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Filed pursuant to Rule 424(b)(5)
Registration File No. 333-72879
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MAY 25, 1999
PNC MORTGAGE SECURITIES CORP.
DEPOSITOR AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-7
$272,156,900 CLASS A CERTIFICATES
(Approximate)
THE PNC MORTGAGE SECURITIES CORP. SERIES 1999-7 TRUST WILL ISSUE FIVE CLASSES OF
CERTIFICATES. ONLY THE CLASS A CERTIFICATES ARE OFFERED HEREBY. THE CLASS A
CERTIFICATES WILL RECEIVE MONTHLY DISTRIBUTIONS OF INTEREST AND PRINCIPAL.
CLASS A CERTIFICATES
Total principal amount $272,156,900
(approximate)
First payment date June 25, 1999
Interest and principal paid Monthly
Last possible payment date June 25, 2029
Credit enhancement for the Class A Certificates is being provided by three
classes of privately offered certificates which have an aggregate principal
balance of approximately $6,264,563. In addition, concurrently with the issuance
of the Class A Certificates, Ambac Assurance Corporation will issue an
irrevocable and unconditional certificate guaranty insurance policy which will
guarantee certain distributions due on the Class A Certificates, as described
herein.
[Ambac LOGO]
Bear, Stearns & Co. Inc. will offer the Class A Certificates at a price equal to
approximately 101.80% of the initial principal balance of the Class A
Certificates plus accrued interest. The proceeds to PNC Mortgage Securities
Corp. from the sale of the offered certificates will be approximately 101.74% of
the initial principal balance of the Class A Certificates plus accrued interest,
before deducting expenses. The underwriter's commission will be approximately
0.06% of the initial principal balance of the Class A Certificates.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THE CLASS A CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
May 26, 1999
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS PROSPECTUS
SUPPLEMENT AND PAGE 5 IN THE ACCOMPANYING PROSPECTUS.
The certificates will represent interests only in the trust created for Series
1999-7 and will not represent interests in or obligations of PNC Mortgage
Securities Corp., PNC Bank Corp., Bankers Trust Company of California, N.A. or
any of their affiliates.
This prospectus supplement may be used to offer and sell the Class A
Certificates only if accompanied by the prospectus.
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the Class A Certificates in two
separate documents that progressively provide more detail: (a) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (b) this prospectus supplement, which describes
the specific terms of your series of certificates.
IF THE TERMS OF YOUR CERTIFICATES VARY BETWEEN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS
PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where certain capitalized terms used in
this prospectus supplement and the accompanying prospectus are defined under the
caption "Index of Terms" on page S-42 in this prospectus supplement and under
the caption "Index of Terms" beginning on page 85 in the accompanying
prospectus. Capitalized terms used in this prospectus supplement and not
otherwise defined herein have the meanings assigned in the accompanying
prospectus.
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TABLE OF CONTENTS
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SUMMARY INFORMATION............................ S-4
WHAT YOU OWN................................. S-4
Information About the
Mortgage Pool........................... S-4
THE CLASS A CERTIFICATES..................... S-4
Initial Principal Balance of the
Certificates............................ S-4
DISTRIBUTIONS ON THE CERTIFICATES............ S-5
Monthly Distributions..................... S-5
Distributions of Interest................. S-5
Compensating Interest and Interest
Shortfalls.............................. S-5
Distributions of Principal................ S-5
ADVANCES..................................... S-6
CREDIT ENHANCEMENTS.......................... S-6
ALLOCATION OF LOSSES......................... S-6
YIELD CONSIDERATIONS......................... S-7
BOOK-ENTRY REGISTRATION...................... S-7
DENOMINATIONS................................ S-7
LEGAL INVESTMENT............................. S-7
ERISA CONSIDERATIONS......................... S-7
FEDERAL INCOME TAX CONSEQUENCES.............. S-7
RATINGS...................................... S-7
RISK FACTORS................................... S-8
THE TRUST...................................... S-13
DESCRIPTION OF THE MORTGAGE POOL............... S-13
The Indices.................................. S-15
Additional Information....................... S-16
DESCRIPTION OF THE CLASS A CERTIFICATES........ S-17
General...................................... S-17
Book-Entry Registration...................... S-17
Definitive Class A Certificates.............. S-19
Priority of Distributions.................... S-19
Distributions of Interest.................... S-20
Distributions of Principal................... S-20
General................................... S-20
Class A Certificate Principal
Distributions........................... S-21
Class B Certificate Principal
Distributions........................... S-21
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Principal Prepayments........................ S-22
Subordination and Allocation
of Losses................................. S-22
Advances..................................... S-23
Available Distribution Amount................ S-23
Last Scheduled Distribution Date............. S-24
Optional Termination of the Trust............ S-24
Servicing Compensation, Trustee Compensation
and Payment of Expenses................... S-24
Special Servicing Agreements................. S-25
DELINQUENCY, LOSS AND FORECLOSURE EXPERIENCE... S-25
YEAR 2000 READINESS
DISCLOSURE................................... S-27
YIELD AND PREPAYMENT CONSIDERATIONS............ S-28
General...................................... S-28
Principal Prepayments and Compensating
Interest.................................. S-28
Rate of Distributions........................ S-29
Prepayment Assumptions....................... S-29
CREDIT ENHANCEMENTS............................ S-32
The Certificate Insurance Policy and the
Certificate Insurer....................... S-32
The Certificate Insurer...................... S-32
The Certificate Insurance Policy............. S-33
Subordination................................ S-35
Shifting of Interests........................ S-35
CERTAIN FEDERAL INCOME TAX CONSEQUENCES........ S-35
CERTAIN LEGAL INVESTMENT ASPECTS............... S-36
ERISA CONSIDERATIONS........................... S-36
METHOD OF DISTRIBUTION......................... S-37
LEGAL MATTERS.................................. S-37
CERTIFICATE RATINGS............................ S-38
EXPERTS........................................ S-38
APPENDIX A..................................... S-39
INDEX OF TERMS................................. S-42
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SUMMARY INFORMATION
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER
IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND THE TERMS OF THE CLASS A
CERTIFICATES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS.
THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOWS AND OTHER
INFORMATION TO AID YOUR UNDERSTANDING. THIS SUMMARY IS QUALIFIED BY THE FULL
DESCRIPTION OF THESE CALCULATIONS, CASH FLOWS AND OTHER INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
WHAT YOU OWN
YOUR CERTIFICATES REPRESENT INTERESTS ONLY IN THE ASSETS OF THE TRUST. ALL
DISTRIBUTIONS TO YOU WILL COME ONLY FROM THE AMOUNTS RECEIVED IN CONNECTION WITH
THOSE ASSETS.
The Trust contains a pool of mortgage loans, the certificate guaranty insurance
policy and certain other assets, as described under "The Trust" in this
prospectus supplement.
INFORMATION ABOUT THE MORTGAGE POOL
The mortgage pool consists of approximately 1,087 mortgage loans with an
aggregate principal balance as of May 1, 1999 of approximately $278,421,463. All
of the mortgage loans are secured by residential properties or shares of
cooperative apartments and each is set to mature within 30 years of the date it
was originated. Mortgage loans with loan-to-value ratios as of May 1, 1999 in
excess of 80% are either secured by additional collateral or have primary
mortgage insurance.
The mortgage loans provide for a fixed interest rate during an initial period of
either three or five years from the date of origination of such mortgage loan
and thereafter provide for adjustments to such interest rate every six months or
on an annual basis. 1,037 mortgage loans representing approximately 96.2% (by
principal balance as of May 1, 1999) of the mortgage pool do not provide for any
payments of principal during the initial fixed rate period.
The interest rate on each mortgage loan will adjust with reference to the sum of
an index and a margin. Such adjustments may be rounded and will be subject to
the limitations set forth in the related mortgage note with respect to increases
and decreases for any adjustment and the maximum and minimum interest rate, if
any.
The indices will consist of either (i) the weekly average yield on United States
Treasury Securities adjusted to a constant maturity of one year or (ii) the
average of interbank offered rates for six-month U.S. dollar denominated
deposits in the London market.
For a further description of the mortgage loans in the mortgage pool, see
"Description of the Mortgage Pool" and Appendix A in this prospectus supplement.
THE CLASS A CERTIFICATES
PNC Mortgage Securities Corp. will deposit the mortgage loans into the Trust.
The Trust is being created for the purpose of issuing the Mortgage Pass-Through
Certificates, Series 1999-7. The initial class principal balance for the
Class A Certificates will equal approximately $272,156,900. For the initial
distribution date, the annual certificate interest rate on the Class A
Certificates will equal approximately 6.549%. Thereafter, the annual certificate
interest rate on the Class A Certificates will equal the weighted average of the
mortgage interest rates on the mortgage loans less the per annum rates at which
each of the servicing fee, the master servicing fee and the certificate insurer
premium is calculated.
The Trust will also issue the Class B-1, Class B-2, Class B-3 and Class R
Certificates which are not being offered by this prospectus supplement. The
Class B-1, Class B-2 and Class B-3 Certificates are subordinated to the Class A
Certificates and provide credit enhancement for the Class A Certificates.
INITIAL PRINCIPAL BALANCE OF THE CERTIFICATES
The initial aggregate principal balance of the certificates issued by the Trust
is approximately $278,421,463, subject to an upward or downward variance of no
more than 5%.
The initial aggregate principal balance of the Class A Certificates comprise
approximately 97.750% of the mortgage pool and the Class B
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Certificates in the aggregate comprise approximately 2.250% of the mortgage
pool. The Class R Certificate is issued without a principal balance.
DISTRIBUTIONS ON THE CERTIFICATES
MONTHLY DISTRIBUTIONS
Each month, the trustee, Bankers Trust Company of California, N.A., will make
distributions of interest and principal to the holders of the certificates. The
first distribution date will be June 25, 1999. Thereafter, distributions will be
made on the 25th day of each month, or if such 25th day is not a business day,
on the next business day.
Source of Payments. The mortgagors pay their interest and principal during the
month to the servicers. Each month, the servicers subtract their servicing fee
and send the remainder to the master servicer. The master servicer then
subtracts its master servicing fee and sends the remainder to the trustee. On
the distribution date for that month, the trustee then subtracts the premium
payable to the certificate insurer and distributes the remaining amount to the
holders of the certificates in the order described in "Description of the
Class A Certificates--Priority of Distributions" in this prospectus supplement.
DISTRIBUTIONS OF INTEREST
The Class A Certificates will accrue interest each month. On each distribution
date interest will be distributed to the holders of the Class A Certificates in
the order described in "Description of the Class A Certificates--Priority of
Distributions" in this prospectus supplement.
It is possible that, on any given distribution date, there will be insufficient
payments from the mortgage loans to pay interest and principal due on the
Certificates. Any such shortfall will be allocated first to interest and
principal on the Class B Certificates and then to interest and principal on the
Class A Certificates. If the shortfall in mortgage loan payments would be
allocable to interest on the Class A Certificates, such shortfall will be
covered by payments under the certificate guaranty insurance policy to the
extent described herein under "Credit Enhancements--Certificate Insurance
Policy." However, the certificate guaranty insurance policy will not cover
(i) shortfalls in interest collections attributable to the timing of prepayments
or (ii) shortfalls attributable to the Soldiers' and Sailors' Civil Relief Act
of 1940.
The amount of interest accruing on the Class A Certificates each month will
equal 1/12th of the annual certificate interest rate for that class multiplied
by its class principal balance. The principal balance used for this calculation
on the first distribution date will be the applicable balance as of May 28,
1999, which is the closing date. The principal balance used for this calculation
on any other distribution date will be the applicable balance immediately after
the preceding distribution date.
The annual certificate interest rate on the Class A Certificates is described in
this summary under "--The Class A Certificates."
COMPENSATING INTEREST AND INTEREST SHORTFALLS
When mortgagors make partial or full prepayments they are required to pay
interest only to the date of their prepayment. To compensate certificateholders
for the shortfall in interest this causes, the servicers are obligated to pay
compensating interest to the master servicer for distribution to
certificateholders out of a portion of the servicing fees they collect. The
master servicer will be obligated to pay compensating interest if the servicers
fail to do so. For a description of how compensating interest is allocated among
the certificates as well as important limitations on the amount of compensating
interest that will be allocated among the certificates, see "Description of the
Class A Certificates--Distributions of Interest--Compensating Interest" and
"Yield and Prepayment Considerations" in this prospectus supplement.
DISTRIBUTIONS OF PRINCIPAL
As the mortgagors pay principal on the mortgage loans, that principal is passed
on to the holders of certificates. On each distribution date, a certain portion
of the principal received on the mortgage loans will be distributed to the
holders of the Class A Certificates as of the last business day in the
immediately preceding month. Likewise, a certain portion will be distributed to
the holders of the Class B Certificates as of the last business day in the
immediately preceding month. To the extent that losses have been realized on the
mortgage loans, those losses will be allocated first to the Class B Certificates
and then to the Class A Certificates. Subject to the terms of the certificate
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guaranty insurance policy, any such realized losses allocated to the Class A
Certificates will be covered by payments under the certificate guaranty
insurance policy to the extent described in this prospectus supplement under
"Credit Enhancements--Certificate Insurance Policy." See "Description of the
Class A Certificates--Distributions of Principal" in this prospectus supplement.
SEE "YIELD AND PREPAYMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT FOR A
TABLE SHOWING THE PERCENTAGE OF THE PRINCIPAL BALANCE OF THE CLASS A
CERTIFICATES OUTSTANDING AT DIFFERENT RATES OF PREPAYMENTS ON THE MORTGAGE
LOANS.
ADVANCES
For any month, if the master servicer receives a payment on a mortgage loan that
is less than the full scheduled payment or if no payment is received at all, the
master servicer will advance its own funds to cover that shortfall. However, the
master servicer will make advances only so long as it determines that such
advance will be recoverable from future payments or collections on that mortgage
loan. See "Description of the Class A Certificates--Advances" in this prospectus
supplement.
CREDIT ENHANCEMENTS
Certificate Guaranty Insurance Policy. The Class A Certificates will have the
benefit of an unconditional and irrevocable certificate guaranty insurance
policy issued by Ambac Assurance Corporation. With limited exceptions, the
certificate guaranty insurance policy will, subject to its terms, require the
certificate insurer to make payments for the benefit of the holders of the Class
A Certificates in respect of shortfalls in interest collections on the Mortgage
Loans to the extent allocable to the Class A Certificates. In addition, the
certificate guaranty insurance policy will, subject to its terms, cover realized
losses of principal allocable to the Class A Certificates. On the distribution
date in November, 2029, the certificate guaranty insurance policy will, subject
to its terms, cover the remaining class principal balance of the Class A
Certificates, after giving effect to distributions to be made on such date. The
certificate guaranty insurance policy will not cover (i) shortfalls in interest
collections attributable to the timing of prepayments or (ii) shortfalls
attributable to the Soldiers' and Sailors' Civil Relief Act of 1940. See "Credit
Enhancements--Certificate Insurance Policy" in this prospectus supplement.
Subordination. On each distribution date, the Class A Certificates will receive
distributions of interest and principal to which they are entitled before the
Class B Certificates receive distributions of interest or principal to which
they are entitled. This priority of distributions, together with the manner in
which realized losses are allocated, provides credit enhancement to the Class A
Certificates.
Shifting of Interests. The holders of the Class A Certificates in the aggregate
will generally receive 100% of principal prepayments received on the mortgage
loans until the tenth anniversary of the first distribution date. During the
next four years and subject to certain delinquency and loss tests described in
this prospectus supplement under "Description of the Class A
Certificates--Principal Prepayments," the Class A Certificates in the aggregate
will generally receive a disproportionately large, but decreasing, share of
principal prepayments. This will result in a quicker return of principal to the
Class A Certificates than the Class B Certificates. This allocation of principal
prepayments will cause the proportionate interests in the Trust represented by
the Class A and Class B Certificates to shift. It also increases the likelihood
that holders of the Class A Certificates will be paid the full amount of
principal to which they are entitled. For a more detailed description of how
principal prepayments are allocated between the Class A and Class B
Certificates, see "Description of the Class A Certificates--Principal
Prepayments" in this prospectus supplement.
ALLOCATION OF LOSSES
A loss is realized on a mortgage loan when the master servicer or applicable
servicer determines that it has received all amounts it expects to recover with
respect to such loan and that amount is less than the outstanding principal
balance of the loan and its accrued and unpaid interest. LOSSES WILL BE
ALLOCATED TO THE CERTIFICATES BY DEDUCTING SUCH LOSSES FROM THE PRINCIPAL
BALANCE OF THE CERTIFICATES WITHOUT MAKING ANY DISTRIBUTIONS TO THE
CERTIFICATEHOLDERS. The amount of such losses will first be allocated to the
Class B Certificates and will be allocated to the Class A Certificates only
after the principal balance of the Class B Certificates has been reduced to
zero.
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However, subject to its terms, the certificate guaranty insurance policy will
cover such losses to the extent allocable to the Class A Certificates.
For a more detailed description of the allocation of realized losses among the
certificates, see "Description of the Class A Certificates--Subordination and
Allocation of Losses" in this prospectus supplement.
YIELD CONSIDERATIONS
The yield to maturity of the Class A Certificates will depend upon, among other
things:
o the price at which such certificates are purchased;
o the applicable certificate interest rate; and
o the rate of prepayments on the related mortgage loans.
Prepayments may be affected by a variety of factors as more fully described in
this prospectus supplement under "Yield and Prepayment Considerations."
BOOK-ENTRY REGISTRATION
In general, the Class A Certificates will be available only in book-entry form
through the facilities of The Depository Trust Company. See "Description of the
Class A Certificates--Book-Entry Registration" in this prospectus supplement.
DENOMINATIONS
The Class A Certificates are offered in minimum denominations of $25,000 each
and multiples of $1 in excess thereof.
LEGAL INVESTMENT
As of the date of their issuance, the Class A Certificates will be "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984. See "Certain Legal Investment Aspects" in this prospectus
supplement for important information concerning possible restrictions on
ownership of the Class A Certificates by regulated institutions. You should
consult your own legal advisors in determining whether and to what extent the
Class A Certificates constitute legal investments for you.
ERISA CONSIDERATIONS
Subject to important considerations described under "ERISA Considerations" in
this prospectus supplement and in the accompanying prospectus, the Class A
Certificates will be eligible for purchase by persons investing assets of
employee benefit plans or individual retirement accounts.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, PNC Mortgage Securities Corp. will cause a
REMIC election to be made with respect to the Trust. The Class A Certificates
will represent ownership of REMIC regular interests. Such certificates will
generally be treated as representing ownership of debt for federal income tax
purposes. You will be required to include in income all interest and original
issue discount on such certificates in accordance with the accrual method of
accounting regardless of your usual methods of accounting.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences" in this prospectus supplement and in the accompanying prospectus.
RATINGS
The Class A Certificates are required to be rated "AAA" by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. and "Aaa" by
Moody's Investors Service, Inc. The ratings on the Class A Certificates address
the likelihood of the receipt by holders thereof of all distributions on the
underlying mortgage loans to which they are entitled. They do not address the
likely actual rate of prepayments. Such rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the Class A Certificates.
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RISK FACTORS
THE CLASS A CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, YOU SHOULD NOT PURCHASE THE CLASS A CERTIFICATES UNLESS YOU
UNDERSTAND AND ARE ABLE TO BEAR THE INTEREST RATE, PREPAYMENT, CREDIT, LIQUIDITY
AND MARKET RISKS ASSOCIATED WITH THE CLASS A CERTIFICATES.
THE MORTGAGE LOANS UNDERLYING THE CLASS A CERTIFICATES ARE COMPLEX, AND IT IS
IMPORTANT THAT YOU POSSESS, EITHER ALONE OR TOGETHER WITH AN INVESTMENT ADVISOR,
THE EXPERTISE NECESSARY TO EVALUATE THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN THE CONTEXT OF YOUR FINANCIAL
SITUATION.
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THERE IS NO GUARANTEE THAT YOU WILL As the mortgagors make payments of interest and principal on their
RECEIVE PRINCIPAL DISTRIBUTIONS ON YOUR mortgage loans, you will receive distributions. Because the
CLASS A CERTIFICATES AT ANY SPECIFIC RATE mortgagors are free to make those payments faster than scheduled, you
OR ON ANY SPECIFIC DATES may receive distributions faster than you expected. There is no
guarantee that you will receive principal distributions on your
Class A Certificates at any specific rate or on any specific dates.
THE YIELD ON YOUR CLASS A CERTIFICATES IS The yield to maturity on your Class A Certificates is directly
DIRECTLY RELATED TO THE PREPAYMENT RATE ON related to the rate at which the mortgagors pay principal on the
THE MORTGAGE LOANS mortgage loans. Principal payments on the mortgage loans may be in
the following forms:
o scheduled principal payments; and
o principal prepayments which consist of:
o prepayments in full on a mortgage loan;
o partial prepayments on a mortgage loan;
o insurance proceeds;
o proceeds of mortgage loans that are repurchased; and
o liquidation principal, which is the principal recovered after
foreclosing on or otherwise liquidating a defaulted mortgage loan.
In general, during the initial fixed rate period, as prevailing
mortgage interest rates decline significantly below the mortgage
interest rates on the mortgage loans in the mortgage pool, the
prepayment rate may increase. General economic conditions and
homeowner mobility will also affect the prepayment rate. None of the
mortgage loans is assumable prior to its first adjustment date and,
therefore, the sale of any mortgaged property during such period may
cause a prepayment in full on the related mortgage loan. See "Yield
and Prepayment Considerations" in this prospectus supplement and
"Maturity, Average Life and Prepayment Assumptions" in the
prospectus. The prepayment rate will affect the yield on the Class A
Certificates.
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Each mortgage loan in the Trust is an adjustable-rate mortgage loan
with an initial fixed rate period. 1,037 mortgage loans representing
96.2% (by principal balance as of May 1, 1999) of the mortgage pool
do not provide for any payments of principal during the initial
fixed-rate period. We are not aware of any publicly available
statistics that set forth principal prepayment experience or
prepayment forecasts of mortgage loans of the type included in the
Trust over an extended period of time, and the experience with
respect to the mortgage loans included in the Trust is insufficient
to draw any conclusions with respect to the expected prepayment rates
on such mortgage loans. As is the case with conventional fixed-rate
mortgage loans, adjustable-rate mortgage loans with an initial
fixed-rate period may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if
prevailing mortgage interest rates fall significantly,
adjustable-rate mortgage loans with an initial fixed-rate period
could be subject to higher prepayment rates either before or after
the interest rate on the mortgage loan begins to adjust than if
prevailing mortgage interest rates remain constant because the
availability of fixed-rate mortgage loans at competitive interest
rates may encourage mortgagors to refinance their mortgage loans to
"lock in" lower fixed interest rates. The features of such
adjustable-rate mortgage loan programs of mortgage loan originators
during the past years have varied significantly in response to market
conditions such as interest rates, consumer demand, regulatory
restrictions and other factors. The lack of uniformity of the terms
and provisions of such adjustable-rate mortgage loan programs have
made it impracticable to compile meaningful comparative data on
prepayment rates and, accordingly, we cannot assure you as to the
rate of prepayments on the mortgage loans in stable or changing
interest rate environments.
THE YIELD ON YOUR CLASS A CERTIFICATES The mortgage interest rate on each mortgage loan will be fixed for an
WILL ALSO BE AFFECTED BY CHANGES IN THE initial period from the date of origination of such mortgage loan.
CLASS A CERTIFICATE INTEREST RATE Thereafter each mortgage loan provides for adjustments to such
interest rate every six months or on an annual basis. The interest
rate on each mortgage loan will adjust with reference to the sum of
an index and a margin, subject to the limitations set forth in the
mortgage note with respect to increases and decreases for any
adjustment (i.e., a "periodic cap") and the maximum and minimum
interest rate, if any. See "Description of the Mortgage Pool" herein.
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The certificate interest rate on the Class A Certificates may
decrease, and may decrease significantly, after the mortgage interest
rates on the mortgage loans begin to adjust as a result of, among
other factors, changes in the applicable indices, the dates of
adjustment, the margins and any applicable periodic cap or lifetime
rate change limitations. Moreover, although each mortgage loan has a
maximum mortgage interest rate, none have a specified floor.
Accordingly, the minimum mortgage interest rate to which the mortgage
loans may adjust will be determined by the applicable margin. In the
event that, despite prevailing market interest rates, the mortgage
interest rate on any mortgage loan cannot increase due to a maximum
mortgage interest rate change or a periodic cap, the yield on the
Class A Certificates could be adversely affected. See "Description of
the Mortgage Pool" and "Yield and Prepayment Considerations" herein.
THE TRUST CONTAINS ADDITIONAL COLLATERAL Approximately 37.3% (by principal balance as of May 1, 1999) of the
OTHER THAN REAL ESTATE mortgage loans have a loan-to-value ratio at origination greater than
80% but not greater than 100% and three mortgage loans representing
approximately 0.6% (by principal balance as of May 1, 1999) of the
mortgage pool have loan-to-value ratios at origination greater than
100% but not greater than approximately 107% and, in each case, are
secured by both the related mortgaged property and certain additional
collateral. Such additional collateral may include securities or a
third party guarantee secured by real estate, securities or the right
to draw on a home equity line of credit. The securities may include
publicly traded stocks, corporate and municipal bonds, government
securities, commercial paper, bank deposits, trust accounts and
mutual funds. See "Description of the Mortgage Pool" in this
prospectus supplement.
