to the Trustee on behalf of the holders of such
Certificates, or to any other person, except on account of such director's,
officer's, employee's or agent's own willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. The Pooling Agreement for each Series
will further provide that, with the exceptions stated above, a director,
officer, employee or agent of PNC Mortgage Securities Corp. is entitled to be
indemnified by the Trust Fund against all liability in connection with the
mortgage pool evidenced by such Series.
II-3
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement (to be utilized for firm commitment underwritings and public reoffering by
underwriters). (Incorporated by reference to Exhibit 1.1 to Registration Statement 33-53016.)
1.2 Form of Purchase Agreement (to be utilized for sales by the Registrant and placement agents primarily to
institutional purchasers). (Incorporated by reference to Exhibit 1.2 to Registration Statement
33-53016.)
3.1 Certificate of Incorporation of PNC Mortgage Securities Corp. (Incorporated by reference to Exhibit 3.1
to Registration Statement 33-53016.)
3.2 By-Laws of PNC Mortgage Securities Corp. (Incorporated by reference to Exhibit 3.2 to Registration
Statement 33-53016.)
3.3 Certificate of Name Change from PMI Mortgage Corporation to Sears Mortgage Securities Corporation.
(Incorporated by reference to Exhibit 3.3 to Registration Statement 33-53016.)
3.4 Certificate of Name Change from Sears Mortgage Securities Corporation to PNC Mortgage Securities Corp.
(Incorporated by reference to Exhibit 3.4 to Registration Statement 33-53016.)
4.1 Form of Pooling and Servicing Agreement. (Incorporated by reference to Exhibit 4.1 to Registration
Statement 33-84896.)
4.2 Form of typical Mortgage Pool Insurance Policy. (Incorporated by reference to Exhibit 4.2 to Registration
Statement 33-53016.)
4.3 Form of typical Special Hazard Insurance Policy. (Incorporated by reference to Exhibit 4.3 to
Registration Statement 33-45663.)
4.4 Form of typical Primary Mortgage Insurance Policy. (Incorporated by reference to Exhibit 4.4 to
Registration Statement 33-53016.)
4.5 Form of typical Selling and Servicing Contract with Lenders and Servicers, with Selling Guide and
Servicing Guide. (Incorporated by reference to Exhibit 4.5 to Registration Statement 33-53016.)
4.6 Form of typical Bankruptcy Bond. (Incorporated by reference to Exhibit 4.6 to Registration Statement
33-45663.)
4.7 Form of typical Fraud Bond. (Incorporated by reference to Exhibit 4.7 to Registration Statement
33-45663.)
4.8 Form of typical Letter of Credit. (Incorporated by reference to Exhibit 4.8 to Registration Statement
33-45663.)
5.1 Opinion of Thomas G. Lehmann with respect to the Certificates.*
8.1 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to tax matters.*
23.1 Consent of Thomas G. Lehmann (included in Exhibit 5.1 hereto).*
23.2 Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit 8.1 hereto).*
24.1 Powers of Attorney (included in signature page hereto).*
</TABLE>
- --------------
* Previously Filed.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
PNC Mortgage Securities Corp. hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement; and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement.
2. That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
4. That, for purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling PNC
Mortgage Securities Corp. pursuant to the foregoing provisions, PNC Mortgage
Securities Corp. has been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by PNC Mortgage
Securities Corp. of expenses incurred or paid by a director, officer or
controlling person of PNC Mortgage Securities Corp. in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, PNC
Mortgage Securities Corp. will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
PNC Mortgage Securities Corp. hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934 that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, reasonably believes that the
security rating requirement contained in Transaction Requirement B.5. of Form
S-3 will be met by the time of the sale of the securities registered hereunder
and has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Village of Vernon Hills, County of Lake, State of Illinois, on the fourth day of
May 1998.
<TABLE>
<S> <C> <C>
PNC MORTGAGE SECURITIES CORP.,
AS PACKAGER AND MASTER SERVICER
By: /s/ THOMAS G. LEHMANN
---------------------------------------
Thomas G. Lehmann
VICE PRESIDENT AND GENERAL COUNSEL
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed on May 4, 1998 by
the following persons in the capacities indicated:
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ SAIYID T. NAQVI* Director and President
- ------------------------------ (Principal Executive
Saiyid T. Naqvi Officer)
Director, Senior Vice
/s/ DOUGLAS H. BURR* President, Chief
- ------------------------------ Financial Officer and
Douglas H. Burr Treasurer
/s/ RICHARD J. LOVETT*
- ------------------------------ Director
Richard J. Lovett
/s/ ALEXANDER T. TOPPING,
JR.* Director and Senior Vice
- ------------------------------ President
Alexander T. Topping, Jr.
Vice President and
/s/ JOHN W. LAUBER* Controller
- ------------------------------ (Principal Accounting
John W. Lauber Officer)
<TABLE>
<S> <C> <C>
/s/ THOMAS G. LEHMANN
---------------------------------------
Thomas G. Lehmann
*By: ATTORNEY-IN-FACT
</TABLE>
- --------------
Note: Powers of Attorney appointing Thomas G. Lehmann to execute the
Registration Statement and any amendments thereto on behalf of these above-named
individuals were previously filed with the Securities and Exchange Commission.
II-6