We cannot assure you as to the amount or timing of proceeds, if any,
that might be realized from such additional collateral.
TWENTY BALLOON LOANS MADE TO A SINGLE 20 mortgage loans representing approximately 0.5% (by principal
BORROWER WILL HAVE ADDITIONAL RISK BASED balance as of May 1, 1999) of the mortgage pool are made to the same
ON CONCENTRATION IN THE SAME LOCATION AND borrower and are secured by non-owner occupied condominium units in
RENTAL MARKET CONDITIONS the same project. The borrower under such mortgage loans is a limited
liability company. All of such mortgage loans are
cross-collateralized and cross-defaulted. These mortgage loans
involve additional risk because the ability of the borrower to make
payments due under such mortgage loans depends to an unknown and
possibly significant extent on cash flow generated by rentals of
these mortgaged properties. The cash flow generated by these
mortgaged properties from time to time may be volatile and will be
influenced by a variety of factors, including the creditworthiness of
tenants, the level of tenant defaults and turnover, the occupancy
rates and the level of expenses incurred by the borrower to operate
such properties. Furthermore, in the event of a default by the
borrower, the liquidation value of the property may be determined, in
substantial part, by the amount of such cash flow (or its potential
to generate cash flow).
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
The bankruptcy or insolvency of such borrower or any affiliate could
have an adverse effect on the operation of all of such mortgaged
properties and on the ability of such mortgaged properties to produce
sufficient cash flow to make required payments on such mortgage
loans.
In addition, all of such mortgage loans are balloon loans. These
mortgage loans will not fully amortize over their terms to maturity
and, thus, will require interest and principal payments at their
stated maturity on November 1, 2004 that are substantially greater
than the monthly payments previously due on such mortgage loans
(i.e., balloon payments). Mortgage loans with balloon payments
involve a greater degree of risk because the ability of a mortgagor
to make a balloon payment typically will depend on the mortgagor's
ability either to refinance the loan or to timely sell the related
mortgaged property. The ability of a mortgagor to refinance the loan
or sell the related mortgaged property will be affected by a number
of factors, including:
o the level of available mortgage interest rates at the time of
refinancing or sale;
o the mortgagor's equity in the related mortgaged property;
o prevailing general economic conditions; and
o the availability of credit and insurance for one- to four-family
residential real properties generally.
CLASS A CERTIFICATES BOUGHT AT PREMIUMS If you purchase a Class A Certificate at a discount from its original
AND DISCOUNTS MAY RECEIVE A LOWER YIELD principal balance and the rate of principal distributions is slower
THAN EXPECTED than you expect, your yield may be lower than you anticipate. If you
purchase a certificate at a premium over its original principal
balance and the rate of principal distributions is faster than you
expect, your yield may be lower than you anticipate.
THE LACK OF SECONDARY MARKETS MAY MAKE IT A secondary market for the Class A Certificates may not develop. If a
DIFFICULT FOR YOU TO RESELL YOUR CLASS A secondary market does develop, it might not continue or it might not
CERTIFICATES be sufficiently liquid to allow you to resell any of your Class A
Certificates. The Class A Certificates will not be listed on any
securities exchange.
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
THE LACK OF PHYSICAL CERTIFICATES MAY You will not have a physical certificate. As a result, you will be
CAUSE DELAYS IN PAYMENT AND CAUSE able to transfer your Class A Certificates only through The
DIFFICULTIES IN PLEDGING OR SELLING YOUR Depository Trust Company, participating organizations, indirect
CLASS A CERTIFICATES participants and certain banks. The ability to pledge such a
certificate to a person that does not participate in the DTC system
may be limited because of the lack of a physical certificate. In
addition, you may experience some delay in receiving distributions on
the Class A Certificates because the trustee will not send
distributions directly to you. Instead, the trustee will send all
distributions to The Depository Trust Company, which will then credit
those distributions to the participating organizations. Those
organizations will, in turn, credit your account either directly or
indirectly. Also, because investors may be unwilling to purchase
securities without delivery of a physical certificate, the Class A
Certificates may be less liquid than otherwise would be the case.
RISKS ASSOCIATED WITH COMPUTER PROGRAMS Some computer programs use two digits to define the applicable year.
AND THE YEAR 2000 In performing date calculations, a two-digit program could recognize
a date ending in "00" as the year 1900, rather than the year 2000.
This could result in a failure to properly calculate dates before and
after December 31, 1999, including dates such as February 29, 2000,
and this could also cause the computer running the programs to stop
operating properly. The master servicer is testing for potential
problems from two-digit programs, and it plans to correct or replace
its affected computer programs and systems on a timely basis. The
master servicer has also requested each servicer to undertake testing
and correction or replacement as necessary.
If the master servicer, any servicer or any of their suppliers,
customers or agents do not timely implement effective procedures to
deal with computer programs that rely on two-digit year calculations,
the master servicer's performance of its obligations for the Trust
could be adversely affected. This could result in delays in
processing payments on the mortgage loans, which could cause a delay
in distributions to you.
Likewise, The Depository Trust Company has developed and is
implementing a program so that its systems, as they relate to the
timely payment of distributions to securityholders, book-entry
deliveries and settlement of trades within the DTC system continue to
function appropriately. However, DTC's ability to perform properly
its services is also dependent upon other parties, including issuers
and their agents, as well as DTC's direct and indirect participants,
banks and third party vendors. If DTC, any of its agents, direct or
indirect participants, banks or third-party vendors do not timely
implement effective procedures to deal with computers programs that
rely on two-digit year calculations, Class A Certificateholders may
not receive timely distributions.
</TABLE>
S-12
<PAGE>
THE TRUST
The primary assets of the Trust will consist of a pool (the "MORTGAGE
POOL") of Mortgage Loans. The Trust will also contain (i) certain insurance
policies related to the Mortgage Loans (including rights under the surety bond
issued by Ambac Assurance Corporation as described herein under "Description of
the Mortgage Pool"), (ii) any property which secured a Mortgage Loan and which
is acquired by foreclosure or by deed in lieu of foreclosure after May 1, 1999
(the "CUT-OFF DATE"), (iii) amounts held in the Certificate Account (as defined
in the Prospectus) and certain other accounts, (iv) a certificate guaranty
insurance policy (the "CERTIFICATE INSURANCE POLICY") issued by Ambac Assurance
Corporation (the "CERTIFICATE INSURER"), (v) rights in and to the Mortgaged
Properties (as defined herein) and the Additional Collateral (as defined herein)
and (vi) certain other assets. Funds otherwise required to be held in the
Certificate Account may be held in an investment account and invested for the
benefit of the Master Servicer in Eligible Investments pursuant to the terms of
the Pooling Agreement, as described herein. The Mortgage Loans will be assigned
to the Trustee, together with all principal and interest due on the Mortgage
Loans after the Cut-Off Date. The Trustee will, concurrently with such
assignment, authenticate and deliver the Certificates. Each Mortgage Loan will
be identified in a schedule appearing as an exhibit to the Pooling Agreement
(the "MORTGAGE LOAN SCHEDULE") which will specify with respect to each Mortgage
Loan, among other things, the original principal balance and the outstanding
principal balance as of the close of business on the Cut-Off Date, the term of
the Mortgage Note, the Mortgage Interest Rate in effect on the Cut-Off Date, the
Index, the next Adjustment Date, the Adjustment Date frequency, the Periodic
Cap, the Rate Ceiling (each, as defined herein) and certain other information.
DESCRIPTION OF THE MORTGAGE POOL*
The Mortgage Pool will consist of 1,087 Mortgage Loans that will have an
aggregate principal balance as of the Cut-Off Date, after deducting payments due
on or before that date, of approximately $278,421,463. Certain of the risks of
loss on certain Mortgage Loans will be covered up to specified limits by Primary
Insurance Policies.
The Mortgage Loans are secured by first mortgages or first deeds of trust
or other similar security instruments creating first liens on one- to
four-family residential properties or shares of stock relating to cooperative
apartments (the "MORTGAGED PROPERTIES"), which may include detached homes,
duplexes, townhouses, individual condominium units, individual units in planned
unit developments and other attached dwelling units which are part of buildings
consisting of more than four units (so long as the Mortgaged Property consists
of no more than four units other than cooperative apartments), and having the
additional characteristics described below and in the Prospectus.
- ------------------
*The description herein of the Mortgage Pool and the Mortgaged Properties in
this section and in Appendix A is based on the Mortgage Loans as of the close
of business on the Cut-Off Date, after deducting the scheduled principal
payments due on or before such date, whether or not actually received. All
references herein to "principal balance" refer to the principal balance as of
the Cut-Off Date, unless otherwise specifically stated or required by the
context. All references herein to "loan-to-value ratios" are calculated without
reference to the value of the Additional Collateral, unless otherwise
specifically stated. Due to rounding, percentages may not sum to 100%.
References herein to percentages of Mortgage Loans refer in each case to the
percentage of the aggregate principal balance of the Mortgage Loans, based on
the outstanding principal balances of the Mortgage Loans after giving effect to
scheduled Monthly Payments due on or prior to the Cut-Off Date, whether or not
received. References to weighted averages refer in each case to weighted
averages by principal balance as of the Cut-Off Date of the Mortgage Loans
(determined as described in the preceding sentence). Prior to the issuance of
the Certificates, Mortgage Loans may be removed from the Mortgage Pool as a
result of Payoffs, delinquencies or otherwise. In such event, other Mortgage
Loans may be included in the Mortgage Pool. The Company believes that the
information set forth herein and in Appendix A with respect to the Mortgage
Pool is representative of the characteristics of the Mortgage Pool as it will
actually be constituted at the time the Certificates are issued, although the
range of Mortgage Interest Rates and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary. See "--Additional Information"
herein.
S-13
<PAGE>
Each Mortgage Loan will have a first payment date during the period from
November 1997 through June 1999, inclusive. All of the Mortgage Loans will have
payments due on the first day of each month (the "DUE DATE"). As of the Cut-Off
Date, one Mortgage Loan representing approximately 0.03% of the Mortgage Pool is
more than 30 days but less than 59 days delinquent.
Each Mortgage Loan will be a conventional Mortgage Loan evidenced by a
Mortgage Note and will have an original term to maturity of not more than 30
years. 1,066 Mortgage Loans representing approximately 98.6% of the Mortgage
Pool provide for a fixed Mortgage Interest Rate (a "FIXED RATE") during the
first five years after the origination of such Mortgage Loan and 21 Mortgage
Loans representing approximately 1.4% of the Mortgage Pool provide for a Fixed
Rate during the first three years after the origination of such Mortgage Loan.
Each Mortgage Note will provide for adjustments to the Mortgage Interest Rate
thereon at the end of the initial fixed rate period and every six months (with
respect to the Mortgage Loans that have an Index consisting of Six-Month Libor
(as defined herein)) or annually (with respect to the Mortgage Loans that have
an Index consisting of One-Year CMT (as defined herein)) thereafter (each, an
"ADJUSTMENT DATE"). 1,037 Mortgage Loans representing approximately 96.2% of the
Mortgage Pool do not provide for any payments of principal during the initial
fixed rate period. As of the Cut-Off Date, 20 Mortgage Loans representing
approximately 0.5% of the Mortgage Pool, with an aggregate principal balance of
approximately $1,450,368, will not, by the terms of the related Mortgages, fully
amortize by their stated maturity dates (each, a "BALLOON LOAN"). Such Mortgage
Loans, all of which have a stated maturity of November 1, 2004, are made to the
same borrower and are secured by non-owner occupied condominium units in the
same project. The borrower under such Mortgage Loans is a limited liability
company. Each other Mortgage Loan is fully amortizing over the term to maturity
of such Mortgage Loan.
The Mortgage Interest Rate on each Mortgage Loan will adjust every six
months or annually commencing on the third or fifth anniversary of the first Due
Date and thereafter every six months or on each anniversary of the Due Date on
which such adjustment occurred. On each Adjustment Date, the Mortgage Interest
Rate will adjust to the sum of the Index and the number of basis points
specified in the applicable Mortgage Note (the "MARGIN"), rounded to the nearest
one-eighth of one percent, subject to the limitation that with respect to each
Adjustment Date after the initial Adjustment Date, the Mortgage Interest Rate
after such adjustment may not vary from the Mortgage Interest Rate in effect
prior to such adjustment by more than the number of basis points specified in
the Mortgage Note (the "PERIODIC CAP"). 115 Mortgage Loans representing
approximately 12.6% of the Mortgage Pool have Periodic Caps on each Adjustment
Date after the initial Adjustment Date. The Periodic Cap with respect to such
Mortgage Loans for each Adjustment Date other than the initial Adjustment Date
ranges from 1.000% to 2.000%, with a weighted average of approximately 1.959%.
However, 32 Mortgage Loans representing approximately 2.7% of the Mortgage Pool
also provide for a Periodic Cap on the first Adjustment Date. In addition,
adjustments to the Mortgage Interest Rate for each Mortgage Loan are subject to
a lifetime maximum interest rate (a "RATE CEILING"). None of the Mortgage Loans
specify a lifetime minimum interest rate. Consequently, the minimum Mortgage
Interest Rate for each Mortgage Loan will be the applicable Margin. None of the
Mortgage Loans are assumable during the initial fixed rate period. On the first
Due Date following each Adjustment Date for each Mortgage Loan, the monthly
payment for the Mortgage Loan will be adjusted, if necessary, to an amount that
will fully amortize such Mortgage Loan at the adjusted Mortgage Interest Rate
over its remaining scheduled term to maturity, or, in the case of any Balloon
Loan, over its remaining amortized term to maturity.
Approximately 37.3% of the Mortgage Loans (the "ADDITIONAL COLLATERAL
LOANS") have a loan-to-value ratio at origination greater than 80% but not
greater than 100% and three Mortgage Loans representing approximately 0.6% of
the Mortgage Pool have a loan-to-value ratio at origination greater than 100%
but not greater than approximately 107% and, in each case, are secured by both
the related Mortgaged Property and certain additional collateral (the
"ADDITIONAL COLLATERAL"). The Additional Collateral may include securities owned
by the borrower or a third party guarantee (usually a relative of the borrower),
which in turn is secured by a security interest in securities, a lien on
residential real estate owned by such guarantor or the right to draw on a home
equity line of credit. The amount of such Additional Collateral ranges from
approximately 12.6% to 50.0% of the original principal balance of each such
Additional Collateral Loan with a weighted average of approximately 30.2%. The
requirement to maintain Additional Collateral generally terminates when the
loan-to-value ratio of the Additional Collateral Loan is reduced to a
predetermined
S-14
<PAGE>
amount set forth in the related Mortgage Loan as a result of a reduction in the
principal balance because of principal payments or an increase in the appraised
value of the related Mortgaged Property. The Servicer (or the Master Servicer,
in the event of a default by the Servicer) will be required to attempt to
realize on any such Additional Collateral, in addition to the related Mortgaged
Property, if the related Additional Collateral Loan is liquidated upon default.
The right to receive proceeds from the realization of Additional Collateral upon
any such liquidation will be assigned to the Trustee pursuant to the Pooling
Agreement. No assurance can by given as to the amount or timing of proceeds, if
any, that might be realized by the Servicer from such Additional Collateral and
remitted to the Trustee for the benefit of the Certificates. The Additional
Collateral Loans are not covered by primary mortgage insurance policies.
However, the assets of the Trust will include rights under a limited purpose
surety bond issued by Ambac Assurance Corporation and assigned to the Trustee
for the benefit of the Certificateholders which is intended to guarantee the
ultimate receipt of certain shortfalls in the net proceeds realized from the
liquidation of Additional Collateral (such amount not to exceed 30% of the
original principal balance of the related Additional Collateral Loan) to the
extent any such shortfall results in a loss of principal on such Additional
Collateral Loan. Such limited purpose surety bond is in addition to the
Certificate Insurance Policy. See "The Mortgage Pools" in the accompanying
prospectus.
None of the Mortgage Loans will be Buydown Loans (as defined in the
Prospectus). As of the Cut-Off Date, approximately 3.8% of the Mortgage Loans
are covered by a Primary Insurance Policy. All of the Mortgage Loans with
loan-to-value ratios as of the Cut-Off Date in excess of 80% were covered by a
Primary Insurance Policy or secured by Additional Collateral.
SEE APPENDIX A FOR A DETAILED DESCRIPTION OF THE MORTGAGE LOANS.
THE INDICES
The Indices will consist of (i) One-Year CMT (as defined herein), with
respect to 95 Mortgage Loans representing approximately 12.1% of the principal
balance of the Mortgage Pool and (ii) Six-Month Libor (as defined below), with
respect to 992 Mortgage Loans representing approximately 87.9% of the principal
balance of the Mortgage Pool.
One-Year CMT
"ONE-YEAR CMT" is defined to be the weekly average yield on United States
Treasury Securities adjusted to a constant maturity of one year, as made
available by the Federal Reserve Board and most recently available as of the
date 45 days before the applicable Adjustment Date. In the event such Index is
no longer available, the Master Servicer will select a substitute Index in
accordance with the terms of the related Mortgage Note and in compliance with
federal and state law.
Listed below are historical values of certain average yields since January
1994, which are related to One-Year CMT. The values shown are the average
monthly yields on United States Treasury Securities adjusted to a constant
maturity of one-year for the months indicated, published by the Federal Reserve
Board. By contrast, One-Year CMT is determined by reference to a weekly average
yield on United States Treasury Securities adjusted to a constant maturity of
one year, rather than such monthly average yields. The monthly averages shown
are intended only to provide an historical summary of the movements in yields on
United States Treasury Securities adjusted to a constant maturity of one-year
and may not be indicative of future rates. The source of the values shown below
is Federal Reserve Statistical Release H.15 (519).
<TABLE>
<CAPTION>
ONE-YEAR CMT
--------------------------------------------------
MONTH 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
January......................................................... 4.51% 5.24% 5.61% 5.09% 7.05% 3.54%
February........................................................ 4.70 5.31 5.53 4.94 6.70 3.87
March........................................................... 4.78 5.39 5.80 5.34 6.43 4.32
April........................................................... 4.69 5.38 5.99 5.54 6.27 4.82
May............................................................. 5.44 5.87 5.64 6.00 5.31
June............................................................ 5.41 5.69 5.81 5.64 5.27
July............................................................ 5.36 5.54 5.85 5.59 5.48
August.......................................................... 5.21 5.56 5.67 5.75 5.56
September....................................................... 4.71 5.52 5.83 5.62 5.76
October......................................................... 4.12 5.46 5.55 5.59 6.11
November........................................................ 4.53 5.46 5.42 5.43 6.54
December........................................................ 4.52 5.53 5.47 5.31 7.14
</TABLE>
S-15
<PAGE>
Six-Month Libor
"SIX-MONTH LIBOR" is defined to be the rate for six-month U.S. dollar
denominated deposits offered in the London interbank market as published in The
Wall Street Journal and most recently available as of the first business day of
the month immediately preceding the month of the applicable Adjustment Date or,
with respect to 20 Mortgage Loans, representing approximately 0.5% of the
Mortgage Pool, as of the date 45 days before the applicable Adjustment Date. In
the event such Index is no longer available, the Master Servicer will select a
substitute Index in accordance with the terms of the related Mortgage Note and
in compliance with federal and state law.
Listed below are historical values of certain average yields since January
1994, which are related to Six-Month Libor. The monthly averages shown are
intended only to provide an historical summary of the movements in Six-Month
Libor and may not be indicative of future rates.
<TABLE>
<CAPTION>
SIX-MONTH LIBOR
--------------------------------------------------
MONTH 1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
January........................................................ 5.01% 5.66% 5.68% 5.41% 6.77% 3.43%
February....................................................... 5.05 5.64 5.60 5.17 6.53 3.76
March.......................................................... 5.08 5.71 5.80 5.41 6.46 4.15
April.......................................................... 5.05 5.74 6.01 5.56 6.38 4.51
May............................................................ 5.77 5.99 5.60 6.16 5.02
June........................................................... 5.75 5.91 5.76 5.91 4.97
July........................................................... 5.75 5.84 5.85 5.84 5.27
August......................................................... 5.71 5.84 5.70 5.93 5.29
September...................................................... 5.42 5.84 5.83 5.86 5.51
October........................................................ 5.06 5.84 5.64 5.88 5.89
November....................................................... 5.15 5.88 5.55 5.73 6.23
December....................................................... 5.10 5.92 5.60 5.59 6.87
</TABLE>
ADDITIONAL INFORMATION
Appendix A contains important information about the Mortgage Loans and sets
forth in detail the following information regarding the Mortgage Loans: the
Mortgage Interest Rates; the Pass-Through Rates; the initial Adjustment Dates;
the Margins; the Indices; the Rate Ceilings; the original principal balances of
the Mortgage Loans; the years in which initial monthly payments on the Mortgage
Loans are due; the loan-to-value ratios of the Mortgage Loans as of the Cut-Off
Date; the types of Mortgaged Properties; the geographic distribution by state of
the Mortgaged Properties; the scheduled maturity years of the Mortgage Loans and
the weighted average remaining term to maturity of the Mortgage Loans (adjusted
for Curtailments and with respect to Balloon Loans, disregarding their
amortization schedules); the original terms to maturity of the Mortgage Loans;
the number of Mortgage Loans originated under reduced documentation or no
documentation programs, if any; the stated owner occupancy status of the
Mortgaged Properties at the time the Mortgage Loans were originated; the
Mortgagor's purpose of financing; and the number of Mortgage Loans with
loan-to-value ratios greater than 80% at origination that are secured by
Additional Collateral or are covered by primary mortgage insurance.
The Pooling Agreement, by means of a Current Report on Form 8-K, will be
available to purchasers of the Class A Certificates and will be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Class A Certificates. In the event that Mortgage Loans are
removed from or added to the Mortgage Pool as set forth in the footnote on page
S-13, such removal or addition will be noted in the Current Report on Form 8-K.
S-16
<PAGE>
DESCRIPTION OF THE CLASS A CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "POOLING AGREEMENT") to be dated as of the Cut-Off Date between
PNC Mortgage Securities Corp. (the "COMPANY"), as Depositor and Master Servicer,
and Bankers Trust Company of California, N.A., as trustee (the "TRUSTEE"), a
form of which is filed as an exhibit to the Registration Statement of which this
Prospectus Supplement is a part. Reference is made to the Prospectus for
important additional information regarding the terms and conditions of the
Pooling Agreement and the Certificates. It is a condition to the issuance of the
Class A Certificates that they receive a "AAA" rating from Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. and a "Aaa"
rating from Moody's Investors Service, Inc. As of May 28, 1999 (the "CLOSING
DATE"), the Class A Certificates will qualify as "mortgage related securities"
within the meaning of the Secondary Mortgage Market Enhancement Act of 1984.
The Master Servicer will be obligated to make Advances (as defined herein)
with respect to delinquent payments on the Mortgage Loans as described herein
under "--Advances."
The Certificates will evidence all the beneficial ownership interest in a
trust (the "TRUST") established by the Company into which the mortgage loans
(the "MORTGAGE LOANS") will be deposited. The Mortgage Pass-Through
Certificates, Series 1999-7 (the "CERTIFICATES"), will consist of the following
classes: Class A, Class B-1, Class B-2, Class B-3 and Class R. The Class B-1,
Class B-2 and Class B-3 Certificates may be collectively referred to herein as
the "CLASS B CERTIFICATES."
Only the Class A Certificates are offered hereby. The Class B and Class R
Certificates are not offered hereby.
The "CLASS PRINCIPAL BALANCE" for any Class of Certificates will equal the
aggregate amount of principal to which such Class is entitled, after giving
effect to prior (i) distributions of principal to such Class and (ii)
allocations of losses required to be borne by such Class.
The "CERTIFICATE PRINCIPAL BALANCE" for any Certificate will be the portion
of the corresponding Class Principal Balance represented by such Certificate.
The Class A Certificates will comprise approximately 97.75% of the
aggregate principal balance of the Mortgage Loans as of the Cut-Off Date. The
Class B Certificates will comprise approximately 2.25% of the aggregate
principal balance of the Mortgage Loans as of the Cut-Off Date. The Class R
Certificate will be issued without a principal balance.
The Class A Certificates are offered in minimum denominations equivalent to
not less than $25,000 initial Certificate Principal Balance each and multiples
of $1 in excess thereof; provided that one such Certificate may be issued in a
different amount.
BOOK-ENTRY REGISTRATION
The Class A Certificates will initially be represented by a global
Certificate registered in the name of the nominee of The Depository Trust
Company ("DTC"). DTC has advised the Company that DTC's nominee will be Cede &
Co. ("CEDE"). Accordingly, Cede is expected to be the holder of record of the
Class A Certificates, and references to "Class A Certificateholders" should be
understood to be references to the beneficial owners of the Class A
Certificates. No Class A Certificateholder will be entitled to receive a
certificate representing such person's interest in such Certificate. Unless and
until Definitive Class A Certificates (as defined below) are issued under the
limited circumstances described herein, all references herein to actions by
Class A Certificateholders shall refer to actions taken by DTC upon instructions
from DTC Participants (as defined below), and all references herein to
distributions, notices, reports, and statements to Class A Certificateholders
shall refer to distributions, notices, reports, and statements to Cede, as the
registered holder of such Certificates, for distribution to Class A
Certificateholders in accordance with DTC procedures.
Certificateholders may hold their Class A Certificates through DTC, if they
are DTC Participants or indirectly through organizations that are DTC
Participants. Transfers between DTC Participants will occur in
S-17
<PAGE>
the ordinary way in accordance with DTC rules. Cede, as nominee of DTC, will
hold the global Certificates for the Class A Certificates.
DTC has advised the Company that it is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended. DTC holds securities
that its participants ("DTC PARTICIPANTS") deposit with DTC. DTC also
facilitates the settlement among DTC Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in DTC Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. DTC
Participants include the Underwriter, securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Indirect
access to the DTC system is also available to other entities, such as banks,
brokers, dealers, and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly ("INDIRECT
DTC PARTICIPANTS").
Class A Certificateholders that are not DTC Participants or Indirect DTC
Participants but desire to purchase, sell, or otherwise transfer ownership of or
other interests in Class A Certificates may do so only through DTC Participants
and Indirect DTC Participants. In addition, unless Definitive Class A
Certificates are issued, Class A Certificateholders will receive all
distributions of principal and interest on the Class A Certificates through DTC
Participants. Under a book-entry format, Class A Certificateholders will receive
distributions after the related Distribution Date because, although
distributions are required to be forwarded to Cede, as nominee for DTC, on each
such Distribution Date, DTC will forward such distributions to DTC Participants
which thereafter will be required to forward them to Indirect DTC Participants
or Certificateholders. It is anticipated that the sole "Certificateholder" (as
such term is used in the Pooling Agreement) for the Class A Certificates will be
Cede, as nominee of DTC, and that Class A Certificateholders will not be
recognized by the Trustee as Certificateholders under the Pooling Agreement.
Class A Certificateholders will be permitted to exercise the rights of
Certificateholders under the Pooling Agreement only indirectly through DTC
Participants, who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "RULES"), DTC is required to make book-entry transfers among
DTC Participants on whose behalf it acts with respect to the Class A
Certificates and is required to receive and transmit distributions of principal
and interest, if any, on such Class A Certificates. DTC Participants and
Indirect DTC Participants with whom Class A Certificateholders have accounts
with respect to the Class A Certificates similarly are required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Class A Certificateholders. Accordingly, although owners of
Class A Certificates will not possess Definitive Class A Certificates, the Rules
provide a mechanism by which owners of the Class A Certificates through their
DTC Participants will receive distributions and will be able to transfer their
interest.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a Class A
Certificateholder to pledge Class A Certificates to persons or entities that do
not participate in the DTC system, or otherwise take actions in respect of such
Class A 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 Class A Certificateholder under the Pooling Agreement only at the
direction of one or more DTC Participants to whose account with DTC the
Certificates are credited. Additionally, DTC has advised the Company that it
will take such actions with respect to a Class A Certificate only at the
direction of and on behalf of the DTC Participant whose holdings include that
Certificate. DTC may take conflicting actions with respect to other Class A
Certificates to the extent that such actions are taken on behalf of DTC
Participants whose holdings include such Class A Certificates.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Class A Certificates among DTC Participants, it is under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
S-18
<PAGE>
DEFINITIVE CLASS A CERTIFICATES
The Class A Certificates will be issued in fully registered, certificated
form ("DEFINITIVE CLASS A CERTIFICATES") to Certificateholders or their
nominees, 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 Class A 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, Class A Certificateholders
evidencing not less than 66% of the aggregate outstanding Certificate Principal
Balance advise the Trustee and DTC through DTC Participants in writing that the
continuation of a book-entry system through DTC (or its successor) is no longer
in the best interest of the Certificateholders.
Upon notice of the occurrence of any of the events described in the
immediately preceding paragraph, DTC is required to notify all DTC Participants
of the availability of Definitive Class A Certificates. Upon surrender by DTC of
the global Certificates and receipt from DTC of instructions for
re-registration, the Trustee will issue the Class A Certificates in the form of
Definitive Class A Certificates, and thereafter the Trustee will recognize the
holders of such Definitive Class A Certificates as Certificateholders under the
Pooling Agreement.
Distributions of principal and interest on the Definitive Class A
Certificates, as well as the other Classes of Certificates, will be made by the
Trustee (or its duly appointed paying agent, if any) directly to holders of such
Certificates in accordance with the procedures set forth herein and in the
Pooling Agreement. Distributions of principal and interest on each Distribution
Date will be made to holders in whose names such Certificates were registered at
the close of business on the related Record Date (as defined in the Prospectus).
Distributions will be made by wire transfer in immediately available funds for
the account of each such holder or, if a holder has not provided wire
instructions, by check mailed to the address of such holder as it appears on the
register maintained by the Certificate Registrar. The final payment on any
Certificate will be made only upon presentation and surrender of such
Certificate at the offices of the Trustee or its agent or such office or agency
as is specified in the notice of final distribution to holders of Certificates
being retired. The Trustee will provide such notice to registered
Certificateholders not later than the fifteenth day of the month in which all
remaining outstanding Certificates will be retired.
Definitive Class A Certificates, as well as the other Classes of
Certificates, will be transferable and exchangeable at the office or agency of
the Trustee designated for such purposes. A reasonable service charge may be
imposed for any registration of transfer or exchange, and the Trustee or such
agent may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
PRIORITY OF DISTRIBUTIONS
Commencing in June 1999, on the 25th day of each month, or if such 25th day
is not a business day, on the immediately succeeding business day (each, a
"DISTRIBUTION DATE"), distributions will be made, to the extent of the Available
Distribution Amount (as defined herein) remaining following prior distributions,
if any, on such Distribution Date, in the order and priority as follows:
(i) first, to the Class A Certificates, accrued and unpaid interest at
the Class A Certificate Interest Rate (as defined herein) on the Class A
Principal Balance;
(ii) second, to the Class A Certificates, as principal, the Senior
Principal Distribution Amount (as defined in "--Distributions of
Principal--Class A Certificate Principal Distributions" herein);
(iii) third, to the Certificate Insurer, an amount equal to the sum of
(a) all amounts previously paid by the Certificate Insurer under the
Certificate Insurance Policy or due to the Certificate Insurer under the
Insurance Agreement (as defined herein) which have not been previously
reimbursed and (b) interest on the foregoing at the rate set forth in the
Insurance Agreement;
(iv) fourth, to the Class B-1, Class B-2 and Class B-3 Certificates,
in that order, accrued and unpaid interest and their pro rata share (or
such other amount as may be specified in the Pooling Agreement) of the
Subordinate Principal Distribution Amount;
S-19
<PAGE>
(v) fifth, to each Class of the Class B Certificates in order of
seniority, the remaining portion, if any of the Available Distribution
Amount, up to the amount of unreimbursed realized losses previously
allocated to such Class, if any, provided, however, that any amounts
distributed pursuant to this paragraph (v) will not cause a further
reduction in the Class Principal Balance of the Class B Certificates; and
(vi) sixth, to the Class R Certificate, the remaining portion, if any
(which is expected to be zero), of the Available Distribution Amount for
such Distribution Date.
DISTRIBUTIONS OF INTEREST
Interest will be passed through monthly on each Distribution Date to
Certificateholders commencing in June 1999. With respect to each Distribution
Date, an amount of interest will accrue on the Class A Certificates, generally
equal to 1/12th of the Certificate Interest Rate for such Class multiplied by
the Class A Principal Balance. Interest to be distributed on the Certificates on
any Distribution Date will consist of accrued and unpaid interest as of previous
Distribution Dates and interest accrued during the preceding calendar month. All
distributions of interest for the Class A Certificates will generally be made
only to the extent of the Available Distribution Amount as described herein
under "--Priority of Distributions."
Certificate Interest Rate. The "CERTIFICATE INTEREST RATE" on the Class A
Certificates will be equal to the weighted average (by principal balance) of the
Pass-Through Rates (as defined below) on the Mortgage Loans as of the second
preceding Due Date less the Premium Payment Rate (as defined herein).
The "PASS-THROUGH RATE" for each Mortgage Loan is equal to the Mortgage
Interest Rate thereon less the sum of the rates at which the related Master
Servicing Fee and Servicing Fee (each, as defined herein) are calculated.
With respect to 408 Mortgage Loans representing approximately 34.0% of the
Mortgage Pool, the Servicing Fee will be reduced from 0.875% to 0.250% at the
end of the initial five-year fixed rate period for such Mortgage Loans.
Compensating Interest. The Company, as Master Servicer, is obligated to
remit to the Certificate Account on the day prior to each Distribution Date an
amount ("COMPENSATING INTEREST") equal to the lesser of (a) any shortfall for
the previous month in interest collections resulting from Curtailments (as
defined herein) and the timing of Payoffs (as defined herein) on the Mortgage
Loans made in the preceding calendar month and (b) a portion of the aggregate
Servicing Fee of the related Servicer otherwise payable to such Servicer. See
"--Servicing Compensation, Trustee Compensation and Payment of Expenses" herein.
Compensating Interest will be added to the Available Distribution Amount. Any
remaining shortfall in interest collections resulting from Curtailments and the
timing of Payoffs as well as shortfalls resulting from the Soldier's and
Sailor's Civil Relief Act of 1940 (the "RELIEF ACT") will not be covered by the
Certificate Insurance Policy and will be allocated pro rata according to the
amount of interest to which each Class of Certificates would otherwise be
entitled in reduction thereof.
See "Yield and Prepayment Considerations" herein and "Yield
Considerations--Effective Interest Rate" in the Prospectus.
DISTRIBUTIONS OF PRINCIPAL
GENERAL
On each Distribution Date, Certificateholders will be entitled to receive
principal distributions from the Available Distribution Amount to the extent and
in the priority described herein. See "--Priority of Distributions" herein.
For any Distribution Date, the "PRINCIPAL PAYMENT AMOUNT" is the sum of
(i) scheduled principal payments on the Mortgage Loans due on the Due Date
immediately prior to such Distribution Date, (ii) the principal portion of
repurchase proceeds received with respect to any Mortgage Loan which was
repurchased as permitted or required by the Pooling Agreement during the
calendar month preceding the month of the Distribution Date and (iii) any other
unscheduled payments of principal which were received on the Mortgage
S-20
<PAGE>
Loans during the preceding calendar month, other than Payoffs, Curtailments or
Liquidation Principal (as defined below).
"PRINCIPAL PREPAYMENTS" include prepayments in full on a Mortgage Loan
("PAYOFFS") and partial prepayments on a Mortgage Loan ("CURTAILMENTS"). For any
Distribution Date, the "PRINCIPAL PREPAYMENT AMOUNT" is the sum of all Payoffs
and Curtailments which were received during the calendar month preceding the
month of such Distribution Date.
"LIQUIDATION PRINCIPAL" is the principal portion of Liquidation Proceeds
(as defined in the Pooling Agreement) received with respect to each Mortgage
Loan that became a Liquidated Mortgage Loan (as defined below) (but not in
excess of the principal balance thereof) during the calendar month preceding the
month of the Distribution Date. A "LIQUIDATED MORTGAGE LOAN" is a Mortgage Loan
as to which the Master Servicer or a Servicer has determined that all amounts
which it expects to recover from or on account of such Mortgage Loan, whether
from Insurance Proceeds (as defined in the Pooling Agreement), Liquidation
Proceeds or otherwise, have been recovered.
CLASS A CERTIFICATE PRINCIPAL DISTRIBUTIONS
On each Distribution Date, the Class A Certificates will be entitled to
receive as a payment of principal the Senior Principal Distribution Amount,
until the Class A Principal Balance has been reduced to zero.
The "SENIOR PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date will
equal the sum of (i) the Senior Percentage (as defined below) of the Principal
Payment Amount, (ii) the Senior Prepayment Percentage (as defined under
"--Principal Prepayments" herein) of the Principal Prepayment Amount and
(iii) the Senior Liquidation Amount (as defined below).
The "SENIOR PERCENTAGE" for any Distribution Date will equal the Class A
Principal Balance divided by the aggregate Class Principal Balance of the
Certificates, in each case immediately prior to the Distribution Date. The
"SUBORDINATE PERCENTAGE" for any Distribution Date will equal the excess of 100%
over the Senior Percentage for such date. The Senior Percentage and the
Subordinate Percentage as of the Closing Date will be approximately 97.75% and
2.25%, respectively.
The "SENIOR LIQUIDATION AMOUNT" will equal the aggregate, for each Mortgage
Loan that became a Liquidated Mortgage Loan during the calendar month preceding
the month of the Distribution Date, of the lesser of (i) the Senior Percentage
of the principal balance of such Mortgage Loan and (ii) the Senior Prepayment
Percentage of the Liquidation Principal with respect to such Mortgage Loan.
CLASS B CERTIFICATE PRINCIPAL DISTRIBUTIONS
On each Distribution Date, an amount, up to the amount of the Subordinate
Principal Distribution Amount (as defined below) for such Distribution Date,
will be distributed as principal to the Class B Certificates. On each
Distribution Date, except to the extent otherwise provided in the Pooling
Agreement, each Class of the Class B Certificates will be entitled to receive
its pro rata (by Class Principal Balance) share of the Subordinate Principal
Distribution Amount, to the extent of the Available Distribution Amount
remaining after distributions of interest and principal to the Class A
Certificates and the repayment of amounts owed to the Certificate Insurer (with
interest thereon). See "--Priority of Distributions" herein. The relative
seniority, from highest to lowest, of the Class B Certificates will be as
follows: Class B-1, Class B-2 and Class B-3.
The "SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date
will equal the sum of (i) the Subordinate Percentage of the Principal Payment
Amount, (ii) the Subordinate Prepayment Percentage of the Principal Prepayment
Amount and (iii) the Subordinate Liquidation Amount (as defined below).
The "SUBORDINATE PREPAYMENT PERCENTAGE" for any Distribution Date will
equal the excess of 100% over the Senior Prepayment Percentage; provided,
however, that if the Class A Principal Balance has been reduced to zero, then
the Subordinate Prepayment Percentage will equal 100%.
The "SUBORDINATE LIQUIDATION AMOUNT" will equal the excess, if any, of the
aggregate Liquidation Principal for all Mortgage Loans that became Liquidated
Mortgage Loans during the calendar month preceding the month of the Distribution
Date, over the Senior Liquidation Amount for such Distribution Date.
S-21
<PAGE>
PRINCIPAL PREPAYMENTS
The "SENIOR PREPAYMENT PERCENTAGE" for any Distribution Date occurring
prior to the month of the tenth anniversary of the first Distribution Date will
equal 100%. During the next four years, the "SENIOR PREPAYMENT PERCENTAGE" will
be calculated as follows: for any Distribution Date in or after the month of the
tenth anniversary of the month of the first Distribution Date but before the
eleventh anniversary of the month of the first Distribution Date, the Senior
Percentage for such Distribution Date plus 70% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date in or after the month of the
eleventh anniversary of the month of the first Distribution Date but before the
twelfth anniversary of the month of the first Distribution Date, the Senior
Percentage for such Distribution Date plus 60% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date in or after the month of the
twelfth anniversary of the month of the first Distribution Date but before the
thirteenth anniversary of the month of the first Distribution Date, the Senior
Percentage for such Distribution Date plus 40% of the Subordinate Percentage for
such Distribution Date; and for any Distribution Date in or after the month of
the thirteenth anniversary of the month of the first Distribution Date but
before the fourteenth anniversary of the month of the first Distribution Date,
the Senior Percentage for such Distribution Date plus 20% of the Subordinate
Percentage for such Distribution Date. For any Distribution Date in or after the
month of the fourteenth anniversary of the month of the first Distribution Date,
the Senior Prepayment Percentage will equal the Senior Percentage for such
Distribution Date.
Notwithstanding the foregoing, (i) on any Distribution Date, if the Senior
Percentage for such Distribution Date exceeds the initial Senior Percentage as
of the Closing Date, then the Senior Prepayment Percentage for such Distribution
Date will equal 100% or (ii) on any Distribution Date occurring in or after the
month of the fifth anniversary of the first Distribution Date, if the
Subordinate Percentage for any such Distribution Date is greater than twice the
Subordinate Percentage as of the Closing Date, then the Senior Prepayment
Percentage for such Distribution Date will equal the Senior Percentage. The
scheduled reductions in the Senior Prepayment Percentage for Distribution Dates
occurring on or after the month of the tenth anniversary of the month of the
first Distribution Date and any reduction specified in clause (ii) of the
preceding sentence will be subject to certain conditions specified in the
Pooling Agreement. Such conditions may include requirements that no such
reduction may occur if any claims have been made against the Certificate
Insurance Policy or if delinquencies or losses on the Mortgage Loans exceed
specified limits at the time of, or on a date preceding, the Distribution Date
for which such reduction would otherwise be applicable. Notwithstanding the
foregoing, on any Distribution Date, if the delinquencies or losses on the
Mortgage Loans exceed such limits such that the Pooling Agreement restricts a
reduction of the Senior Prepayment Percentage, then the Senior Prepayment
Percentage for such Distribution Date will equal 100%. If on any Distribution
Date the allocation to the Class A Certificates in the percentage required would
reduce the Class A Principal Balance below zero, the Senior Prepayment
Percentage for such Distribution Date will be limited to the percentage
necessary to reduce such sum to zero.
SUBORDINATION AND ALLOCATION OF LOSSES
The Class B Certificates will be subordinate in right of payment to and
provide credit support to the Class A Certificates to the extent described
herein. The support provided by the Class B Certificates is intended to enhance
the likelihood of regular receipt by the Class A Certificates of the full amount
of the monthly distributions of interest and principal to which they are
entitled and to afford such Certificates protection against certain losses. The
protection afforded to the Class A Certificates by the Class B Certificates will
be accomplished by the preferential right on each Distribution Date of such
Class A Certificates to receive distributions of interest and principal to which
they are entitled prior to distributions of interest and principal to the Class
B Certificates.
Any loss realized with respect to a Mortgage Loan will be allocated among
the Class A and Class B Certificates first, to the Class B Certificates in
reverse numerical order, until the aggregate of the Class Principal Balances
thereof has been reduced to zero and second, to the Class A Certificates;
provided, however, that any allocation of losses to the Class A Certificates
pursuant to this paragraph will be covered by payments under the Certificate
Insurance Policy, subject to the terms thereof.
S-22
<PAGE>
On each Distribution Date, if the aggregate Class Principal Balance of all
outstanding Classes of Certificates exceeds the aggregate principal balance of
the Mortgage Loans (after giving effect to distributions of principal and the
allocation of all losses to the Certificates on such Distribution Date), such
excess will be deemed a principal loss and will be allocated to the most junior
Class of Class B Certificates then outstanding.
ADVANCES
With respect to each Mortgage Loan, the Master Servicer will make advances
("ADVANCES") to the Certificate Account on each Distribution Date to cover any
shortfall between (i) payments scheduled to be received in respect of such
Mortgage Loan and (ii) the amounts actually deposited in the Certificate Account
on account of such payments; provided, that the Master Servicer determines, in
good faith, on such Distribution Date that such Advances will be recoverable
from Insurance Proceeds, Liquidation Proceeds or other amounts received with
respect to such Mortgage Loan. With respect to any Balloon Loan that is
delinquent on its maturity date, the Master Servicer will not be required to
advance the related balloon payment but will be required to continue to make
Advances with respect to such Balloon Loan in an amount equal to one month's
interest on the unpaid principal balance at the applicable Pass-Through Rate to
the extent the Master Servicer deems such amount to be recoverable. Advances are
reimbursable to the Master Servicer from cash in the Certificate Account prior
to distributions to the Certificateholders if the Master Servicer determines
that such Advances previously made are not recoverable from Insurance Proceeds,
Liquidation Proceeds or other amounts recoverable with respect to the applicable
Mortgage Loan.
AVAILABLE DISTRIBUTION AMOUNT
On each Distribution Date, the Available Distribution Amount for any
Distribution Date, which will generally include scheduled principal and interest
payments due on the Due Date immediately prior to such Distribution Date,
Payoffs and Curtailments received during the preceding calendar month and
amounts received with respect to liquidations of Mortgage Loans in the previous
calendar month, will be distributed by or on behalf of the Trustee to the
Certificateholders, as specified herein.
The determination date (the "DETERMINATION DATE" is a business day not
later than the 10th day preceding the related Distribution Date in the month in
which such Distribution Date occurs.
The "AVAILABLE DISTRIBUTION AMOUNT" for any Distribution Date, as more
fully described in the Pooling Agreement, will equal the sum of the following
amounts:
(1) the total amount of all cash received by or on behalf of the
Master Servicer with respect to the Mortgage Loans by the Determination
Date for such Distribution Date and not previously distributed (including
advances made by Servicers and proceeds of Mortgage Loans which are
liquidated), except:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the first day in the month of such
Distribution Date;
(b) all Curtailments received after the previous calendar month
(together with any interest payment received with such prepayments to
the extent that it represents the payment of interest accrued on such
Mortgage Loans for the period subsequent to the previous calendar
month);
(c) all Payoffs received after the previous calendar month
(together with any interest payment received with such Payoffs to the
extent that it represents the payment of interest accrued on the
Mortgage Loans for the period subsequent to the previous calendar
month);
(d) Liquidation Proceeds and Insurance Proceeds received on the
Mortgage Loans after the previous calendar month;
(e) all amounts in the Certificate Account which are due and
reimbursable to a Servicer or the Master Servicer pursuant to the terms
of the Pooling Agreement;
(f) the sum of the Servicing Fee and the Master Servicing Fee for
each such Mortgage Loan;
(g) the excess, if any, of aggregate Liquidation Proceeds on such
Mortgage Loans received during the previous calendar month over the
amount that would have been received if Payoffs had been made with
respect to such Mortgage Loans on the date such Liquidation Proceeds
were received ("EXCESS LIQUIDATION PROCEEDS"); and
S-23
<PAGE>
(h) the premium payable to the Certificate Insurer;
(2) the total, to the extent not previously distributed, of the
following amounts, to the extent advanced or received, as applicable, by
the Master Servicer:
(a) all Advances made by the Master Servicer with respect to such
Distribution Date; and
(b) any amounts payable as Compensating Interest on such
Distribution Date; and
(3) the total amount of any cash received by the Trustee or the Master
Servicer in respect of any obligation to repurchase any of the Mortgage
Loans.
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for the Class A Certificates is the
Distribution Date in June 2029, which is the Distribution Date in the month
after the scheduled maturity date for the latest maturing Mortgage Loan. As the
Certificate Insurance Policy does not guarantee the ultimate payment of
principal on the Class A Certificates until the Distribution Date occurring in
November 2029, the actual final distribution with respect to the Class A
Certificates could be later than the Last Scheduled Distribution Date. See
"Credit Enhancements--Certificate Insurance Policy" herein.
The actual rate of principal distributions on the Certificates will depend
on the rate of principal payments (including principal prepayments) on the
Mortgage Loans which, in turn, may be influenced by a variety of economic,
geographic and social factors, as well as the level of prevailing mortgage
interest rates. No assurance can be given as to the actual payment experience on
the Mortgage Loans.
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 all property acquired in respect
of any Mortgage Loan remaining in the Trust, and thereby effect the termination
of the Trust and the retirement of the Certificates. However, the Company may
not exercise such repurchase option if it would result in a claim against the
Certificate Insurance Policy. The repurchase price will equal, after deductions
of related unreimbursed Advances by the Master Servicer, the sum of (1) 100% of
the aggregate outstanding principal balance of the Mortgage Loans (other than
Liquidated Mortgage Loans), plus accrued interest thereon at the applicable
Pass-Through Rates through the last day of the month of such repurchase, less
any Bankruptcy Losses (as defined in the Prospectus) realized with respect to
the Mortgage Loans not already allocated to the Certificates and (2) the fair
market value of all other property remaining in the Trust, including any "real-
estate owned" properties, as determined by an appraisal conducted by an
appraiser mutually agreed upon by the Company, the Certificate Insurer and the
Trustee. 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 through the distribution of such
proceeds and the allocation of the associated realized losses, if any, on each
Mortgaged Property in the Trust the fair market value of which is less than the
aggregate principal balance of the related Mortgage Loan as of the time that the
Trust acquired such Mortgaged Property, and upon such payment in full, the Trust
will be terminated. In no event will the Trust continue beyond the expiration of
21 years from the death of the survivor of certain persons identified in the
Pooling Agreement. See "Description of Certificates--Termination" in the
Prospectus.
SERVICING COMPENSATION, TRUSTEE COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will receive a fee (the "MASTER SERVICING FEE") for its
services as Master Servicer under the Pooling Agreement. The Master Servicer
will retain as its Master Servicing Fee an amount which will be calculated as a
per annum percentage for each Mortgage Loan.
The Master Servicer will pay all expenses incurred in connection with its
activities as Master Servicer. The Master Servicer is entitled to reimbursement
for certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans. In addition, the Master Servicer is entitled to
reimbursement of expenditures incurred by it in connection with the restoration
of damaged Mortgaged Properties.
S-24
<PAGE>
The Company, as Master Servicer, will pay all expenses incurred in
connection with its responsibilities under the Pooling Agreement (subject to
reimbursement as described in the Prospectus), including, without limitation,
the various items of expense enumerated in the Prospectus. In particular,
pursuant to the Pooling Agreement, each month or year, as applicable, the Master
Servicer will be obligated to pay from the Master Servicing Fee the fees of the
Trustee and certain other fees and expenses of the Trust, as prescribed by the
Pooling Agreement.
The Servicing Fee (as defined in the Prospectus) will be calculated as a
per annum percentage for each Mortgage Loan. As of the Cut-off Date, the
Servicing Fee with respect to each Mortgage Loan will range from 0.250% to
0.875%, with a weighted average of approximately 0.502%. However, with respect
to 408 Mortgage Loans representing approximately 34.0% of the Mortgage Pool, the
Servicers are obligated to pay Compensating Interest with respect to only a
portion of the Servicing Fee. As of the Cut-off Date, such portion of the
Servicing Fee with respect to each such Mortgage Loan will equal 0.250%.
The Master Servicing Fee with respect to each Mortgage Loan will equal
0.02%. The Master Servicer will also be entitled to reinvestment income earned
with respect to investments of amounts on deposit in accounts maintained under
the Pooling Agreement.
The "PREMIUM PAYMENT RATE" is the per annum rate set forth in the Insurance
and Indemnity Agreement dated as of the Closing Date by and among the Company,
the Trustee and the Certificate Insurer (the "INSURANCE AGREEMENT") at which the
fee payable to the Certificate Insurer is calculated.
SPECIAL SERVICING AGREEMENTS
The Pooling Agreement permits the Master Servicer to enter into one or more
special servicing agreements with unaffiliated holders of one or more Classes of
Class B Certificates or of a class of securities representing interests in one
or more Classes of Class B Certificates. Pursuant to the terms of such
agreements, such holder may, with respect to delinquent Mortgage Loans:
(a) instruct the Master Servicer to commence or delay foreclosure
proceedings, provided that the holder deposits a specified amount of cash
with the Master Servicer which will be available for distribution to
Certificateholders if Liquidation Proceeds are less than they otherwise may
have been had the Master Servicer acted pursuant to its normal servicing
procedures;
(b) purchase such Mortgage Loans from the Trust immediately prior to
the commencement of foreclosure proceedings at a price equal to the
aggregate outstanding principal balance of such Mortgage Loans, plus
accrued interest thereon at the applicable Mortgage Interest Rates through
the last day of the month in which such Mortgage Loans are purchased;
and/or
(c) assume all of the servicing rights and obligations with respect to
such Mortgage Loans so long as (i) the Master Servicer has the right to
transfer the servicing rights and obligations of such Mortgage Loans to
another Servicer and (ii) such holder will service the Mortgage Loans
according to the Company's servicing guidelines.
DELINQUENCY, LOSS AND FORECLOSURE EXPERIENCE
The following table sets forth certain information, as reported to the
Company by its various servicers, concerning recent delinquency, loss and
foreclosure experience on mortgage loans included in various mortgage pools
underlying all series of the Company's mortgage pass-through certificates with
respect to which one or more classes of certificates were publicly offered.
There can be no assurance that the delinquency, loss and foreclosure
experience set forth in the following table (which includes mortgage loans with
various terms to stated maturity, and includes loans having a variety of payment
characteristics such as balloon loans, and Buydown Loans) will be representative
of the results that may be experienced with respect to the Mortgage Loans
included in the Trust. Delinquencies, losses and foreclosures generally are
expected to occur more frequently after the first full year of the life of a
mortgage loan. Accordingly, because a large number of mortgage loans included in
the mortgage pools underlying the Company's mortgage pass-through certificates
have been recently originated,
S-25
<PAGE>
the current level of delinquencies, losses and foreclosures may not be
representative of the levels which may be experienced over the lives of such
mortgage loans.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED AT OR FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------------------ -----------------------------------------
BY DOLLAR BY DOLLAR
BY AMOUNT OF BY AMOUNT OF
NO. OF LOANS NO. OF LOANS
LOANS (IN MILLIONS) LOANS (IN MILLIONS)
------------------- ------------- ------------------------ -------------
<S> <C> <C> <C> <C>
Total Rated Mortgage
Pass-Through Certificate
Portfolio.................. 27,343 $ 6,817.3 74,769 $16,647.8
Average Balance(1)........... 19,336 4,878.5 47,628 10,998.8
Period of Delinquency(2)
31 to 59 days.............. 451 95.7 2,178 488.8
60 to 89 days.............. 69 17.0 173 35.5
90 days or more............ 55 14.4 108 23.1
------- --------- ------ ---------
Total Delinquent Loans....... 575 $ 127.1 2,459 $ 547.3
Delinquency Rate............. 2.10% 1.86% 3.29% 3.29%
Foreclosures(3).............. 288 $ 62.4 217 $ 43.3
Foreclosure Ratio(4)......... 1.05% 0.92% 0.29% 0.26%
Covered Losses(5)............ $ 19.2 $ 8.6
Applied Losses(6)............ $ 1.8 $ 0.6
<CAPTION>
AT OR FOR THE THREE-MONTH
PERIOD ENDED MARCH 31, 1999
------------------------------------------------------------
BY DOLLAR
BY AMOUNT OF
NO. OF LOANS
LOANS (IN MILLIONS)
------------------------------------------- -------------
<S> <C> <C>
Total Rated Mortgage
Pass-Through Certificate
Portfolio.................. 85,420 $18,673.8
Average Balance(1)........... 81,692 18,073.2
Period of Delinquency(2)
31 to 59 days.............. 1,537 302.9
60 to 89 days.............. 216 46.0
90 days or more............ 110 19.8
------- ---------
Total Delinquent Loans....... 1,863 $ 368.7
Delinquency Rate............. 2.18% 1.97%
Foreclosures(3).............. 186 $ 39.4
Foreclosure Ratio(4)......... 0.22% 0.21%
Covered Losses(5)............ $ 1.4
Applied Losses(6)............ $ 0.3
</TABLE>
- ------------------
(1) Average Balance for the period indicated is based on end of month balances
divided by the number of months in the period indicated.
(2) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
the purpose of this table until one month has passed after the related due
date. A mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(3) Includes mortgage loans for which foreclosure proceedings had been
instituted or with respect to which the related property had been acquired
as of the dates indicated.
(4) Foreclosures as a percentage of total mortgage loans at the end of each
period.
(5) Covered Losses are Gross Losses (as defined below) realized during the
period indicated which were covered by credit enhancements obtained or
established for one or more pools of mortgage loans, exclusive of any
insurance (such as primary mortgage insurance or ordinary hazard insurance)
which was available for specific mortgage loans or mortgaged properties.
"Gross Losses" are the sum for each mortgage loan liquidated during the
applicable period of the difference between (a) the sum of the outstanding
principal balance plus accrued interest, plus all liquidation expenses
related to such mortgage loan and (b) all amounts received in connection
with the liquidation of the related mortgaged property, including insurance
(such as primary mortgage insurance or ordinary hazard insurance) available
solely for such mortgage loan or the related mortgaged property.
(6) Applied Losses are Covered Losses that were applied against the outstanding
principal balance of the mortgage pass-through certificates during the
period indicated.
S-26
<PAGE>
YEAR 2000 READINESS DISCLOSURE
The Company has been working since 1997 to prepare its computer systems and
applications to meet the year 2000 challenge. This process involves reviewing,
modifying and replacing existing hardware, software and embedded chip technology
systems, as necessary. The Company is also assessing the year 2000 preparedness
of third parties such as vendors, customers and others.
As of December 31, 1998, approximately 99% of the Company's MIS-supported
mainframe, mid-range and PC client-server systems had been tested and returned
to production as year 2000 ready. Approximately 99% of the Company's non-PC
related hardware and systems software had also been tested and determined to be
year 2000 ready as of that date. At year-end 1998, the Company had also
substantially completed an organization-wide assessment of year 2000 issues
relating to its mission critical systems which utilize embedded chip
technologies. No significant problems have been identified to date with respect
to embedded chip technology systems.
The Company has substantially completed its assessment of the year 2000
preparedness of its identified mission critical service providers. The Company
has not to date identified any material problems associated with its mission
critical service providers.
During the spring of 1999, the Company plans to conduct fully integrated
testing of its systems and applications to determine whether its mission
critical application systems will perform in coordination with one another. The
mission critical applications systems will be tested on year 2000-ready hardware
and software using dates in both 1999 and 2000. The Company also intends to
conduct testing during 1999 with those mission-critical vendors that provide
systems-related services.
The estimated total cost to become year 2000 compliant, which is being
expensed as incurred by the Company jointly with its affiliate PNC Mortgage
Corp. of America, is approximately $1.41 million. Through December 31, 1998, the
Company and its affiliate had expensed approximately $1.13 million related to
the year 2000 effort. Expenses incurred for year 2000 readiness efforts
comprised less than 5.5% of the total technology-related costs for the Company
and its affiliate in 1998 and are not expected to exceed 1.6% of
technology-related expenses in 1999 for the Company and its affiliate. No
significant outlays have been made to replace existing systems solely for
year 2000 compliance reasons. The costs and the timetable in which the Company
plans to complete its year 2000 readiness activities are based on management's
best estimates, which were derived using numerous assumptions of future events
including the continued availability of certain resources, third party
preparedness and other factors. The Company can make no guarantee that these
estimates will be achieved, and actual results could differ from such plans.
Contingency plans have been completed for those systems that were not
tested and returned to production by October 31, 1998, and for those critical
service providers who either were not expected to be year 2000 ready by
March 31, 1999, or did not respond to requests for year 2000 readiness
information. Contingency plans are being developed for mission critical end-user
computing applications that were not tested by December 15, 1998. In addition,
business continuity plans were completed by February 28, 1999. The Company will
continue to review all contingency plans during 1999 and modify them when
necessary or appropriate. Certain critical service provider and systems
contingency plans will be tested during 1999.
It is not possible to predict with certainty all of the adverse effects
that could result from a failure of the Company or of third parties to become
fully year 2000 compliant or whether such effects could have a material impact
on the Company. However, if the Company were to fail to correct internal
year 2000 problems, or if one or more of its third party providers, including
servicers and trustees, are unable due to year 2000 issues to provide services
required by the Company or by the trust in any securitization transaction, a
disruption of operations, resulting in increased operating costs and other
adverse effects, could result. Such disruptions could include a temporary
inability to process transactions and delays in providing services.
This section entitled "Year 2000 Readiness Disclosure" contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act. Generally, all statements in this section that are not statements of
historical fact are forward-looking statements. Forward-looking statements made
in this section are subject to certain risks and uncertainties. Important
factors that could cause results to differ materially
S-27
<PAGE>
from such forward-looking statements include, among other things, the ability of
the Company to successfully identify components that may pose year 2000
problems, the nature and amount of programming required to fix the affected
components, the costs of labor and consultants related to such efforts, the
continued availability of resources (both personnel and technology) and the
ability of the Company's third-party suppliers and service providers to
successfully address their year 2000 issues.
YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity of the Class A Certificates will depend upon, among
other things, the price at which such Certificates are purchased, the Class A
Certificate Interest Rate, the actual characteristics of the Mortgage Loans, the
rate of principal payments (including prepayments) on the Mortgage Loans and the
rate of liquidations on the Mortgage Loans. The yield to maturity to holders of
the Class A Certificates will be lower than the yield to maturity otherwise
produced by the Class A Certificate Interest 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).
The Mortgage Interest Rates on the Mortgage Loans will be fixed for the
first three or five years after origination and thereafter will adjust annually
or semi-annually and may vary significantly over time. Upon a Mortgage Loan
commencing its adjustable period, increases and decreases in the Mortgage
Interest Rate on such Mortgage Loan will be limited by the Periodic Cap and the
Rate Ceiling and will be based on the applicable Index (which may not rise and
fall consistently with mortgage interest rates) plus the applicable Margin. As a
result, the Mortgage Interest Rates on the Mortgage Loans at any time may not
equal the prevailing mortgage interest rates for similar adjustable-rate loans,
and accordingly the prepayment rate may be lower or higher than would otherwise
be anticipated. Moreover, although each of the Mortgage Loans has a Rate
Ceiling, none have a specified minimum Mortgage Interest Rate. Accordingly, the
minimum Mortgage Interest Rate to which the Mortgage Loans may adjust on any
Adjustment Date is the applicable Margin. Further, some mortgagors who prefer
the certainty provided by fixed rate mortgage loans may nevertheless obtain
adjustable rate mortgage loans at a time when they regard the mortgage interest
rates (and, therefore, the payments) on fixed rate mortgage loans as
unacceptably high. Such mortgagors may be induced to refinance adjustable-rate
mortgage loans when the mortgage interest rates and monthly payments on
comparable fixed-rate mortgage loans decline to levels which such mortgagors
regard as acceptable, even though such mortgage interest rates and monthly
payments may be significantly higher than the current mortgage interest rates
and monthly payments on the mortgagors' adjustable-rate mortgage loans. The
ability to refinance a Mortgage Loan will depend on a number of factors
prevailing at the time refinancing is desired, including, without limitation,
real estate values, the Mortgagor's financial situation, prevailing mortgage
interest rates, the Mortgagor's equity in the related Mortgaged Property, tax
laws and prevailing general economic conditions. In addition, the Class A
Certificate Interest Rate may decrease, and may decrease significantly after the
Mortgage Interest Rates on the Mortgage Loans begin to adjust.
PRINCIPAL PREPAYMENTS AND COMPENSATING INTEREST
When a Mortgagor prepays a Mortgage Loan in full between Due Dates for such
Mortgage Loan, the Mortgagor pays interest on the amount prepaid only to the
date of prepayment instead of for the entire month. Also, when a Curtailment is
made on a Mortgage Loan together with the scheduled monthly payment for a month
on or after the related Due Date, the principal balance of the Mortgage Loan is
reduced by the amount of the Curtailment as of such Due Date, but such principal
is not distributed to related Certificateholders until the Distribution Date in
the next month; therefore, one month of interest shortfall accrues on the amount
of such Curtailment.
In order to reduce the adverse effect on Certificateholders from the
deficiency in interest payable as a result of a Payoff on a Mortgage Loan
between its Due Dates or a Curtailment, the Master Servicer will pass through
Compensating Interest to the related Certificateholders to the limited extent
and in the manner set
S-28
<PAGE>
forth above. Each Servicer is obligated to remit to the Master Servicer
Compensating Interest in respect of the Mortgage Loans that it services that
experience Payoffs between their respective Due Dates or Curtailments. If a
Servicer fails to remit Compensating Interest, the Master Servicer will be
obligated, pursuant to the Pooling Agreement, to remit such amount.
To the extent that the amount allocated to pay Compensating Interest is
insufficient to cover the deficiency in interest payable as a result of (i) the
timing of a Payoff on a Mortgage Loan or (ii) a Curtailment on a Mortgage Loan,
such remaining deficiency will not be covered by the Certificate Insurance
Policy and will be allocated to the Certificates pro rata according to the
amount of interest to which each related Class of Certificates would otherwise
be entitled in reduction thereof.
RATE OF DISTRIBUTIONS
The rate of principal distributions on the Class A Certificates generally
is directly related to the rate of principal payments on the Mortgage Loans,
which may be in the form of scheduled payments, Principal Prepayments or
liquidations. See "Risk Factors" herein and "Yield Considerations" in the
Prospectus. Except for one Mortgage Loan representing approximately 0.9% of the
Mortgage Pool which has a prepayment penalty if such Mortgagor makes any
prepayments during the three-year period after origination, Mortgagors may
prepay the Mortgage Loans at any time without penalty. A higher than anticipated
rate of principal prepayments would reduce the aggregate principal balance of
the Mortgage Loans more quickly than expected. As a consequence, aggregate
interest payments with respect to the Mortgage Loans would be substantially less
than expected. Therefore, a higher rate of principal prepayments could result in
a lower than expected yield to maturity on Certificates purchased at a premium.
Conversely, a lower than expected rate of principal prepayments would reduce the
return to investors on any Certificates purchased at a discount, in that
principal payments with respect to the Mortgage Loans would occur later than
anticipated. There can be no assurance that Certificateholders will be able to
reinvest amounts received with respect to the Certificates at a rate which is
comparable to the Class A Certificate Interest Rate. Investors should fully
consider all of the associated risks.
PREPAYMENT ASSUMPTIONS
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this Prospectus
Supplement (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 mortgage loans. This rate is based on the constant prepayment rate
("CPR") at which such principal balance is assumed to prepay annually. A
prepayment assumption of 100% BPA assumes annual rates of prepayment as follows:
(i) 15.0% CPR in the first six months of the life of the pool of
mortgage loans;
(ii) 20.0% CPR in the following six months of the life of the pool of
mortgage loans;
(iii) 30.0% CPR in the following twenty-four months of the life of the
pool of mortgage loans;
(iv) 35.0% CPR in the following twelve months of the life of the pool
of mortgage loans;
(v) 70.0% CPR in the following twelve months of the life of the pool
of mortgage loans; and
(vi) 25.0% CPR in each month thereafter during the life of the pool of
mortgage loans.
As used in the table below, 50% BPA assumes prepayment rates equal to one-half
of 100% of the BPA and 125% BPA assumes prepayment rates equal to one and
one-quarter times 100% BPA, and so forth.
The BPA does not purport to be either an historical description of the
prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Pool, and there is no assurance that the Mortgage Loans will prepay at
the BPA percentage or any other rate. The actual rate of prepayments on the
Mortgage Loans may be influenced by a variety of economic, geographic, social
and other factors. In general, during the initial fixed-rate period, if
prevailing mortgage interest rates fall significantly below the mortgage
interest rates on the Mortgage Loans, the Mortgage Loans may be subject to
higher prepayment rates than if prevailing rates remain at or above the mortgage
interest rates on the Mortgage Loans. Conversely, during the initial fixed-rate
period, if prevailing mortgage interest rates rise above the mortgage interest
rates on the Mortgage Loans, the rate of prepayment
S-29
<PAGE>
may decrease. A comparatively low mortgage interest-rate environment may result
in a higher than expected rate of prepayments on the Mortgage Loans and an
earlier than expected retirement of the Certificates.
The Company makes no representation as to the specific factors that will
affect the prepayment of the Mortgage Loans or the relative importance of such
factors. Factors not identified by the Company or discussed herein may
significantly affect the prepayment rate of the Mortgage Loans. In particular,
the Company makes no representation as to the percentage of the principal amount
of the Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment.
For purposes of the table set forth below, it is assumed that the Mortgage
Loans are comprised of the hypothetical mortgage loans which have the common
characteristics indicated:
HYPOTHETICAL MORTGAGE LOANS
<TABLE>
<CAPTION>
STATED AMORTIZED
REMAINING ORIGINAL ORIGINAL MORTGAGE PASS-
UNPAID PRINCIPAL TERM TERM TERM INTEREST THROUGH RATE PERIODIC
BALANCE (MONTHS) (MONTHS) (MONTHS) RATE RATE INDEX CEILING CAP
- ---------------- --------- -------- --------- ---------- ---------- --------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,450,368.26 66 72 360 7.5000000% 7.2300000% Six-Month Libor 12.500% 1.00
$ 2,481,379.45 350 360 360 7.6250000% 7.2300000% One-Year CMT 13.625% 2.00
$ 24,653,285.65 356 360 360 7.4108747% 7.0547267% One-Year CMT 13.404% 2.00
$ 6,570,065.27 350 360 360 7.1263974% 6.8178852% One-Year CMT 12.376% 2.00
$ 243,266,365.31 356 360 360 7.0393921% 6.4922166% Six-Month Libor 13.151% none
<CAPTION>
MONTHS
TO NEXT
UNPAID PRINCIPAL ADJUSTMENT
BALANCE MARGIN DATE
- ---------------- ------ ----------
<S> <C> <C>
$ 1,450,368.26 2.500% 30
$ 2,481,379.45 2.375% 26
$ 24,653,285.65 2.746% 57
$ 6,570,065.27 2.750% 50
$ 243,266,365.31 2.000% 56
</TABLE>
and that (i) scheduled payments on all Mortgage Loans are received on the first
day of each month beginning June 1, 1999, (ii) any Payoffs on the Mortgage Loans
are received on the last day of each month beginning in May 1999 and include
30 days of interest thereon, (iii) there are no defaults or delinquencies on the
Mortgage Loans, (iv) optional termination of the Trust does not occur and no
Mortgage Loans are required to be repurchased, (v) there are no partial
prepayments on the Mortgage Loans and prepayments are computed after giving
effect to scheduled payments received on the following day, (vi) the Mortgage
Loans prepay at the indicated constant percentages of the BPA, (vii) the
Servicing Fee with respect to each Mortgage Loan in effect as of the Closing
Date does not change, (viii) the date of issuance for the Certificates is
May 27, 1999, (ix) cash distributions are received by the Certificateholders on
the 25th day of each month when due, (x) the scheduled monthly payments for each
hypothetical mortgage loan are computed based upon the characteristics indicated
above, (xi) One-Year CMT equals 4.820% and Six-Month Libor equals 5.176% and
(xii) the hypothetical mortgage loans indicated in line 3 and line 5 above do
not provide for any amortization of principal prior to and including their
respective first Adjustment Dates (collectively, the "MODELING ASSUMPTIONS").
The approximate Class Principal Balances of the Class B Certificates as of the
Closing Date will be as follows: Class B-1, $2,784,200; Class B-2, $1,670,600;
and Class B-3, $1,809,763.
Any discrepancy between the actual characteristics of the Mortgage Loans
and the characteristics of the hypothetical mortgage loans set forth above may
affect the percentages of the initial Class Principal Balances set forth in the
table below and the weighted average lives of the Class A Certificates. In
addition, to the extent that the characteristics of the Mortgage Loans and the
initial Class Principal Balances differ from those assumed in preparing the
table set forth below, the outstanding Class Principal Balance of the Class A
Certificates may be reduced to zero earlier or later than indicated by such
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 table set forth below. Such variations may
occur even if the average prepayment experience of all the Mortgage Loans equals
the indicated percentage of the BPA. There is no assurance, however, that
prepayments of the Mortgage Loans will conform to any given percentage of
the BPA.
Based on the foregoing assumptions, the table set forth below indicates the
projected weighted average lives of the Class A Certificates and sets forth the
percentages of the initial outstanding Class Principal Balance of the Class A
Certificates that would be outstanding after each of the dates shown at various
constant percentages of the BPA.
S-30
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
PERCENTAGE OF BPA
-------------------------------------
DISTRIBUTION DATE 0% 50% 100% 125% 135%
- --------------------------------------------------------------------------- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage......................................................... 100% 100% 100% 100% 100%
May 25, 2000............................................................... 100 88 77 71 68
May 25, 2001............................................................... 100 75 53 43 40
May 25, 2002............................................................... 100 62 35 25 22
May 25, 2003............................................................... 100 47 16 7 4
May 25, 2004............................................................... 99 33 5 0 0
May 25, 2005............................................................... 97 28 4 0 0
May 25, 2006............................................................... 96 24 3 0 0
May 25, 2007............................................................... 94 21 2 0 0
May 25, 2008............................................................... 92 18 2 0 0
May 25, 2009............................................................... 90 15 1 0 0
May 25, 2010............................................................... 88 13 1 0 0
May 25, 2011............................................................... 86 11 1 0 0
May 25, 2012............................................................... 83 9 * 0 0
May 25, 2013............................................................... 80 8 * 0 0
May 25, 2014............................................................... 78 7 * 0 0
May 25, 2015............................................................... 74 6 * 0 0
May 25, 2016............................................................... 71 5 * 0 0
May 25, 2017............................................................... 68 4 * 0 0
May 25, 2018............................................................... 64 3 * 0 0
May 25, 2019............................................................... 60 3 * 0 0
May 25, 2020............................................................... 55 2 * 0 0
May 25, 2021............................................................... 50 2 * 0 0
May 25, 2022............................................................... 45 1 * 0 0
May 25, 2023............................................................... 40 1 * 0 0
May 25, 2024............................................................... 34 1 * 0 0
May 25, 2025............................................................... 28 1 * 0 0
May 25, 2026............................................................... 21 * * 0 0
May 25, 2027............................................................... 13 * * 0 0
May 25, 2028............................................................... 5 * * 0 0
May 25, 2029............................................................... 0 0 0 0 0
Weighted Average Life (Years) (1) ......................................... 20.64 5.42 2.54 1.99 1.86
</TABLE>
- ------------------
* Indicates an amount above zero and less than 0.5% of original principal
balance outstanding.
(1) The weighted average life of the Class A Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal amount
on each Distribution Date on the Class A Certificates by the number of years
from the date of issuance of the Class A Certificates to the related
Distribution Date, (ii) summing the results, and (iii) dividing the sum by
the aggregate amount of the assumed net reductions in principal amount on
the Class A Certificates.
S-31
<PAGE>
CREDIT ENHANCEMENTS
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The information set forth in this section has been provided by Ambac
Assurance Corporation. No representation is made by Company, the Trustee, the
Underwriter or any of their affiliates as to the accuracy or completeness of any
such information.
THE CERTIFICATE INSURER
Ambac Assurance Corporation (the "CERTIFICATE INSURER") is a
Wisconsin-domiciled stock insurance corporation regulated by the Office of the
Commissioner of Insurance of the State of Wisconsin and licensed to do business
in 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the
Territory of Guam. The Certificate Insurer primarily insures newly issued
municipal and structured finance obligations. The Certificate Insurer is a
wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly, AMBAC, Inc.),
a 100% publicly-held company. Moody's Investors Service, Inc. ("MOODY'S"),
Standard & Poor's Rating Services ("S&P") and Fitch IBCA, Inc. have each
assigned a triple-A financial strength rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and its
subsidiaries as of December 31, 1998 and December 31, 1997 and for the three
years ended December 31, 1998, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of Ambac
Financial Group, Inc. (which was filed with the Commission on March 30, 1999;
Commission File No. 1-10777) and the unaudited consolidated financial statements
of the Certificate Insurer and subsidiaries as of March 31, 1999 and for the
periods ended March 31, 1999 and March 31, 1998 included in the Quarterly Report
on Form 10-Q of Ambac Financial Group, Inc. for the period ended March 31, 1999
(which was filed with the Commission on May 12, 1999) are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated herein by reference
shall be modified or superseded for the purposes of this Prospectus Supplement
to the extent that a statement contained herein by reference herein also
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
All financial statements of the Certificate Insurer and subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this Prospectus Supplement and prior
to the termination of the offering of the Class A Certificates shall be deemed
to be incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1996, December 31, 1997, December 31, 1998 and March
31, 1999, respectively, in conformity with generally accepted accounting
principles.
S-32
<PAGE>
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999
(Dollars in Millions) 1996 1997 1998 (UNAUDITED)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Unearned premiums........................................ $ 995 $1,184 $1,303 $ 1,324
Other liabilities........................................ 259 562 548 544
------ ------ ------ -------
Total liabilities........................................ 1,254 1,746 1,851 1,868
------ ------ ------ -------
Stockholder's equity(1)..................................
Common stock........................................... 82 82 82 82
Additional paid in capital............................. 515 521 541 541
Accumulated other comprehensive income................. 66 118 138 112
Retained earnings...................................... 992 1,180 1,405 1,467
------ ------ ------ -------
Total stockholder's equity............................... 1,665 1,901 2,166 2,202
------ ------ ------ -------
Total liabilities and stockholder's equity............... $2,909 $3,647 $4,017 $ 4,070
------ ------ ------ -------
------ ------ ------ -------
</TABLE>
- ------------------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in accordance
with the Statement of Financial Account Standards No. 130 "Reporting
Comprehensive Income" adopted by the Certificate Insurer effective
January 1, 1998. As this new standard only requires additional information
in the financial statements, it does not affect the Certificate Insurer's
financial position or results of operations.
For additional financial information concerning the Certificate Insurer,
see the audited and unaudited financial statements of the Certificate Insurer
incorporated by reference herein. Copies of the financial statements of the
Certificate Insurer incorporated herein by reference and copies of the
Certificate Insurer's annual statement for the year ended December 31, 1998
prepared in accordance with statutory accounting standards are available,
without charge, from the Certificate Insurer. The address of the Certificate
Insurer's administrative offices and its telephone number are One State Street
Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the Certificates
or the advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus
Supplement other than the information supplied by the Certificate Insurer and
presented under the headings "Credit Enhancements--The Certificate Insurer" and
"--Certificate Insurance Policy" and in the financial statements incorporated
herein by reference.
THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the Certificate Insurance Policy does
not purport to be complete and is qualified in its entirety by reference to the
Certificate Insurance Policy. The following information regarding the
Certificate Insurance Policy has been supplied by the Certificate Insurer for
inclusion herein. Only the Class A Certificates will be entitled to the benefit
of the Certificate Insurance Policy to be issued by the Certificate Insurer.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Holder (as defined below) that
an amount equal to each full and complete Insured Amount will be paid to the
Trustee or its successor, as trustee for the Holders. The Insurer's obligations
under the Certificate Insurance Policy with respect to a particular Insured
Amount shall be discharged to the extent funds equal to the applicable Insured
Amount are received by the Trustee, whether or not such funds are properly
applied by the Trustee. Insured Amounts shall be paid only at the time set forth
in the Certificate Insurance Policy, and no accelerated Insured Amount shall be
paid regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Certificate Insurer. The Certificate
Insurance Policy does not cover any interest shortfalls relating to the Relief
Act or any prepayment interest shortfalls.
S-33
<PAGE>
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust,
the REMIC or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Certificate Insurer will pay any amounts payable under the Certificate
Insurance Policy no later than 12:00 noon, New York City time, on the later of
the Distribution Date on which the related Deficiency Amount (as defined below)
is due or the Business Day following receipt in New York, New York on a Business
Day of a Notice (as described below); provided that if such Notice is received
after 12:00 noon, New York City time, on such Business Day, it will be deemed to
be received on the following Business Day. If any such Notice received is not in
proper form or is otherwise insufficient for the purpose of making a claim under
the Certificate Insurance Policy, it shall be deemed not to have been received
for purposes of this paragraph, and the Certificate Insurer shall promptly so
advise the Trustee and the Trustee may submit an amended Notice.
Insured Amounts due under the Certificate Insurance Policy, unless
otherwise stated therein, are to be disbursed by the Certificate Insurer to the
Trustee on behalf of the Holders by wire transfer of immediately available funds
in the amount of the Insured Amount.
As used in this section and in the Certificate Insurance Policy, the
following terms shall have the following meanings:
"AGREEMENT" means the Pooling and Servicing Agreement, dated as of May 1,
1999, between the Company and the Trustee, without regard to any amendment or
supplement thereto unless such amendment or supplement has been approved in
writing by the Certificate Insurer.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Agreement or the Certificate
Insurer is located are authorized or obligated by law or executive order to
close.
"DEFICIENCY AMOUNT" means, with respect to the Class A Certificates as of
any Distribution Date, (i) any shortfall in amounts available in the Certificate
Account to pay interest accrued during the preceding calendar month on the
Class A Principal Balance at the Class A Certificate Interest Rate, net of any
interest shortfalls relating to the Relief Act and any prepayment interest
shortfalls allocated to the Class A Certificates, (ii) the principal portion of
any realized loss allocated to the Class A Certificates, and (iii) the Class A
Principal Balance to the extent unpaid on the Distribution Date occuring in
November 2029.
"HOLDER" means any person who is the registered or beneficial owner of any
Class A Certificate and who, on the applicable Distribution Date, is entitled
under the terms of the Class A Certificates to payment thereunder.
"INSURED AMOUNT" means, as of any Distribution Date, any Deficiency Amount
and any Preference Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Certificate Insurance Policy, the original of which is subsequently delivered by
registered or certified mail from the Trustee specifying the Insured Amount
which shall be due and owing on the applicable Distribution Date.
"PREFERENCE AMOUNT" means any amount previously distributed to a Holder of
a Class A Certificate that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.) as amended from time to time, in accordance with a
final non-appealable order of a court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not
otherwise defined therein shall have the respective meanings set forth in the
Agreement as of the date of execution of the Certificate Insurance Policy,
without giving effect to any subsequent amendment to or modification of the
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
In the event that the Certificate Insurer were to become insolvent, any
claims arising under the Certificate Insurance Policy would be excluded from
coverage by the California Insurance Guaranty Association, established pursuant
to the laws of the State of California.
S-34
<PAGE>
The Certificate Insurance Policy is being issued under and pursuant to and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to maturity of the
Class A Certificates.
SUBORDINATION
The Class A Certificates receive distributions of interest and principal to
which they are entitled before distributions of interest or principal to the
Class B Certificates. See "Description of the Class A Certificates--Priority of
Distributions" herein.
Realized losses on Mortgage Loans will be allocated first, to the Class B
Certificates in reverse numerical order; and second, to the Class A
Certificates.
SHIFTING OF INTERESTS
The Class A Certificates will generally receive 100% of Principal
Prepayments received until the tenth anniversary of the first Distribution Date.
During the next four years, such Class A Certificates, in the aggregate, will
generally receive a disproportionately large, but decreasing, share of Principal
Prepayments received. This will result in an acceleration of the amortization of
the Class A Certificates, in the aggregate, enhancing the likelihood that
holders of the Class A Certificates will be paid the full amount of principal to
which they are entitled.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Company will cause a REMIC election to
be made with respect to the Trust. The Certificates (other than the Class R
Certificate) will represent ownership of REMIC regular interests. Such
Certificates will generally be treated as representing ownership of debt for
federal income tax purposes. Certificateholders will be required to include in
income all interest and original issue discount ("OID") on such Certificates in
accordance with the accrual method of accounting regardless of the
Certificateholders' usual methods of accounting.
The Class A Certificates will be reported as having been issued without OID
for federal income tax purposes. The prepayment assumption that will be used in
determining the rate of accrual of market discount and premium, if any, for
federal income tax purposes is 100% BPA, as described herein under "Yield and
Prepayment Considerations." No representation is made that the Mortgage Loans
will prepay at any given percentage of the BPA.
In certain circumstances, OID Regulations (as defined in "Certain Federal
Income Tax Consequences" in the Prospectus) permit the holder of a debt
instrument to recognize OID under a method that differs from that used by the
issuer. Accordingly, it is possible that the holder of a Certificate may be able
to select a method for recognizing OID that differs from that used by the
Company in preparing reports to the Certificateholders and the Internal Revenue
Service.
If actual prepayments differ sufficiently from the prepayment assumption,
the calculation of OID for the Class A Certificates might produce a negative
number for certain accrual periods. In such event, Certificateholders will not
be entitled to a deduction for such amount, but will be required to carry such
amount forward as an offset to OID, if any, accruing in future accrual periods.
The Class A Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Certificate will be
treated as holding a Certificate with amortizable bond premium will depend on
such Certificateholder's purchase price and the distributions remaining to be
made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of such Classes of Certificates should consult their
own tax advisors regarding the possibility of making an election to amortize any
such premium. See "Certain Federal Income Tax Consequences--Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" and "--Market Discount
and Premium" in the Prospectus.
The Class A 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
S-35
<PAGE>
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 Class A Certificates will
generally be treated as "interest on obligations secured by mortgages on real
property" for REITs to the extent that such Class A Certificates are treated as
"real estate assets." See "Certain Federal Income Tax Consequences" in the
Prospectus.
For further information regarding the federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences" in
the Prospectus.
CERTAIN LEGAL INVESTMENT ASPECTS
As of the date of their issuance, the Class A Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and as such, will be legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including depository institutions, life insurance companies,
and pension funds) created pursuant to or existing under the laws of the United
States or of any state whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, if a state enacted legislation prior to October 4, 1991 specifically
limiting the legal investment authority of any of such entities with respect to
"mortgage related securities," the Class A 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 Class A
Certificates, constitute legal investments for such investors.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with the Class A
Certificates without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in the Class A Certificates and
national banks may purchase the Class A Certificates for their own accounts
without regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. 24 (Seventh), in each case subject to such regulations as
the applicable federal regulatory authority may prescribe.
Institutions whose investment activities are subject to review by certain
regulatory authorities hereafter may be or may become subject to restrictions on
investment in the Class A Certificates, and such restrictions may be
retroactively imposed. The Federal Financial Institutions Examination Council,
the Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Office of
Thrift Supervision and the National Credit Union Administration have adopted
guidelines, and have proposed policies, regarding the suitability of investments
in various types of derivative mortgage-backed securities, including securities
such as the Class A Certificates. In addition, several states have adopted or
are considering regulations that would prohibit regulated institutions subject
to their jurisdiction from holding mortgage-backed securities such as the
Class A Certificates, including such securities previously purchased. Investors
should consult their own legal advisors in determining whether and to what
extent the Class A Certificates constitute legal investments for such investors.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase the Class A Certificates
or to purchase the Class A Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Class A Certificates
constitute legal investments for such investors.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (a "PLAN"), any insurance company
(whether through its general or separate accounts) or any other person investing
Plan Assets (as defined in the Prospectus) of any Plan (as defined under "ERISA
Considerations--Plan Asset Regulation" in the Prospectus) should carefully
review with its legal counsel whether the purchase or holding of Class A
Certificates could give rise to a transaction prohibited or not otherwise
permissible under ERISA
S-36
<PAGE>
or Section 4975 of the Code. The purchase or holding of the Class A Certificates
by or on behalf of, or with Plan Assets of, a Plan may qualify for exemptive
relief under the Underwriter's Exemption, as described under "ERISA
Considerations--Underwriter's Exemption" in the Prospectus. However, the
Underwriter's Exemption contains a number of conditions which must be met for
the Underwriter's Exemption to apply, including the requirement that any such
Plan must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation
D of the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
Insurance companies contemplating the investment of general account assets
in the Class A Certificates should consult with their legal counsel with respect
to the applicability of Section 401(c) of ERISA, as described in "ERISA
Considerations--Insurance Company General Accounts" in the Prospectus. The U.S.
Department of Labor issued proposed regulations under Section 401(c) on December
22, 1997, but the final regulations have not been issued as of the date hereof.
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold the Class A Certificates on behalf of or with Plan Assets of any Plan
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. See "ERISA Considerations" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase, all of the Class A Certificates. The
aggregate proceeds (excluding accrued interest) to the Company from the sale of
the Class A Certificates, before deducting expenses estimated to be
approximately $567,500, will be approximately 101.74% of the initial Class A
Principal Balance. The Underwriter will offer the Class A Certificates at a
price equal to 101.80% of the initial Class A Principal Balance plus accrued
interest. Under the terms and conditions of the Underwriting Agreement, the
Underwriter is committed to take and pay for all of the Class A Certificates, if
any are taken. The Underwriter's commission will be 0.06% of the initial
Class A Principal Balance.
Until payment of the Class A Certificates is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriter and
certain selling group members to bid for and purchase the Class A Certificates.
As an exception to these rules, the Underwriter is permitted to engage in
certain transactions that stabilize the price of the Class A Certificates. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Class A Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Class A Certificates. In addition,
neither the Company nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Richard
Careaga, Assistant General Counsel, Second Vice President and Assistant
Secretary of the Company, and by its special counsel, Orrick, Herrington &
Sutcliffe LLP, San Francisco, California. Brown & Wood LLP, New York, New York,
will pass upon certain legal matters on behalf of the Underwriter. The
enforceability of the Certificate Insurance Policy will be passed upon by Kevin
J. Doyle, Managing Director and General Counsel--Specialized Finance Division of
Ambac Assurance Corporation.
S-37
<PAGE>
CERTIFICATE RATINGS
It is a condition to the issuance of the Class A Certificates that they
receive a "AAA" rating from Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. ("S&P"), and a "Aaa" rating from Moody's
Investors Service, Inc. ("MOODY'S").
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. Each security rating should be evaluated independently of any other
security rating.
The ratings assigned to this issue do not constitute a recommendation to
purchase or sell these securities. Rather, they are an indication of the
likelihood of the payment of principal and interest as set forth in the
transaction documentation. The ratings do not address the effect on the Class A
Certificates' yield attributable to prepayments or recoveries on the underlying
Mortgage Loans.
The ratings on the Class A Certificates address the likelihood of the
receipt by Certificateholders of all distributions with respect to the
underlying Mortgage Loans to which they are entitled. The ratings do not
represent any assessment of the likelihood that the rate of Principal
Prepayments by Mortgagors might differ from those originally anticipated. As a
result of such differences in the rate of Principal Prepayments,
Certificateholders might suffer a lower than anticipated yield to maturity. See
"Risk Factors" and "Yield and Prepayment Considerations" herein.
The Company has not requested a rating on the Class A Certificates by any
rating agency other than S&P and Moody's. However, there can be no assurance as
to whether any other rating agency will rate the Class A Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Class A Certificates by another rating agency, if assigned at all, may be
lower than the rating assigned to the Class A Certificates by S&P or Moody's.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries, as of December 31, 1998 and 1997 and for each of the years in the
three-year period ended December 31, 1998 are incorporated by reference herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
S-38
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
MORTGAGE INTEREST RATES OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
MORTGAGE INTEREST MORTGAGE AS OF THE BALANCE OF THE
RATES (%) LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
5.875.................. 1 $ 320,000.00 0.11%
6.000.................. 7 2,811,475.00 1.01
6.125.................. 10 2,744,065.00 0.99
6.250.................. 5 2,103,999.99 0.76
6.375.................. 6 1,858,050.00 0.67
6.500.................. 11 3,604,795.92 1.29
6.625.................. 25 4,863,788.93 1.75
6.750.................. 161 34,325,032.16 12.33
6.875.................. 256 63,047,655.29 22.64
7.000.................. 165 42,535,520.25 15.28
7.125.................. 104 28,068,043.51 10.08
7.250.................. 76 24,054,040.71 8.64
7.375.................. 59 18,397,624.13 6.61
7.500.................. 62 14,179,982.31 5.09
7.625.................. 51 16,430,573.29 5.90
7.750.................. 48 7,641,219.59 2.74
7.875.................. 33 5,458,577.84 1.96
8.000.................. 4 1,798,107.50 0.65
8.125.................. 1 2,450,000.00 0.88
8.375.................. 2 1,728,912.52 0.62
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
<TABLE>
<CAPTION>
PASS-THROUGH RATES OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE WEIGHTED
PRINCIPAL WEIGHTED AVERAGE
BALANCE OF THE AVERAGE SCHEDULED
MORTGAGE LOANS MORTGAGE REMAINING
RANGE OF PASS-THROUGH AS OF THE INTEREST TERM (IN
RATES (%) CUT-OFF DATE RATES MONTHS)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
5.001-5.250............. $ 3,065,275.00 6.086% 352
5.251-5.500............. 2,581,250.00 6.300 352
5.501-5.750............. 6,063,990.50 6.375 354
5.751-6.000............. 30,349,026.54 6.798 352
6.001-6.250............. 23,199,194.95 6.970 353
6.251-6.500............. 57,536,998.91 6.912 356
6.501-6.750............. 81,945,759.40 7.064 357
6.751-7.000............. 38,046,544.04 7.385 356
7.001-7.250............. 26,620,777.61 7.535 340
7.251-7.500............. 4,082,845.96 7.791 356
7.501-7.750............. 3,399,801.03 8.059 356
7.751-8.000............. 1,530,000.00 8.375 359
--------------- ----- ---
Total............... $278,421,463.94 7.082%* 354*
---------------
---------------
</TABLE>
* Represents a weighted average (by principal balance) of all the Mortgage
Loans.
As of the Cut-Off Date, the Pass-Through Rates for the Mortgage Loans
ranged from approximately 5.105% per annum to approximately 7.980% per annum,
with a weighted average of approximately 6.560% per annum.
<TABLE>
<CAPTION>
ORIGINAL PRINCIPAL BALANCES OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
RANGE OF ORIGINAL MORTGAGE AS OF THE BALANCE OF THE
PRINCIPAL BALANCES LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
$ 50,000 or less....... 40 $ 1,492,307.93 0.54%
$ 50,001- 75,000....... 89 5,599,688.70 2.01
$ 75,001-100,000....... 122 10,548,362.14 3.79
$100,001-150,000....... 202 25,388,948.19 9.12
$150,001-200,000....... 163 28,924,841.40 10.39
$200,001-250,000....... 110 24,738,965.46 8.89
$250,001-300,000....... 81 22,407,084.94 8.05
$300,001-350,000....... 50 16,269,678.86 5.84
$350,001-400,000....... 50 18,942,461.80 6.80
$400,001-450,000....... 29 12,492,714.03 4.49
$450,001-500,000....... 30 14,515,758.97 5.21
Over $500,000.......... 121 97,100,651.52 34.88
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
As of the Cut-Off Date, the principal balances of the Mortgage Loans
ranged from approximately $10,000 to approximately $3,360,000 with an average of
approximately $256,137.50.
<TABLE>
<CAPTION>
YEARS OF INITIAL MONTHLY PAYMENTS FOR THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
YEARS OF INITIAL MORTGAGE AS OF THE BALANCE OF THE
MONTHLY PAYMENT LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
1997................... 2 $ 617,837.42 0.22%
1998................... 494 114,349,171.26 41.07
1999................... 591 163,454,455.26 58.71
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
<TABLE>
<CAPTION>
CURRENT LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
CURRENT LOAN-TO-VALUE MORTGAGE AS OF THE BALANCE OF THE
RATIO (%) LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
60.00 or less.......... 202 $ 44,621,566.71 16.03%
60.01-70.00............ 147 35,678,111.93 12.81
70.01-75.00............ 77 19,376,581.72 6.96
75.01-80.00............ 221 63,546,579.12 22.82
80.01-85.00............ 18 3,577,566.03 1.28
85.01-90.00............ 50 13,314,460.92 4.78
90.01-95.00............ 57 13,296,564.44 4.78
95.01 or more.......... 315 85,010,033.07 30.53
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
At origination, the weighted average loan-to-value ratio of the Mortgage
Loans was approximately 79.6%. As of the Cut-Off Date, the weighted average
loan-to-value ratio of the Mortgage Loans was approximately 79.2%. All of the
Mortgage Loans with loan-to-value ratios as of the Cut-Off Date in excess of 80%
were covered by a Primary Insurance Policy or secured by Additional Collateral.
S-39
<PAGE>
<TABLE>
<CAPTION>
TYPES OF MORTGAGE PROPERTIES SECURING MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
MORTGAGE AS OF THE BALANCE OF THE
PROPERTY TYPES LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Single Family 660 $180,131,647.82 64.70%
Detached.............
Duplex................. 13 2,327,601.66 0.84%
Triplex................ 2 371,000.00 0.13%
Fourplex............... 1 815,000.00 0.29%
Condominium............ 175 29,516,314.48 10.60%
Planned Unit
Development.......... 51 13,133,945.85 4.72%
De Minimus PUD......... 152 45,772,707.50 16.44%
Housing Cooperatives... 33 6,353,246.63 2.28%
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE LOANS BY STATE
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
MORTGAGE AS OF THE BALANCE OF THE
STATES LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Alabama................ 12 $ 2,194,775.22 0.79%
Alaska................. 1 195,000.00 0.07
Arizona................ 30 8,323,169.50 2.99
Arkansas............... 6 823,599.98 0.30
California............. 156 58,847,143.22 21.14
Colorado............... 43 10,400,569.67 3.74
Connecticut............ 22 7,519,943.15 2.70
Delaware............... 3 941,828.00 0.34
District of Columbia... 5 1,206,049.38 0.43
Florida................ 105 23,040,899.28 8.28
Georgia................ 56 15,957,150.87 5.73
Hawaii................. 3 965,752.63 0.35
Idaho.................. 6 1,334,793.75 0.48
Illinois............... 41 10,995,548.92 3.95
Indiana................ 19 3,204,244.34 1.15
Iowa................... 6 743,771.04 0.27
Kansas................. 10 1,354,314.34 0.49
Kentucky............... 12 2,878,052.60 1.03
Louisiana.............. 8 1,260,121.35 0.45
Maine.................. 1 320,000.00 0.11
Maryland............... 12 3,032,776.31 1.09
Massachusetts.......... 29 10,843,969.56 3.89
Michigan............... 53 8,640,966.86 3.10
Minnesota.............. 9 1,776,573.36 0.64
Mississippi............ 3 846,400.00 0.30
Missouri............... 30 4,677,748.12 1.68
Montana................ 3 1,103,180.00 0.40
Nebraska............... 9 1,511,191.68 0.54
Nevada................. 15 1,595,473.04 0.57
New Hampshire.......... 4 542,500.00 0.19
New Jersey............. 50 14,496,515.18 5.21
New Mexico............. 14 2,563,734.63 0.92
New York............... 63 14,531,496.52 5.22
North Carolina......... 41 8,346,246.39 3.00
Ohio................... 30 6,201,775.34 2.23
Oklahoma............... 7 831,000.00 0.30
Oregon................. 7 1,202,145.95 0.43
Pennsylvania........... 30 7,589,600.42 2.73
Rhode Island........... 4 430,100.00 0.15
South Carolina......... 7 2,199,769.16 0.79
South Dakota........... 1 360,000.00 0.13
Tennessee.............. 11 1,277,135.11 0.46
Texas.................. 37 8,147,131.12 2.93
Utah................... 12 4,755,160.30 1.71
Vermont................ 5 849,239.84 0.31
Virginia............... 19 5,360,061.47 1.93
Washington............. 28 8,415,863.00 3.02
West Virginia.......... 1 442,000.00 0.16
Wisconsin.............. 7 863,603.89 0.31
Wyoming................ 1 2,481,379.45 0.89
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
No more than approximately 1.8% of the Mortgage Loans will be secured by
Mortgaged Properties in any one Massachusetts zip code area, and no more than
approximately 1.3% of the Mortgage Loans will be secured by Mortgaged Properties
in any other single zip code area.
<TABLE>
<CAPTION>
ORIGINAL TERMS OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
LOAN TERM MORTGAGE AS OF THE BALANCE OF THE
(IN MONTHS) LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
72.................... 20 $ 1,450,368.26 0.52%
300.................... 1 158,132.73 0.06
352.................... 1 297,978.72 0.11
353.................... 1 232,665.42 0.08
360.................... 1,064 276,282,318.81 99.23
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
<TABLE>
<CAPTION>
SCHEDULED MATURITY YEARS OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
MORTGAGE AS OF THE BALANCE OF THE
YEAR OF MATURITY LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
2004................... 20 $ 1,450,368.26 0.52%
2023................... 1 158,132.73 0.06
2027................... 4 1,148,481.56 0.41
2028................... 489 117,795,284.54 42.31
2029................... 573 157,869,196.85 56.70
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
The weighted average (by principal balance) stated remaining term of the
Mortgage Loans as of the Cut-Off Date is approximately 354 months.
The latest scheduled maturity of any of the Mortgage Loans is May 1, 2029.
<TABLE>
<CAPTION>
DOCUMENTATION PROGRAM TYPES OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
LOAN DOCUMENTATION MORTGAGE AS OF THE BALANCE OF THE
PROGRAM TYPES LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Full Documentation..... 1,024 $261,970,044.37 94.09%
No Documentation....... 30 10,311,185.31 3.70
No Ratio............... 3 1,134,000.00 0.41
Reduced Documentation.. 30 5,006,234.26 1.80
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
As of the Cut-Off Date, the weighted average of the loan-to-value ratios
of the Mortgage Loans originated under a reduced or no documentation program was
approximately 77.8%.
As of the Cut-Off Date, the weighted average of the loan-to-value ratios
of the Mortgage Loans originated under a no ratio program was approximately
88.1%.
Under a no ratio program, income information is not obtained from the
related Mortgagors or verified.
<TABLE>
<CAPTION>
PURPOSES OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
MORTGAGE AS OF THE BALANCE OF THE
PURPOSE OF LOAN LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Purchase Loans......... 534 $137,909,974.77 49.53%
Rate/Term
Refinancing.......... 201 47,026,298.39 16.89
Cash Out Refinancing... 352 93,485,190.78 33.58
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
S-40
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
MORTGAGE AS OF THE BALANCE OF THE
OCCUPANCY STATUS LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Owner Occupied......... 849 $225,219,898.65 80.89%
Owner Occupied--2nd
Home................. 101 34,115,210.43 12.25
Non-Owner Occupied..... 137 19,086,354.86 6.86
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
<TABLE>
<CAPTION>
FIRST INTEREST RATE ADJUSTMENT DATES OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
MORTGAGE AS OF THE BALANCE OF THE
MONTH/YEAR LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
07/2001................ 1 $ 2,481,379.45 0.89%
11/2001................ 20 1,450,368.26 0.52
08/2002................ 1 297,978.72 0.11
09/2002................ 1 232,665.42 0.08
10/2002................ 1 383,748.88 0.14
11/2002................ 1 234,088.54 0.08
01/2003................ 1 500,000.00 0.18
03/2003................ 1 158,132.73 0.06
04/2003................ 3 513,613.60 0.18
05/2003................ 6 2,492,110.77 0.90
06/2003................ 3 963,215.49 0.35
07/2003................ 2 213,304.50 0.08
08/2003................ 42 8,844,808.96 3.18
09/2003................ 315 72,140,665.23 25.91
10/2003................ 80 18,328,498.37 6.58
11/2003................ 17 5,388,429.76 1.94
12/2003................ 19 5,929,258.41 2.13
01/2004................ 39 8,272,330.78 2.97
02/2004................ 50 14,613,105.66 5.25
03/2004................ 245 69,254,417.66 24.87
04/2004................ 227 62,758,092.75 22.54
05/2004................ 12 2,971,250.00 1.07
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
<TABLE>
<CAPTION>
INDICES OF THE MORTGAGE LOANS
- ----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE OF THE THE AGGREGATE
NUMBER OF MORTGAGE LOANS PRINCIPAL
MORTGAGE AS OF THE BALANCE OF ALL
INDEX LOANS CUT-OFF DATE MORTGAGE LOANS
- ----------------------------------------------------------------------
<S> <C> <C> <C>
One-Year CMT........... 95 $ 33,704,730.37 12.11%
Six-Month Libor........ 992 244,716,733.57 87.89
----- --------------- ------
Total.............. 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
<TABLE>
<CAPTION>
MARGINS OF THE MORTGAGE LOANS
- -----------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF THE
BALANCE AGGREGATE
NUMBER OF OF THE MORTGAGE PRINCIPAL BALANCE
MORTGAGE LOANS AS OF THE OF THE MORTGAGE
MARGIN (%) LOANS CUT-OFF DATE LOANS
- -----------------------------------------------------------------------
<S> <C> <C> <C>
2.000............... 973 $243,391,365.31 87.42%
2.375............... 1 2,481,379.45 0.89%
2.500............... 20 1,450,368.26 0.52%
2.750............... 93 31,098,350.92 11.17%
----- --------------- ------
Total........... 1,087 $278,421,463.94 100.00%
----- --------------- ------
----- --------------- ------
</TABLE>
<TABLE>
<CAPTION>
RATE CEILINGS OF THE MORTGAGE LOANS
- ------------------------------------------------------------------------
AGGREGATE
PRINCIPAL PERCENTAGE OF
BALANCE THE AGGREGATE
NUMBER OF OF THE MORTGAGE PRINCIPAL
MORTGAGE LOANS AS OF THE BALANCE OF THE
RATE CEILING (%) LOANS CUT-OFF DATE MORTGAGE LOANS
- ------------------------------------------------------------------------
<S> <C> <C> <C>
11.750................ 4 $ 1,294,777.38 0.47%
11.875................ 3 669,246.40 0.24
12.000................ 2 697,891.02 0.25
12.125................ 2 501,760.60 0.18
12.250................ 1 383,748.88 0.14
12.375................ 7 841,234.48 0.30
12.500................ 30 2,697,588.44 0.97
12.750................ 4 478,201.28 0.17
12.875................ 11 2,178,978.96 0.78
13.000................ 620 152,346,193.00 54.72
13.125................ 103 27,765,572.91 9.97
13.250................ 75 23,670,291.83 8.50
13.375................ 52 17,556,389.65 6.31
13.500................ 34 11,832,198.37 4.25
13.625................ 51 16,430,573.29 5.90
13.750................ 48 7,641,219.59 2.74
13.875................ 33 5,458,577.84 1.96
14.000................ 4 1,798,107.50 0.65
14.125................ 1 2,450,000.00 0.88
14.375................ 2 1,728,912.52 0.62
----- --------------- -------
Total............. 1,087 $278,421,463.94 100.00%
----- --------------- -------
----- --------------- -------
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL COLLATERAL OR PRIMARY MORTGAGE INSURANCE OF THE MORTGAGE LOANS
WITH LOAN-TO-VALUE RATIOS GREATER THAN 80% AT ORIGINATION
- ---------------------------------------------------------------------------
PERCENTAGE OF THE
NUMBER OF AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
MORTGAGE LOANS BALANCE AS OF THE BALANCE AS OF THE
WITH LOAN-TO- CUT-OFF DATE OF THE CUT-OFF DATE OF THE
VALUE RATIOS MORTGAGE LOANS WITH MORTGAGE LOANS WITH
GREATER THAN LOAN-TO-VALUE LOAN-TO-VALUE
80% AT RATIOS GREATER THAN RATIOS GREATER THAN
ORIGINATION 80% AT ORIGINATION 80% AT ORIGINATION
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Primary Mortgage
Insurance....... 53 $ 10,567,619.67 9.11%
Additional
Collateral...... 394 105,487,461.97 90.89
---- --------------- -------
Total......... 447 $116,055,081.64 100.00%
---- --------------- -------
---- --------------- -------
</TABLE>
S-41
<PAGE>
INDEX OF TERMS
Set forth below is a list of certain of the more significant terms used in
this Prospectus Supplement and the pages on which the definitions of such terms
can be found.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Collateral.......................... S-14
Additional Collateral Loans.................... S-14
Adjustment Date................................ S-14
Advances....................................... S-23
Agreement...................................... S-34
Available Distribution Amount.................. S-23
Balloon Loan................................... S-14
Basic Prepayment Assumption/BPA................ S-29
Business Day................................... S-34
Cede........................................... S-17
Certificate Insurance Policy................... S-13
Certificate Insurer............................ S-32
Certificate Interest Rate...................... S-20
Certificate Principal Balance.................. S-17
Certificates................................... S-17
Class B Certificates........................... S-17
Class Principal Balance........................ S-17
Closing Date................................... S-17
Company........................................ S-17
Compensating Interest.......................... S-20
CPR............................................ S-29
Curtailments................................... S-21
Cut-Off Date................................... S-13
Deficiency Amount.............................. S-34
Definitive Class A Certificates................ S-19
Determination Date............................. S-23
Distribution Date.............................. S-19
DTC............................................ S-17
DTC Participants............................... S-18
Due Date....................................... S-14
ERISA.......................................... S-36
Excess Liquidation Proceeds.................... S-23
Fixed Rate..................................... S-14
Holder......................................... S-34
Indirect DTC Participants...................... S-18
Insurance Agreement............................ S-25
Insured Amount................................. S-34
Liquidated Mortgage Loan....................... S-21
<CAPTION>
PAGE
----
<S> <C>
Liquidation Principal.......................... S-21
Margin......................................... S-14
Master Servicing Fee........................... S-24
Modeling Assumptions........................... S-30
Moody's........................................ S-32
Mortgage Loan Schedule......................... S-13
Mortgage Loans................................. S-17
Mortgage Pool.................................. S-13
Mortgaged Properties........................... S-13
Notice......................................... S-34
OID............................................ S-35
One-Year CMT................................... S-15
Pass-Through Rate.............................. S-20
Payoffs........................................ S-20
Periodic Cap................................... S-14
Plan........................................... S-36
Pooling Agreement.............................. S-17
Preference Amount.............................. S-34
Premium Payment Rate........................... S-25
Principal Payment Amount....................... S-20
Principal Prepayments.......................... S-20
Rate Ceiling................................... S-14
Relief Act..................................... S-20
Rules.......................................... S-18
S&P............................................ S-32
Senior Liquidation Amount...................... S-21
Senior Percentage.............................. S-21
Senior Prepayment Percentage................... S-21
Senior Principal Distribution Amount........... S-21
Six-Month Libor................................ S-16
SMMEA.......................................... S-36
Subordinate Liquidation Amount................. S-21
Subordinate Percentage......................... S-21
Subordinate Prepayment Percentage.............. S-21
Subordinate Principal Distribution Amount...... S-21
Trust.......................................... S-17
Trustee........................................ S-17
</TABLE>
S-42
<PAGE>
PROSPECTUS
PNC MORTGAGE SECURITIES CORP.
DEPOSITOR AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES
PNC MORTGAGE SECURITIES CORP. MAY PERIODICALLY ISSUE
CERTIFICATES REPRESENTING INTERESTS IN A TRUST THAT
CONSISTS PRIMARILY OF MORTGAGE LOANS. THE
CERTIFICATES WILL BE ISSUED IN SERIES, AND EACH
SERIES OF CERTIFICATES WILL REPRESENT INTERESTS IN A
DIFFERENT TRUST ESTABLISHED BY PNC MORTGAGE
SECURITIES CORP.
EACH TRUST WILL CONSIST OF:
o a pool of mortgage loans secured by residential
properties, which may include cooperative
apartments, described in detail in the
accompanying prospectus supplement.
o related property and interests; and
o other property as described in the accompanying
prospectus supplement.
THE CERTIFICATES IN A SERIES:
o will represent interest in a trust and will be
paid only from the assets of that trust; and
o may be divided into multiple classes of
certificates, and, if so, each class may:
o receive a different fixed or variable rate of
interest;
o be subordinated to other classes of
certificates in that series;
o represent interests in only certain of the
assets of the trust;
o receive principal at different times; and
o have different forms of credit enhancement.
The certificates may be offered to the public through different methods as
described in "Methods of Distribution" in this prospectus. PNC Capital Markets
Inc., an affiliate of PNC Mortgage Securities Corp., may act as agent or
underwriter in connection with the sale of the certificates. This prospectus and
the accompanying prospectus supplement may be used by PNC Capital Markets, Inc.
in secondary market transactions in connection with the offer and sale of any
certificates. PNC Capital Markets, Inc. may act as principal or agent in such
transactions and such sales will be made at prevailing market prices or
otherwise.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
May 25, 1999
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 5 IN THIS PROSPECTUS.
A certificate will represent an interest only in the trust created for that
series of certificates. A certificate will not represent an interest in or an
obligation of PNC Mortgage Securities Corp., PNC Bank Corp. or any of their
affiliates.
This prospectus may be used to offer and sell a series of certificates only if
accompanied by the prospectus supplement for that series.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to your series of
certificates and (b) the accompanying prospectus supplement, which describes the
specific terms of your series of certificates.
IF THE TERMS OF A PARTICULAR SERIES OF CERTIFICATES VARY BETWEEN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE
INFORMATION IN THE PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. We have not authorized anyone to provide you with different
information. We are not offering the certificates in any state where the offer
is not permitted. We do not claim the accuracy of the information in this
prospectus or the accompanying prospectus supplement as of any date other than
the dates stated on their respective covers.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Terms" beginning on page 84.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RISK FACTORS................................... 5
THE MORTGAGE POOLS............................. 8
General................................... 8
Conversion of Mortgage Loans.............. 12
USE OF PROCEEDS................................ 12
YIELD CONSIDERATIONS........................... 12
General................................... 12
Effective Interest Rate................... 13
MATURITY, AVERAGE LIFE AND PREPAYMENT
ASSUMPTIONS.................................. 14
Redemption of Certificates or Underlying
Mortgage Loans.......................... 15
THE COMPANY.................................... 16
Mortgage Purchase Program................. 16
Loan Standards............................ 16
Credit, Appraisal and Underwriting
Standards............................... 17
Seller Warranties and Indemnification of
the Company............................. 18
Relationships with Affiliates............. 18
DESCRIPTION OF CERTIFICATES.................... 19
General................................... 19
Assignment of Mortgage Loans.............. 20
Substitution of Mortgage Loans............ 21
Representations and Warranties............ 21
Servicing................................. 23
Retained Yield............................ 24
Payments on Mortgage Loans; Custodial
Accounts for P&I, Investment Account,
Certificate Account and Reserve
Account................................. 24
Distributions on Certificates............. 29
Reports to Certificateholders............. 30
Advances.................................. 31
Collection and Other Servicing
Procedures.............................. 32
Servicing Compensation and Payment of
Expenses................................ 33
Evidence as to Compliance................. 35
Certain Matters Regarding the Master
Servicer, the Servicer, the Certificate
Administrator and the Company........... 35
Events of Default......................... 36
Rights Upon Event of Default.............. 37
Amendment................................. 38
List of Certificateholders................ 38
Termination............................... 38
Redemption Agreement...................... 39
Put Option................................ 39
The Trustee............................... 39
<CAPTION>
PAGE
--
<S> <C>
PRIMARY INSURANCE, FHA MORTGAGE INSURANCE, VA
MORTGAGE GUARANTY, HAZARD INSURANCE; CLAIMS
THEREUNDER .................................. 40
Primary Insurance......................... 40
FHA Mortgage Insurance.................... 41
VA Mortgage Guaranty...................... 42
Hazard Insurance.......................... 42
DESCRIPTION OF CREDIT ENHANCEMENTS............. 44
Mortgage Pool Insurance................... 45
Subordination............................. 46
The Fraud Bond............................ 47
The Bankruptcy Bond....................... 47
Special Hazard Insurance.................. 48
Letter of Credit.......................... 49
Reserve Fund.............................. 49
Certificate Insurance Policies............ 49
Maintenance of Credit Enhancements; Claims
Thereunder and Other Realization Upon
Defaulted Mortgage Loans................ 50
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS.... 53
Cooperative Loans......................... 53
Tax Aspects of Cooperative Ownership...... 54
Foreclosure............................... 54
Foreclosure on Shares of Cooperatives .... 55
Rights of Redemption...................... 56
Anti-Deficiency Legislation and Other
Limitations on Lenders.................. 56
Enforceability of Certain Provisions...... 58
Applicability of Usury Laws............... 59
Alternative Mortgage Instruments.......... 59
Environmental Risks....................... 59
ERISA CONSIDERATIONS........................... 60
Plan Asset Regulation..................... 61
Underwriter's Exemption................... 61
Other Exemptions.......................... 63
Insurance Company General Accounts........ 63
Representations from Investing Plans...... 64
Tax-Exempt Plan Investors................. 64
Consultation with Counsel................. 65
CERTAIN FEDERAL INCOME TAX CONSEQUENCES........ 66
Classification of REMIC Trust Funds....... 66
Characterization of Investments in REMIC
Certificates............................ 66
Taxation of Owners of REMIC Regular
Certificates............................ 67
Original Issue Discount.............. 67
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
--
<S> <C>
Market Discount and Premium.......... 71
Realized Losses...................... 72
Callable Class Certificates.......... 73
Taxation of Owners of REMIC Residual
Certificates............................ 74
General.............................. 74
Taxable Income or Net Loss of the
REMIC Trust Fund................... 75
Basis Rules and Distributions........ 75
Excess Inclusions.................... 76
Noneconomic REMIC Residual
Certificates....................... 76
Tax-Exempt Investors................. 77
Real Estate Investment Trusts........ 77
Mark-to-Market Rules................. 77
Sales of REMIC Certificates............... 77
Pass-Through of Servicing Fees............ 79
Prohibited Transactions and Other Possible
REMIC Taxes............................. 79
<CAPTION>
PAGE
--
<S> <C>
Termination of a REMIC Trust Fund......... 80
Reporting and Other Administrative Matters
of REMICs............................... 80
Backup Withholding with Respect to REMIC
Certificates............................ 81
Foreign Investors in REMIC Certificates... 81
REMIC Regular Certificates........... 81
REMIC Residual Certificates.......... 81
New Withholding Regulations............... 82
State and Local Taxation.................. 82
Call Right................................ 82
METHODS OF DISTRIBUTION........................ 82
TRANSFERABILITY OF CERTIFICATES ............... 83
LEGAL MATTERS.................................. 83
FINANCIAL INFORMATION.......................... 83
ADDITIONAL INFORMATION......................... 84
INDEX OF TERMS................................. 85
</TABLE>
4
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER THE FOLLOWING RISK FACTORS (IN ADDITION TO THE RISK
FACTORS IN THE PROSPECTUS SUPPLEMENT) IN DECIDING WHETHER TO PURCHASE ANY OF THE
CERTIFICATES.
<TABLE>
<S> <C>
LACK OF SECONDARY MARKETS MAY LIMIT A secondary market for the certificates of any series may not
YOUR ABILITY TO RESELL YOUR CERTIFICATES develop. If a secondary market does develop, it might not
continue or it might not be sufficiently liquid to allow you to
resell any of your certificates. An underwriter may decide to
establish a secondary market for a particular series of
certificates. If so, the prospectus supplement for that series
of certificates will indicate this intention. However, no
underwriter will be obligated to do so. The certificates will
not be listed on any securities exchange.
THERE IS NO SOURCE OF PAYMENTS FOR YOUR When you buy a certificate, you will not own an interest in PNC
CERTIFICATES OTHER THAN PAYMENTS ON THE MORTGAGE Mortgage Securities Corp., PNC Bank Corp or any of their
LOANS IN THE TRUST affiliates. You will own an interest in the Trust established
for that series of certificates. Your payments come only from
assets in the Trust. Therefore, the mortgagors' payments on the
mortgage loans included in the Trust (and any credit
enhancements) will be the sole source of payments to you. If
those amounts are insufficient to make required payments of
interest or principal to you, there is no other source of
payments.
Moreover, no governmental agency either guarantees or insures
payments on the Certificates or any of the mortgage loans.
PNC Securities Corp. and/or the Servicers will have limited
obligations. These will usually include:
o the obligation under certain circumstances to repurchase the
mortgage loans if there has been a breach of representations
and warranties;
o advancing payments on the mortgage loans when the mortgagor
is delinquent if the applicable Master Servicer believes the
advance is recoverable; and
o various servicing and/or administrative obligations made in
the Pooling Agreement and/or servicing contracts.
YOU BEAR THE RISK OF CERTAIN MORTGAGOR DEFAULTS; Because your certificates represent an interest in the mortgage
CERTAIN OF THE MORTGAGE LOANS MAY BE ESPECIALLY loans your investment may be affected may be by a decline in
PRONE TO DEFAULTS real estate values and changes in individual mortgagor's
financial conditions. Investors should be aware that value of
the mortgaged properties may decline. If the outstanding
balance of a mortgage loan and any secondary financing on the
underlying property is greater than the value of the property,
there is an increased risk of delinquency, foreclosure and
losses. If the residential real estate market experiences an
overall decline in property values, the rates of delinquencies,
foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. To the
extent your certificates are not covered by credit
enhancements, you will bear all of the risks resulting from
defaults by mortgagors. In addition, certain types of mortgage
loans which have higher than
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
average rates of default may be included in the Trust that
issues your certificate. The following types of loans may be
included:
o mortgage loans that are subject to "negative amortization".
The principal balances of such loans may be increased to
amounts greater than the value of the underlying property.
This increases the likelihood of default;
o mortgage loans that do not fully amortize over their terms to
maturity which are sometimes referred to as balloon loans.
Such loans require a large payment at their stated maturity.
These loans involve a greater degree of risk because the
ability of a mortgagor to make this final payment typically
depends on the ability to refinance the loan or sell the
related mortgaged property;
o mortgage loans that provide for escalating or variable
payments by the mortgagor. The mortgagor may have qualified
for such loans based on an income level sufficient to make
the initial payments only. As the payments increase, the
likelihood of default will increase; and
o mortgage loans that are concentrated in certain regions,
States or zip code areas of the United States. Such
geographic units may experience weak economic conditions and
housing markets. This may cause higher rates of loss and
delinquency.
See "Description of the Mortgage Pools" in the prospectus
supplement to see if any of these or other types of special
risk loans are present in the mortgage pool applicable to your
certificates.
CREDIT ENHANCEMENTS MAY BE LIMITED OR The prospectus supplement related to your your certificates may
REDUCED AND THIS MAY CAUSE YOUR CERTIFICATES TO specify that credit enhancements will provide some protection
BEAR MORE RISK OF MORTGAGOR DEFAULTS to cover certain losses on the underlying mortgage loans. The
forms of credit enhancement include (but are not limited to)
the following: subordination of one or more classes of
certificates to other classes of certificates in the same
series; an insurance policy on a particular class of
certificates; a letter of credit; a mortgage pool insurance
policy; a special hazard insurance policy; a fraud bond; a
bankruptcy bond; a reserve fund; or any combination thereof.
See "Description of the Credit Enhancements" herein. See also
"Credit Enhancements" in the prospectus supplement in order to
see what forms of credit enhancements apply to your
certificates.
Regardless of the form of credit enhancement, an investor
should be aware that:
o The amount of coverage is usually limited;
o The amount of coverage will usually be reduced over time
according to a schedule or formula;
o The particular form of credit enhancements may provide
coverage only to certain types of losses on the mortgage
loans, and not to other types of losses;
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
o The particular form of credit enhancements may provide
coverage only to certain certificates and not other
certificates of the same series; and
o If the applicable rating agencies believe that the rating on
the certificates will not be adversely affected, certain
types of credit enhancements may be reduced or terminated.
IF THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS The yield to maturity of your certificates will depend
IS DIFFERENT THAN EXPECTED, YOUR YIELD MAY BE primarily on the price you paid for your certificates and the
CONSIDERABLY LOWER THAN ANTICIPATED rate of principal payments on the mortgage loans in the
applicable Trust. The rate of principal payments includes
scheduled payments of interest and principal, prepayments,
liquidations due to defaults and repurchases. If the rate of
prepayments on the mortgage loans related to your certificates
is higher or lower than anticipated, the yield to maturity may
be adversely affected. The yield on some types of certificates
are more sensitive to variations in prepayments than others.
For example, certificates that receive only payments of
interest are especially sensitive to variations in the rate of
prepayments. If the rate of prepayments is high or if a
redemption or call feature of the certificates or the
underlying mortgage loans occurs, the holders of such
certificates may not fully recoup their initial investment. See
"Yield Considerations" and "Maturity, Average Life and
Prepayment Assumptions" in this prospectus. See also "Risk
Factors" and "Yield and Prepayment Considerations" in the
prospectus supplement for more information concerning the
prepayment risks pertaining to your certificates.
THE REDEMPTION OF THE CERTIFICATES OR THE Your certificates may be subject to redemption or other call
UNDERLYING MORTGAGE LOANS WILL AFFECT YOUR YIELD features. Likewise, the underlying mortgage loans may be
subject to a call feature which would result in the retirement
of the certificates. Such an event would affect the average
life and yield of each class of certificates in such series.
See "Yield Considerations" and "Maturity, Average Life and
Prepayment Assumptions" in this prospectus.
</TABLE>
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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 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 Mortgage Loans that, in addition to being secured by
liens on real estate, are secured by other collateral, such as securities or
insurance policies, owned by the related Mortgagors or are supported by
third-party guarantees secured by collateral owned by the related guarantors. 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 PNC Mortgage Securities Corp. (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
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* 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 "Certificate Interest 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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<PAGE>
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 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 Mortgage 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 Mortgage
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 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.
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If so specified in the related Prospectus Supplement, a Mortgage Pool will
contain Mortgage Loans (the "Additional Collateral Loans") that are secured by
both the related Mortgaged Property and certain additional collateral which will
consist of (i) a security interest in financial assets owned by the Mortgagor
(which will consist of securities, insurance policies, annuities, certificates
of deposit, cash, accounts or similar assets) and/or (ii) a third party
guarantee (usually by a relative of the Mortgagor), which in turn is secured by
a security interest in financial assets (as described in (i) above) or
residential property owned by the guarantor. The collateral described in clauses
(i) and (ii) above is referred to as "Additional Collateral". The amount of
Additional Collateral for any Mortgage Loan generally will not exceed 30% of the
principal amount of such Mortgage Loan (the "Additional Collateral
Requirement"), and the requirement to maintain Additional Collateral will
generally terminate when the Loan-to-Value Ratio of the Mortgage Loan is reduced
to a predetermined level (which generally shall not be more than 75%) as a
result of a reduction in the loan amount caused by principal payments by the
Mortgagor or an increase in the appraised value of the related Mortgaged
Property. The Servicer of the Additional Collateral Loan will be required, in
accordance with the Master Servicer's serving guidelines or its normal servicing
procedures, to attempt to realize on any such Additional Collateral, in addition
to the related Mortgaged Property, if such Additional Collateral Loan is
liquidated upon default. The right to receive proceeds from the realization of
Additional Collateral upon any such liquidation will be assigned to the related
Trustee. No assurance can be given as to the amount of proceeds, if any, that
might be realized on the Additional Collateral Loan from such Additional
Collateral and thereafter remitted to the Trustee. If so specified in the
related Prospectus Supplement, Ambac Assurance Corporation or another insurance
company will have issued a limited purpose surety bond insuring any deficiency
in the amounts realized from the liquidation of Additional Collateral, up to the
amount of the Additional Collateral Requirement. For additional considerations
concerning the Additional Collateral Loans, see "Certain Legal Aspects of
Mortgage Loans and Contracts--The Mortgage Loans--Anti-Deficiency Legislation
and Other Limitations on Lenders" herein.
The aggregate principal balances of the Mortgage Loans in each Mortgage
Pool on the date specified in the related Prospectus Supplement as the Cut-Off
Date will be at least $5,000,000. Unless otherwise specified in the Prospectus
Supplement of a particular Series, each Mortgage Loan at origination will have
an outstanding principal balance of not less than $30,000 nor more than
$1,000,000. With respect to each Mortgage Pool, unless otherwise specified in
the related Prospectus Supplement, all principal and interest payments on the
Mortgage Loans due prior to the Cut-Off Date will have been made.
For each Mortgage Pool, the related Prospectus Supplement will generally
contain specific information as of the Cut-Off Date regarding (i) the aggregate
principal balance of the Mortgage Loans; (ii) the range of Mortgage Interest
Rates or initial Mortgage Interest Rates borne by the Mortgage Loans; (iii) the
month and year in which the first monthly payments occur, and the latest
maturity of the Mortgage Loans; (iv) the largest and smallest principal balances
of the Mortgage Loans at origination; (v) the aggregate principal balance of all
Mortgage Loans having loan-to-value ratios at origination exceeding 80%;
(vi) the types of dwellings constituting the Mortgaged Properties securing the
Mortgage Loans; (vii) the percentage of the Mortgage Loans (by principal
balance) of nonowner occupied and of second and vacation properties; (viii) the
geographic distribution of the Mortgage Loans, prepared on a state-by-state
basis for states containing 5% or more of the Mortgage Pool; and (ix) the number
and aggregate principal balance of Buydown Loans.
Specific information with respect to the Mortgage Loans in a particular
Mortgage Pool and the applicable credit enhancements which is not included in
the related Prospectus Supplement will generally be included in a Current Report
on Form 8-K which will be available to purchasers of the Certificates at or
before the time of initial issuance of the related Series of Certificates, and
which will be filed with the Securities and Exchange Commission (the
"Commission") within 15 days thereafter.
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
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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 Pass-Through 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 Pass-Through 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 (the
"Trust Fund") consisting of the Mortgage Loans included in the Mortgage Pool for
that Series and related property. Certain Series will be enhanced by mortgage
loan insurance or other forms of credit enhancement, in each case as more fully
described herein under the captions "Description of Certificates" and
"Description of Credit Enhancements" and/or in the related Prospectus
Supplement. When each Series of Certificates is issued, the Company will cause
the Mortgage Loans in the Mortgage Pool for that Series to be assigned to an
independent bank or trust company as trustee (the "Trustee") for the benefit of
the holders of Certificates of that Series, and the Master Servicer or the
Servicer will be responsible for servicing the Mortgage Loans pursuant to a
separate pooling and servicing agreement ("Pooling Agreement") for the Series.
The Company's assignment of the Mortgage Loans to the Trustee will be
without recourse, and the Company's obligations with respect to the Mortgage
Loans will, unless otherwise indicated in the Prospectus Supplement for a Series
of Certificates, be limited to any representations and warranties made by it in,
as well as its contractual obligations under, the Pooling Agreement for each
Series. These obligations consist primarily of the obligation to administer and,
if applicable, service the Mortgage Loans. 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
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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 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
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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 Certificate Interest Rate for each Class of
Certificates will be calculated on the basis of the "Pass-Through Rate" for the
related Mortgage Loans. With respect to a Series of Certificates as to which the
Company will act as Master Servicer, the "Pass-Through Rate" for any Mortgage
Loan will equal the related Mortgage Interest Rate less the sum of the Servicing
Fee and the Master Servicing Fee for such Mortgage Loan. With respect to a
Series of Certificates as to which the Company will not act as Master Servicer,
the "Pass-Through Rate" for any Mortgage Loan will equal the related Mortgage
Interest Rate less the sum of the Servicing Fee and the Certificate
Administrator Fee for such Mortgage Loan.
As described in the applicable Prospectus Supplement, in certain events, if
the amounts available for distribution in respect of interest are not sufficient
to cover the total of all accrued and unpaid interest at the Pass-Through Rate,
the available amount will be distributed to the Certificateholders pro rata in
accordance with their respective interests or in an order of priority described
in the applicable Prospectus Supplement.
For the sale of Certificates under this Prospectus, the Company may
establish one or more Mortgage Pools having a variable, as opposed to a fixed,
Pass-Through Rate. A Mortgage Pool with a variable Pass-Through Rate may be
composed of Mortgage Loans that have adjustable Mortgage Interest Rates, or of
Mortgage Loans with fixed Mortgage Interest Rates if the amount to be passed
through is determined on a Mortgage Loan-by-Mortgage Loan basis as the Mortgage
Interest Rate minus specified fees for servicing and administrative
compensation, which may include any of the Servicing Fee, the Master Servicing
Fee and the Certificate Administrator Fee, for each such Mortgage Loan, as set
forth in the Prospectus Supplement, or as otherwise determined as described in
the applicable Prospectus Supplement. Because the Mortgage Interest Rates may
vary in such a Mortgage Pool, and the servicing and administrative compensation
generally will be fixed, the Pass-Through Rate will be affected by
disproportionate principal prepayments among Mortgage Loans bearing different
Mortgage Interest Rates and, consequently, the yield to maturity
Certificateholders will be affected. The characteristics of any such
variable-rate Mortgage Pools will be described in the applicable Prospectus
Supplement. Although Mortgage Interest Rates in a fixed Pass-Through Rate
Mortgage Pool may vary from
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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 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.
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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 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
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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 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 Fannie Mae as mortgagees ("Fannie Mae Approved Mortgagees") or
by Freddie Mac as mortgagees ("Freddie Mac Approved Mortgagees"), or any
successor entity to either, (iv) assignees of FHA-Approved Mortgagees, Fannie
Mae Approved Mortgagees or Freddie Mac 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 generally 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 Freddie Mac, Fannie Mae 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
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primary residences and condominiums or other attached dwelling units, including
individual condominiums, row houses, townhouses and other separate dwelling
units even when located in buildings containing five or more such units. Each
Mortgage Loan must be secured by an owner occupied primary residence or
second/vacation home, or by a nonowner occupied residence. The Mortgaged
Property may not be a mobile home.
CREDIT, APPRAISAL AND UNDERWRITING STANDARDS
The Mortgage Loans to be included in each Mortgage Pool will be subject to
the various credit, appraisal and underwriting standards described herein. The
Company's credit, appraisal and underwriting standards with respect to certain
Mortgage Loans will generally conform to those published in the Company's
Selling Guide (together with the Company's Servicing Guide, the "Guide", as
modified from time to time). The credit, appraisal and underwriting standards as
set forth in the Guide are continuously revised based on opportunities and
prevailing conditions in the residential mortgage market and the market for the
Company's mortgage pass-through certificates. The Mortgage Loans may be
underwritten by the Company or by designated third parties.
In addition, the Company may purchase Mortgage Loans which do not conform
to the underwriting standards set forth in the Guide. Such Mortgage Loans may be
purchased in negotiated transactions from Sellers who will represent that the
Mortgage Loans have been originated in accordance with credit, appraisal and
underwriting standards agreed to by the Company. The Company will generally
review only a limited portion of the Mortgage Loans in any delivery of such
Mortgage Loans for conformity with the applicable credit, appraisal and
underwriting standards. Certain other Mortgage Loans will be purchased from
Sellers who will represent that the Mortgage Loans were originated pursuant to
credit, appraisal and underwriting standards determined by a 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.
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The Company's underwriting standards generally follow guidelines acceptable
to Fannie Mae and Freddie Mac. 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.
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.
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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 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) any private mortgage pass-through
certificates or any certificates issued by the Freddie Mac, Fannie Mae or the
Government National Mortgage Association 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,
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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 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
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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 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
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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) immediately upon the transfer and
assignment of the Mortgage Loans to the Trust, the Trustee will have good title
to the Mortgage Loans; (v) as of the Closing Date, 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; (vi) except in the case of Cooperative Loans, as of the Closing Date,
each Mortgage is a valid first lien on an unencumbered estate in fee simple or
leasehold interest in the Mortgaged Property (subject only to (a) liens for
current real property taxes and special assessments, (b) covenants, conditions
and restrictions, rights of way, easements and other matters of public record as
of the date of recording of such Mortgage, such exceptions appearing of record
being acceptable to mortgage lending institutions generally or specifically
reflected in the mortgage originator's appraisal, (c) exceptions set forth in
the title insurance policy covering such Mortgaged Property and (d) other
matters to which like properties are commonly subject which do not materially
interfere with the benefits of the security intended to be provided by the
Mortgage); (vii) as of the Closing Date, each Mortgaged Property is free of
damage and is in good repair, except for ordinary wear and tear; (viii) 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; (ix) as of the Closing Date, there are no
delinquent tax or assessment liens against any Mortgaged Property; and (x)
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
Fannie Mae Approved Mortgagee, or (e) an institution which is a Freddie Mac
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
makerepresentations 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
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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 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
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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 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 Certificate Interest Rate from the
Net Rate or, if applicable, by subtracting the Servicing Fee, the Certificate
Administrator Fee and the Certificate Interest 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 any applicable credit enhancements
or title, hazard or other insurance policy covering any Mortgage Loan,
other than proceeds to
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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 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
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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 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
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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 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.
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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
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
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Certificate Interest Rate, and each Certificate Interest Rate may be fixed,
variable or adjustable. The applicable Prospectus Supplement will specify the
Certificate Interest Rate for each Class, or in the case of a variable or
adjustable Certificate Interest Rate, the initial Certificate Interest Rate and
the method for determining the Certificate Interest 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 Certificate Interest 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
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;
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(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 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
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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. 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.
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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 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
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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 Certificate Interest 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 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
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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 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.
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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 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
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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 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
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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.
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,
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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.
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.
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PRIMARY INSURANCE, FHA MORTGAGE INSURANCE, VA MORTGAGE GUARANTY, HAZARD
INSURANCE; CLAIMS THEREUNDER
As set forth below, a Mortgage Loan may be required to be covered by a
hazard insurance policy and either an FHA Insurance Policy, a VA Guaranty or a
Primary Insurance Policy. The following is only a brief description of such
coverage and does not purport to describe all of the characteristics of each
type of insurance. Such insurance is subject to underwriting and approval of
individual Mortgage Loans by the respective insurers and guarantors. In some
cases, however, the issuer of the insurance or guaranty may delegate
underwriting authority to the originator of the Mortgage Loan. The descriptions
of any insurance coverage in this Prospectus or any Prospectus Supplement do not
purport to be complete and are qualified in their entirety by reference to such
forms of policies, and to such statutes or regulations as may be applicable.
PRIMARY INSURANCE
Unless otherwise specified in the applicable Prospectus Supplement, each
Mortgage Loan with a loan-to-value ratio at origination and at the Cut-Off Date
greater than 80% will be covered by a primary mortgage insurance policy (a
"Primary Insurance Policy") providing insurance coverage against default on such
Mortgage Loan, in general, of up to 25% of the principal balance of such
Mortgage Loan with maintenance requirements in certain cases for the remaining
term of such Mortgage Loan, but at least until the loan-to-value ratio drops to
80%. Conversely, Mortgage Loans with lower loan-to-value ratios (up to
approximately 80%) may not be covered by any Primary Insurance Policies.
Applicable state laws may in some instances limit the maximum coverage which may
be obtained with respect to certain Mortgage Loans. Any such policy will be
issued by a Qualified Insurer.
While the terms and conditions of the Primary Insurance Policies will
differ, each Primary Insurance Policy will in general provide substantially the
following coverage. The amount of the loss as calculated under a Primary
Insurance Policy covering a Mortgage Loan (herein referred to as the "Loss")
will generally consist of the unpaid principal balance of such Mortgage Loan and
accrued and unpaid interest thereon and reimbursement of certain expenses, less
(i) rents or other payments collected or received by the insured (other than the
proceeds of hazard insurance) that are derived from the related Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore such Mortgaged Property and which have not been applied to the payment
of the Mortgage Loan, (iii) certain amounts expended by the insured but not
approved by the insurer, (iv) claim payments previously made on such Mortgage
Loan and (v) unpaid premiums and certain other amounts.
The issuer of a Primary Insurance Policy will generally be required to pay
either: (i) the insured percentage of the Loss; (ii) the entire amount of the
Loss, after receipt by the insurer of good and merchantable title to, and
possession of, the Mortgaged Property; or (iii) at the option of the insurer
under certain Primary Insurance Policies, the sum of the delinquent monthly
payments plus any advances made by the insured, both to the date of the claim
payment and, thereafter, monthly payments in the amount that would have become
due under the Mortgage Loan if it had not been discharged plus any advances made
by the insured until the earlier of (a) the date the Mortgage Loan would have
been discharged in full if the default had not occurred or (b) an approved sale.
As conditions precedent to the filing or payment of a claim under a Primary
Insurance Policy, in the event of default by the Mortgagor, the insured will
typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
insurer, real estate taxes, protection and preservation expenses and foreclosure
and related costs; (ii) in the event of any physical loss or damage to the
Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the insurer good and merchantable title
to, and possession of, the Mortgaged Property. If any Advance to be made
(including expenses to be paid) by the Master Servicer as a condition for
coverage of a loss by a Primary Insurance Policy is not so made by the Master
Servicer because the such Advance has been determined to be nonrecoverable, then
such loss will be allocated to the Certificateholders. See "Description of
Certificates--Advances".
For any Certificates offered hereunder 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
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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/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.
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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 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
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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 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
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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 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. Credit support may also be provided in the form
of an insurance policy covering the risk of collection and adequacy of any
Additional Collateral provided in connection with any Additional Collateral
Loan, subject to the limitations set forth in any such insurance policy.
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
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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 (a "Mortgage Pool Insurance Policy") may
be obtained for a particular Series of Certificates. Any such policy will be
obtained by the Company or the Servicer, as applicable, from a Qualified Insurer
for the Mortgage Pool, covering loss by reason of the default in payments on any
Mortgage Loans included therein that are not covered as to their entire
outstanding principal balances by Primary Insurance, FHA Insurance or VA
Guarantees. Each Mortgage Pool Insurance Policy will cover all or a portion of
those Mortgage Loans in a Mortgage Pool in an amount to be specified in the
applicable Prospectus Supplement or in the related Current Report on Form 8-K.
The term "Mortgage Pool Insurance Policy" wherever used in this Prospectus or
any Supplement shall refer to one or more such Mortgage Pool Insurance Policies
as the context may require. The identity of the insurer or insurers and certain
financial information with respect to the insurer or insurers for each Mortgage
Pool will be contained in the applicable Prospectus Supplement or in the related
Current Report on Form 8-K. The Trustee will be the named insured under any
Mortgage Pool Insurance Policy. A Mortgage Pool Insurance Policy is not a
blanket policy against loss, since claims thereunder may only be made respecting
particular defaulted Mortgage Loans and only upon the satisfaction of certain
conditions precedent described below.
Any Mortgage Pool Insurance Policy will provide that no claim may be
validly presented thereunder unless (i) hazard insurance on the property
securing the defaulted Mortgage Loan has been kept in force and real estate
taxes and other protection and preservation expenses have been paid, (ii) if
there has been physical loss or damage to the Mortgaged Property, it has been
restored to its condition (reasonable wear and tear excepted) at the Cut-Off
Date, (iii) any required Primary Insurance Policy is in effect for the defaulted
Mortgage Loan and a claim thereunder has been submitted and settled, and
(iv) the insured has acquired good and merchantable title to the Mortgaged
Property free and clear of liens except permitted encumbrances. Assuming the
satisfaction of these conditions, the insurer will have the option to either
(i) purchase the property securing the defaulted Mortgage Loan at a price equal
to the principal balance thereof, plus accrued and unpaid interest at the
Mortgage Interest Rate to the date of purchase, less the amount of any loss paid
under a Primary Insurance Policy, if any, or (ii) pay the difference between the
proceeds received from an approved sale of the property and the principal
balance of the defaulted Mortgage Loan, plus accrued and unpaid interest at the
Mortgage Interest Rate to the date of payment of the claim, less the amount of
such loss paid under a Primary Insurance Policy, if any. In each case, the
insurer will reimburse the Master Servicer and the Seller/Servicer, or the
Servicer with respect to Series of Certificates for which the Company will not
act as Master Servicer, for certain expenses incurred by them.
An endorsement (an "Advance Claims Endorsement") may be issued to any
Mortgage Pool Insurance Policy which provides that the Insurer will make
advances of monthly principal and interest payments on Mortgage Loans as to
which the Seller/Servicer, or the Servicer with respect to Series of
Certificates for which the Company will not act as Master Servicer, has not
received a payment from the related Mortgagor and neither the Seller/Servicer
nor the Master Servicer, or the Servicer, as applicable, has advanced such
payment. The presence of such endorsement, if any, will be disclosed in the
Prospectus Supplement.
An endorsement may also be issued to any Mortgage Pool Insurance Policy
which provides that the insurer will pay claims presented under the Mortgage
Pool Insurance Policy although claims made against the applicable Primary
Insurance Policy have not been settled due to the insolvency, bankruptcy,
receivership or assignment for
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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
Entity, 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.
A Mortgage Pool Insurance Policy may include a provision permitting the
insurer to purchase defaulted Mortgage Loans from the Trust.
See "--The Fraud Bond" below for a discussion of the possible effect of
fraudulent conduct or negligence by the Seller, the Seller/Servicer, the
Servicer or the Mortgagor with respect to a Mortgage Loan on the coverage of a
Mortgage Pool Insurance Policy.
SUBORDINATION
If so specified in the applicable Prospectus Supplement, distributions with
respect to scheduled principal, Principal Prepayments, interest or any
combination thereof that otherwise would have been payable to one or more
Classes of Certificates of a Series (the "Subordinated Certificates") will
instead be payable to holders of one or more other Classes of such Series (the
"Senior Certificates") under the circumstances and to the extent specified in
the Prospectus Supplement. If specified in the applicable Prospectus Supplement,
delays in receipt of scheduled payments on the Mortgage Loans and losses on
defaulted Mortgage Loans will be borne first by the various Classes of
Subordinated Certificates and thereafter by the various Classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Mortgage Loans over the lives of the
Certificates or at any time, the aggregate losses in respect of defaulted
Mortgage Loans which must be borne by the Subordinated Certificates by virtue of
subordination and the amount of the distributions otherwise distributable to the
Subordinated Certificateholders that will be distributable to Senior
Certificateholders on any Distribution Date may be limited as specified in the
applicable Prospectus Supplement. If the aggregate distribution with respect to
delinquent payments on the Mortgage Loans or aggregate losses in respect of such
Mortgage Loans were to exceed the total amounts payable and available for
distribution to holders of Subordinated Certificates or, if applicable, were to
exceed the specified maximum amount, holders of Senior Certificates could
experience losses on the Certificates.
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In addition to or in lieu of the foregoing, if so specified in the
applicable Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Certificates on any Distribution Date may
instead be deposited into one or more reserve accounts (the "Reserve Account")
established by the Trustee. If so specified in the applicable Prospectus
Supplement, such deposits may be made on each Distribution Date, on each
Distribution Date for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Certificates or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Account to required levels, in
each case as specified in the Prospectus Supplement. If so specified in the
applicable Prospectus Supplement, amounts on deposit in the Reserve Account may
be released to the Company, 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 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
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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 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
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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 (a "Reserve Fund") cash or Eligible
Investments in specified amounts, or any other instruments satisfactory to the
rating agency or agencies rating the Certificates offered pursuant to such
Prospectus Supplement, which will be applied and maintained in the manner and
under the conditions specified in such Prospectus Supplement. In the alternative
or in addition to such deposit, to the extent described in the related
Prospectus Supplement, a Reserve Fund may be funded through application of all
or a portion of amounts otherwise payable on one or more related Classes of
Certificates, from Retained Yield, or otherwise. Amounts in a Reserve Fund may
be used to provide one or more components of credit enhancement, or applied to
reimburse the 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.
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MAINTENANCE OF CREDIT ENHANCEMENTS; CLAIMS THEREUNDER
AND OTHER REALIZATION UPON DEFAULTED MORTGAGE LOANS
For each Series of Certificates which will be covered by a Mortgage Pool
Insurance Policy, or a Letter of Credit established in lieu of such policy (such
coverage to be disclosed in the applicable Prospectus Supplement), the 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.
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
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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.
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
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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 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".
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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.
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
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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
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
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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 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.
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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 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
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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. With respect to mortgage loans
secured by collateral in addition to the related real properties, realization
upon the additional collateral may be governed by the UCC in effect under the
law of the state applicable thereto. Some courts have interpreted the UCC to
prohibit or limit a deficiency award in certain circumstances, including those
in which the disposition of the collateral was not conducted in a commercially
reasonable manner. In some states, the UCC does not apply to liens upon
additional collateral consisting of certain types of personal property
(including, for example, bank accounts and, to a certain extent, insurance
policies and annuities). Realization upon such additional collateral will be
governed by state laws other than the UCC, and the availability of deficiency
awards under such state laws may be limited. Whether realization upon any
Additional Collateral is governed by the UCC or by other state laws, the ability
of secured parties to realize upon the additional collateral may be limited by
statutory prohibitions that limit remedies in respect of the related mortgage
loans. Such prohibitions may affect secured parties either independently or in
conjunction with statutory requirements that secured parties proceed against the
related mortgaged real properties first or against both such mortgaged real
properties and the additional collateral concurrently. Some state statutes
require secured parties to exhaust the security afforded by the mortgaged real
properties through foreclosure before attempting to realize upon the related
additional collateral (including any third-party guarantees). Other state
statutes require secured parties to foreclose upon mortgaged real properties and
additional collateral concurrently. In states where statutes limit the rights of
secured parties to obtain deficiency judgments against borrowers or guarantors
following foreclosure upon the related real mortgaged properties and where
secured parties either are required or elect to proceed against such mortgaged
real properties before proceeding against the related additional collateral,
limitations upon the amounts of deficiency judgments may reduce the amounts that
may be realized by the secured parties upon the disposition of such additional
collateral. Further, in certain states where secured parties may choose whether
to proceed against the related mortgaged real properties or additional
collateral first or against both concurrently, the secured parties, following a
proceeding against one, may be deemed to have elected a remedy and may be
precluded from thereafter exercising remedies with respect to the other and
resulting in a loss of its lien to such other collateral. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that secured parties will usually proceed against both concurrently
or against the mortgaged real properties first if prohibited from proceeding
against both by state law.
In addition to anti-deficiency and related legislation, numerous other
statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to collect the full amount of interest due or realize
upon its security. For example, with respect to federal bankruptcy law, a court
with federal bankruptcy jurisdiction may permit a mortgagor through his or her
Chapter 11, Chapter 12 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on the mortgagor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
foreclosure proceedings had occurred prior to the filing of the debtor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also held that the terms
of a mortgage loan secured by property of the mortgagor may be modified. These
courts have held that such modifications may include reducing
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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 1990, the
United States Court of Appeals for the Eleventh Circuit suggested, in United
States v. Fleet Factors Corp., that
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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 made 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.
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
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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.
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
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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.
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
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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 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
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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 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".
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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.
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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 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.
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.
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
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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).
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
Except as otherwise stated in this discussion, the REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC Mortgage Pool and not as ownership interests in the REMIC
Mortgage Pool or its Assets. In general, interest, original issue discount and
market discount paid or accrued on a REMIC Regular Certificate will be treated
as ordinary income to the holder of such REMIC Regular Certificate.
Distributions in reduction of the stated redemption price at maturity of the
REMIC Regular Certificate will be treated as a return of capital to the extent
of such holder's basis in such REMIC Regular Certificate. Holders of REMIC
Regular Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to REMIC Regular
Certificates under an accrual method.
1. Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Code Section 1273(a). Any holders of REMIC
Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of the receipt of the cash attributable to
such income. The Company will report annually (or more often if required) to the
Internal Revenue Service ("IRS") and to Certificateholders such information with
respect to the original issue discount accruing on the REMIC Regular
Certificates as may be required under Code Section 6049 and the regulations
thereunder. See "--Reporting and Other Administrative Matters of REMICS" below.
Rules governing original issue discount are set forth in Code
Sections 1271 through 1273 and 1275 and, to some extent, in the OID Regulations.
Code Section 1272(a)(6) provides special original issue discount rules
applicable to REMIC Regular Certificates. Regulations have not yet been proposed
or adopted under Section 1272(a)(6) of the Code. Further, application of the OID
Regulations to the REMIC Regular Certificates remains unclear in some respects
because the OID Regulations generally purport not to apply to instruments to
which Section 1272(a)(6) applies such as REMIC Regular Certificates, and
separately because they either do not address, or are subject to varying
interpretations with regard to, several relevant issues.
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Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates and for certain other federal income tax
purposes. The Prepayment Assumption is to be determined in the manner prescribed
in Treasury regulations. To date, no such regulations have been promulgated. The
Committee Report indicates that the regulations will provide that the Prepayment
Assumption, if any, used with respect to a particular transaction must be the
same as that used by the parties in pricing the transaction. Unless otherwise
specified in the applicable Prospectus Supplement, the Company will use a
percentage of the Basic Prepayment Assumption (or such other Prepayment
Assumption as may be specified in the applicable Prospectus Supplement) in
reporting original issue discount that is consistent with this standard.
However, the Company does not make any representation that the Mortgage Loans
will in fact prepay at that percentage of the Basic Prepayment Assumption or at
any other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the REMIC Regular Certificates. The Prospectus Supplement with respect to a
Series of REMIC Certificates will disclose the percentage of the Basic
Prepayment Assumption (or such other Prepayment Assumption as may be specified
therein) to be used in reporting original issue discount, if any, and for
certain other federal income tax purposes.
The total amount of original issue discount on a REMIC Regular Certificate
is the excess of the "stated redemption price at maturity" of the REMIC Regular
Certificate over its "issue price". Except as discussed in the following two
paragraphs, in general, the issue price of a particular Class of REMIC Regular
Certificates offered hereunder will be the price at which a substantial amount
of REMIC Regular Certificates of that Class are first sold to the public
(excluding bond houses and brokers).
If a REMIC Regular Certificate is sold with accrued interest that relates
to a period prior to the issue date of such REMIC Regular Certificate, the
amount paid for the accrued interest will be treated instead as increasing the
issue price of the REMIC Regular Certificate. In addition, that portion of the
first interest payment in excess of interest accrued from the Closing Date to
the first Distribution Date will be treated for federal income tax reporting
purposes as includible in the stated redemption price at maturity of the REMIC
Regular Certificate, and as excludible from income when received as a payment of
interest on the first Distribution Date. The OID Regulations suggest that some
or all of this pre-issuance accrued interest "may" be treated as a separate
asset (and hence not includible in a REMIC Regular Certificate's issue price or
stated redemption price at maturity), whose cost is recovered entirely out of
interest paid on the first Distribution Date. It is unclear how such treatment
would be elected under the OID Regulations and whether an election could be made
unilaterally by a Certificateholder.
The stated redemption price at maturity of a REMIC Regular Certificate is
equal to the total of all payments to be made on such Certificate other than
"qualified stated interest". Under the OID Regulations, "qualified stated
interest" is interest that is unconditionally payable at least annually during
the entire term of the Certificate at either (i) a single fixed rate that
appropriately takes into account the length of the interval between payments or
(ii) the current values of a single "qualified floating rate" or "objective
rate" (each, a "Single Variable Rate"). A "current value" is the value of a
variable rate on any day that is no earlier than three months prior to the first
day on which that value is in effect and no later than one year following that
day. A "qualified floating rate" is a rate whose variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds in the currency in which the Certificate is denominated. Such a rate
remains qualified even though it is multiplied by a fixed, positive multiple not
exceeding 1.35, increased or decreased by a fixed rate, or both. Certain
combinations of rates constitute a single qualified floating rate, including (i)
interest stated at a fixed rate for an initial period of less than one year
followed by a qualified floating rate if the value of the floating rate at the
closing date is intended to approximate the fixed rate, and (ii) two or more
qualified floating rates that can be expected to have approximately the same
values throughout the term of the Certificate. A combination of such rates is
conclusively presumed to be a single floating rate if the values of all rates on
the closing date are within 0.25% of each other. A variable rate that is subject
to an interest rate cap, floor, "governor" or similar restriction on rate
adjustment may be a qualified floating rate only if such restriction is fixed
throughout the term of the instrument, or is not reasonably expected as of the
closing date to cause the yield on the debt 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
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qualified floating rate), (ii) one or more rates each of which would be a
qualified floating rate for a debt instrument denominated in a foreign currency,
(iii) the yield or changes in price of one or more items of "actively traded"
personal property, (iv) a combination of rates described in (i), (ii) and (iii),
or (v) a rate designated by the IRS. However, a variable rate is not an
objective rate if it is reasonably expected that the average value of the rate
during the first half of the Certificate's term will differ significantly from
the average value of such rate during the final half of its term. A combination
of interest stated at a fixed rate for an initial period of less than one year
followed by an objective rate is treated as a single objective rate if the value
of the objective rate at the closing date is intended to approximate the fixed
rate; such a combination of rates is conclusively presumed to be a single
objective rate if the objective rate on the closing date does not differ from
the fixed rate by more than 0.25%. The qualified stated interest payable with
respect to certain variable rate debt instruments not bearing stated interest at
a Single Variable Rate generally is determined under the OID Regulations by
converting such instruments into fixed rate debt instruments. Instruments
qualifying for such treatment generally include those providing for stated
interest at (i) more than one qualified floating rates, or at (ii) a single
fixed rate and (a) one or more qualified floating rates or (b) a single
"qualified inverse floating rate" (each, a "Multiple Variable Rate"). A
qualified inverse floating rate is an objective rate equal to a fixed rate
reduced by a qualified floating rate, the variations in which can reasonably be
expected to inversely reflect contemporaneous variations in the cost of newly
borrowed funds (disregarding permissible rate caps, floors, governors and
similar restrictions such as are described above). Under these rules, some of
the payments of interest on a Certificate bearing a fixed rate of interest for
an initial period followed by a qualified floating rate of interest in
subsequent periods could be treated as included in the stated redemption price
at maturity if the initial fixed rate were to differ sufficiently from the rate
that would have been set using the formula applicable to subsequent periods. See
"--Variable Rate Certificates". REMIC Regular Certificates offered hereby other
than Certificates providing for variable rates of interest or for the accretion
of interest are not anticipated to have stated interest other than "qualified
stated interest", but if any such REMIC Regular Certificates are so offered,
appropriate disclosures will be made in the Prospectus Supplement. Some or all
of the payments on REMIC Regular Certificates providing for the accretion of
interest will be included in the stated redemption price at maturity of such
Certificates.
Under a de minimis rule in the Code, as interpreted in the OID Regulations,
original issue discount on a REMIC Regular Certificate will be considered to be
zero if such original issue discount is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average life of the REMIC Regular Certificate. For this purpose, the weighted
average life of the REMIC Regular Certificate is computed as the sum of the
amounts determined by multiplying the amount of each payment under the
instrument (other than a payment of qualified stated interest) by a fraction,
whose numerator is the number of complete years from the issue date until such
payment is made, and whose denominator is the stated redemption price at
maturity of such REMIC Regular Certificate. The IRS may be anticipated to take
the position that this rule should be applied taking into account the Prepayment
Assumption and the effect of any anticipated investment income. Under the OID
Regulations, REMIC Regular Certificates bearing only qualified stated interest
except for any "teaser" rate, interest holiday or similar provision would be
treated as subject to the de minimis rule if the greater of the deferred or
foregone interest or the other original issue discount is less than such de
minimis amount.
The OID Regulations generally would treat de minimis original issue
discount as includible in income as each principal payment is made, based on the
product of the total amount of such de minimis original issue discount and a
fraction, whose numerator is the amount of such principal payment and whose
denominator is the stated principal amount of the REMIC Regular Certificate. The
OID Regulations also would permit a Certificateholder to elect to accrue de
minimis original issue discount into income currently based on a constant yield
method. See "Taxation of Owners of REMIC Regular Certificates--Market Discount
and Premium".
Each holder of a REMIC Regular Certificate must include in gross income the
sum of the "daily portions" of original issue discount on its REMIC Regular
Certificate for each day during its taxable 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
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corresponds to a Distribution Date on the REMIC Regular Certificate and begins
on the first day following the immediately preceding accrual period (beginning
on the Closing Date in the case of the first such period). For any accrual
period such portion will equal the excess, if any, of (i) the sum of (A) the
present value of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, as of the end of the accrual period and (B) the
distribution made on such REMIC Regular Certificate during the accrual period of
amounts included in the stated redemption price at maturity, over (ii) the
adjusted issue price of such REMIC Regular Certificate at the beginning of the
accrual period. The present value of the remaining payments referred to in the
preceding sentence will be calculated based on (i) the yield to maturity of the
REMIC Regular Certificate, calculated as of the settlement date, giving effect
to the Prepayment Assumption, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period, and (iii) the Prepayment
Assumption. The adjusted issue price of a REMIC Regular Certificate at the
beginning of any accrual period will equal the issue price of such Certificate,
increased by the aggregate amount of original issue discount with respect to
such REMIC Regular Certificate that accrued in prior accrual periods, and
reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods of amounts included in the stated
redemption price at maturity. The original issue discount accruing during any
accrual period will be allocated ratably to each day during the period to
determine the daily portion of original issue discount for each day. With
respect to an accrual period between the settlement date and the first
Distribution Date on the REMIC Regular Certificate (notwithstanding that no
distribution is scheduled to be made on such date) that is shorter than a full
accrual period, the OID Regulations permit the daily portions of original issue
discount to be determined according to any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost (not including payment for accrued qualified
stated interest) less than its remaining stated redemption price at maturity
will also be required to include in gross income, for each day on which it holds
such REMIC Regular Certificate, the daily portions of original issue discount
with respect to such REMIC Regular Certificate, but reduced, if such cost
exceeds the "adjusted issue price", by an amount equal to the product of (i)
such daily portions and (ii) a constant fraction, whose numerator is such excess
and whose denominator is the sum of the daily portions of original issue
discount on such REMIC Regular Certificate for all days on or after the day of
purchase. The adjusted issue price of a REMIC Regular Certificate on any given
day is equal to the sum of the adjusted issue price (or, in the case of the
first accrual period, the issue price) of the REMIC Regular Certificate at the
beginning of the accrual period during which such day occurs and the daily
portions of original issue discount for all days during such accrual period
prior to such day, reduced by the aggregate amount of distributions previously
made other than distributions of qualified stated interest.
Variable Rate Certificates. Purchasers of REMIC Regular Certificates
bearing a variable rate of interest should be aware that there is uncertainty
concerning the application of Section 1272(a)(6) of the Code and the OID
Regulations to such Certificates. In the absence of other authority, the Company
intends to be guided by the provisions of the OID Regulations governing variable
rate debt instruments in adapting the provisions of Section 1272(a)(6) of the
Code to such Certificates for the purpose of preparing reports furnished to
Certificateholders. The effect of the application of such provisions generally
will be to cause Certificateholders holding Certificates bearing interest at a
Single Variable Rate to take into account for each period an amount
corresponding approximately to the sum of (i) the qualified stated interest,
accruing on the outstanding face amount of the REMIC Regular Certificate as the
stated interest rate for that Certificate varies from time to time and (ii) the
amount of original issue discount that would have been attributable to that
period on the basis of a constant yield to maturity for a bond issued at the
same time and issue price as the REMIC Regular Certificate, having the same face
amount and schedule of payments of principal as such Certificate, subject to the
same Prepayment Assumption, and bearing interest at a fixed rate equal to the
value of the applicable qualified floating rate or qualified inverse floating
rate in the case of a Certificate 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
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dates), (b) for a qualified inverse floating rate, the value of the rate as of
the closing date, (c) for any other objective rate, the fixed rate that reflects
the yield that is reasonably expected for the Certificate, and (d) for an actual
fixed rate, such hypothetical fixed rate as would result under (a) or (b) if the
actual fixed rate were replaced by a hypothetical qualified floating rate or
qualified inverse floating rate such that the fair market value of the
Certificate as of the issue date would be approximately the same as that of an
otherwise identical debt instrument providing for the hypothetical variable rate
rather than the actual fixed rate. If the interest paid or accrued with respect
to a Multiple Variable Rate Certificate during an accrual period differs from
the assumed fixed interest rate, such difference will be an adjustment (to
interest or original issue discount, as applicable) to the Certificateholder's
taxable income for the taxable period or periods to which such difference
relates. Additionally, purchasers of such Certificates should be aware that the
provisions of the OID Regulations applicable to variable rate debt instruments
have been limited and may not apply to some REMIC Regular Certificates having
variable rates. If such a Certificate is not governed by the provisions of the
OID Regulations applicable to variable rate debt instruments, it may be subject
to provisions of proposed Treasury Regulations applicable to instruments having
contingent payments. The application of those provisions to instruments such as
variable rate REMIC Regular Certificates is subject to differing
interpretations. Prospective purchasers of variable rate REMIC Regular
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
2. Market Discount and Premium
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, at a purchase price less than the adjusted issue price (as
defined under "--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount") of such REMIC Regular Certificate generally will recognize
market discount upon receipt of each distribution of principal. In particular,
such a holder will generally be required to allocate each payment of principal
on a REMIC Regular Certificate first to accrued market discount, and to
recognize ordinary income to the extent such principal payment does not exceed
the aggregate amount of accrued market discount on such REMIC Regular
Certificate not previously included in income. Such market discount must be
included in income in addition to any original issue discount includible in
income with respect to such REMIC Regular Certificate.
A Certificateholder may elect to include market discount in income
currently as it accrues, rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made for
a REMIC Regular Certificate with market discount, the Certificateholder would be
deemed to have made an election to currently include market discount in income
with respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate that
is acquired at a premium is deemed to have made an election to amortize bond
premium, as described below, with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Certificate is irrevocable.
Under a statutory de minimis exception, market discount with respect to a
REMIC Regular Certificate will be considered to be zero for purposes of Code
Sections 1276 through 1278 if such market discount is less than 0.25% of the
stated redemption price at maturity of such REMIC Regular Certificate multiplied
by the number of complete years to maturity remaining after the date of its
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
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not been issued in proposed or temporary form, and the precise treatment of de
minimis market discount on obligations payable in more than one installment
therefore remains uncertain.
The 1986 Act grants authority to the Treasury Department to issue
regulations providing for the method for accruing market discount of more than a
de minimis amount on debt instruments, the principal of which is payable in more
than one installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in the Committee Report will apply. Under
those rules, the holder of a bond purchased with more than de minimis market
discount may elect to accrue such market discount either on the basis of a
constant yield method or on the basis of the appropriate proportionate method
described below. Under the proportionate method for obligations issued with
original issue discount, the amount of market discount that accrues during a
period is equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the original issue
discount accruing during the period and the denominator of which is the total
remaining original issue discount at the beginning of the period. Under the
proportionate method for obligations issued without original issue discount, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. The Prepayment Assumption,
if any, used in calculating the accrual of original issue discount is to be used
in calculating the accrual of market discount under any of the above methods.
Because the regulations referred to in this paragraph have not been issued, it
is not possible to predict what effect such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
Further, a purchaser generally will be required to treat a portion of any
gain on sale or exchange of a REMIC Regular Certificate as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income. Such purchaser also may be required to defer a portion of
its interest deductions for the taxable year attributable to any indebtedness
incurred or continued to purchase or carry such REMIC Regular Certificate. Any
such deferred interest expense is, in general, allowed as a deduction not later
than the year in which the related market discount income is recognized. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
A REMIC Regular Certificate purchased at a cost (not including payment for
accrued qualified stated interest) greater than its remaining stated redemption
price at maturity will be considered to be purchased at a premium. The holder of
such a REMIC Regular Certificate may elect to amortize such premium under the
constant yield method. The OID Regulations also permit Certificateholders to
elect to include all interest, discount and premium in income based on a
constant yield method, further treating the Certificateholder as having made the
election to amortize premium generally, as discussed above. The Committee Report
indicates a Congressional intent that the same rules that will apply to accrual
of market discount on installment obligations will also apply in amortizing bond
premium under Code Section 171 on installment obligations such as the REMIC
Regular Certificates.
3. Realized Losses
Under Code Section 166, both corporate holders of REMIC Regular
Certificates and noncorporate holders of REMIC Regular Certificates that acquire
such Certificates in connection with a trade or business should be allowed to
deduct, as ordinary losses, any losses sustained during a taxable year in 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
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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 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 terminated 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
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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.
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.
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.
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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 tax purposes, the REMIC will also be treated as having
written the call option on such underlying Mortgage Loans. See "Callable Class
Certificates".
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.
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4. Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate are
subject to certain special tax rules. With respect to a Residual Owner, the
excess inclusion for any calendar quarter is defined as the excess (if any) of
the daily portions of taxable income over the sum of the "daily accruals" for
each day during such quarter that such REMIC Residual Certificate was held by
such Residual Owner. The daily accruals are determined by allocating to each day
during a calendar quarter its ratable portion of the product of the "adjusted
issue price" of the REMIC Residual Certificate at the beginning of the calendar
quarter and 120 percent of the long-term "applicable federal rate" (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
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Residual Certificate equals at least the present value of the expected tax on
the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling 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.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the seller will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the REMIC Certificate. The adjusted basis of a REMIC Regular
Certificate generally will equal the cost of such REMIC Regular Certificate to
the seller, increased by any original issue discount or market discount included
in the seller's gross income with respect to such REMIC Regular Certificate and
reduced by premium amortization deductions and distributions previously received
by the seller of amounts included in the stated redemption price at maturity of
such REMIC Regular Certificate. The adjusted basis of a REMIC Residual
Certificate will be determined as described under "--Taxation of Owners of REMIC
Residual Certificates--Basis Rules and Distributions", above. Gain from the
disposition of a REMIC Regular Certificate that might otherwise be treated as a
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in such holder's income had income accrued at a rate equal to 110% of
the AFR as of the date of purchase over (ii) the
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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 Agreement requires, as a prerequisite to
any transfer of a Residual Certificate, the delivery to the Trustee of an
affidavit of the transferee to the effect that it is not a disqualified
organization and contains other provisions designed to render any attempted
transfer of a Residual Certificate to a disqualified organization void.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in such entity, then a tax
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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
penalties 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.
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.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMIC Mortgage Pools equal to 100 percent of the
net income derived from "prohibited transactions". In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. The Code also imposes a 100 percent tax
on the value of any contribution of assets to the REMIC after the "start-up day"
(the day on which the regular and residual interests are issued), other than
pursuant to specified exceptions, and subjects "net income from foreclosure
property" to tax at the highest
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corporate rate. It is not anticipated that a REMIC Mortgage Pool will engage in
any such transactions or receive any such income.
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.
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 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.
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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.
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. 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
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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.
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,
1999, subject to certain transition rules. Prospective investors are urged to
consult their tax advisors regarding the New Regulations.
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.
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
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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.
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, 1997 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.
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ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each Series of
Certificates, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., may be obtained at rates prescribed
by the Commission upon request to the Commission and may be inspected, without
charge, at the Commission's offices.
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INDEX OF TERMS
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............................................ 83
Additional Collateral.......................... 10
Additional Collateral Loans.................... 10
Advance Claims Endorsement..................... 45
Advances....................................... 11
AFR............................................ 76
Asset Conservation Act......................... 60
Bankruptcy Instrument.......................... 44
Bankruptcy Loss................................ 44
Basic Prepayment Assumption.................... 15
Budget Act..................................... 78
Buydown Fund................................... 9
Buydown Fund Account........................... 21
Buydown Loans.................................. 9
Callable Class Certificate..................... 73
CERCLA......................................... 59
Certificate Account............................ 27
Certificate Administrator...................... 8
Certificate Administrator Fee.................. 11
Certificate Interest Rate...................... 8
Closing Date................................... 21
Code........................................... 38
Commission..................................... 10
Company........................................ 8
Compensating Interest.......................... 14
Conversion Fee................................. 12
Cooperative.................................... 8
Cooperative Loan............................... 8
Cooperative Note............................... 8
Curtailment.................................... 14
Custodial Account for P&I...................... 24
Defaulted Mortgage Loss........................ 44
Determination Date............................. 30
Distribution Date.............................. 20
Distribution Period............................ 29
DOL............................................ 61
Due Date....................................... 14
Eligible Investments........................... 27
ERISA.......................................... 60
Exemption Rating Agencies...................... 62
Extraordinary Losses........................... 44
FDIC........................................... 16
FHA............................................ 9
FHA Approved Mortgagees........................ 16
FHA Insurance Policies......................... 9
Freddie Mac Approved Mortgagees................ 16
Fannie Mae Approved Mortgagees................. 16
Fraud Instrument............................... 44
Fraud Loss..................................... 44
Garn-St. Germain Act........................... 58
Indemnified Parties............................ 36
Insurance Proceeds............................. 25
Investment Account............................. 26
Investment Period.............................. 26
IRS............................................ 67
Lenders........................................ 16
Letter of Credit............................... 49
Letter of Credit Bank.......................... 49
<CAPTION>
PAGE
--
<S> <C>
Liquidation Proceeds........................... 24
Loss........................................... 40
Master Servicer................................ 8
Master Servicing Fee........................... 11
Mortgage Interest Rate......................... 9
Mortgage Loan Servicing Group.................. 8
Mortgage Loans................................. 8
Mortgage Notes................................. 8
Mortgage Pool Insurance Policy................. 45
Mortgaged Properties........................... 8
Mortgages...................................... 8
Net Rate....................................... 24
Non-U.S. Person................................ 81
OID Regulations................................ 66
Parties in Interest............................ 61
Paying Agent................................... 19
Payoff......................................... 14
Plan Assets.................................... 61
Plans.......................................... 61
Pooling Agreement.............................. 11
Prepayment Assumption.......................... 68
Primary Insurance Policy....................... 40
Principal Prepayment........................... 15
PTCE........................................... 63
PTE............................................ 61
RCRA........................................... 60
Record Date.................................... 20
Relief Act..................................... 58
REMIC.......................................... 66
REMIC Certificates............................. 66
REMIC Mortgage Pool............................ 66
REMIC Provisions............................... 66
REMIC Regulations.............................. 66
Reserve Account................................ 47
Reserve Fund................................... 49
Residual Owner................................. 74
Retained Yield................................. 24
Sellers........................................ 8
Seller/Servicers............................... 8
Selling and Servicing Contracts................ 19
Senior Certificates............................ 46
Servicer....................................... 9
Servicing Contracts............................ 11
Servicing Entity............................... 8
Servicing Fee.................................. 11
Special Hazard Instrument...................... 44
Special Hazard Loss............................ 44
Subordinated Certificates...................... 46
Title V........................................ 59
Title VIII..................................... 59
Trustee........................................ 11
Trust Fund..................................... 11
UCC............................................ 56
Underwriter's Exemption........................ 61
VA............................................. 9
VA Guaranties.................................. 9
VA Loans....................................... 9
Withdrawal Date................................ 25
</TABLE>
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PNC MORTGAGE SECURITIES CORP.
DEPOSITOR AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 1999-7
$272,156,900
(APPROXIMATE)
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
BEAR, STEARNS & CO. INC.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CLASS A CERTIFICATES IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AS OF ANY DATE OTHER THAN THE DATES
STATED ON THEIR RESPECTIVE COVERS.
DEALERS WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF THE CLASS A CERTIFICATES AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THE CLASS A
CERTIFICATES WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL
AUGUST 24, 1999.
