<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: ____________
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED NOVEMBER 28, 2000
[PNC MORTGAGE SECURITIES CORP. LOGO]
DEPOSITOR AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2000-9
$258,835,943
(APPROXIMATE)
CONSIDER CAREFULLY THE RISK THE PNC MORTGAGE SECURITIES CORP. SERIES 2000-9
FACTORS BEGINNING ON PAGE TRUST WILL ISSUE EIGHT CLASSES OF CERTIFICATES.
S-10 IN THIS PROSPECTUS EACH CLASS OF CERTIFICATES WILL RECEIVE MONTHLY
SUPPLEMENT AND PAGE 5 IN DISTRIBUTIONS OF INTEREST, PRINCIPAL OR BOTH.
THE ACCOMPANYING THE TABLE BEGINNING ON PAGE S-4 OF THIS
PROSPECTUS. PROSPECTUS SUPPLEMENT CONTAINS A LIST OF THE
CLASSES OF CERTIFICATES, INCLUDING THE PRINCIPAL
The certificates will BALANCE, INTEREST RATE, AND CERTAIN SPECIAL
represent interests only in CHARACTERISTICS OF EACH CLASS.
the trust created for Series
2000-9 and will not OFFERED CERTIFICATES
represent interests in or --------------------
obligations of PNC Total principal amount
Mortgage Securities Corp., (approximate) $258,835,943
The PNC Financial First payment date January 25, 2001
Services Group, Inc. or Interest and/or principal
any of their affiliates. paid Monthly
Last possible payment date December 25, 2030
This prospectus A THIRD PARTY WILL BE OBLIGATED TO PURCHASE, AND
supplement may be used THE CERTIFICATEHOLDERS WILL BE OBLIGATED TO
to offer and sell the SELL, THE CLASS A-1, CLASS A-2, CLASS A-3 AND
certificates only if CLASS A-4 CERTIFICATES ON THE DISTRIBUTION DATE
accompanied by the IN SEPTEMBER 2005 AT A PREDETERMINED PRICE.
prospectus.
Credit enhancement for the certificates is being
provided by a mortgage portfolio insurance
policy and a special hazard insurance policy.
The underwriter listed below will offer the certificates at varying prices to
be determined at the time of sale. The proceeds to PNC Mortgage Securities
Corp. from the sale of the certificates will be approximately 100.15% of the
principal balance of the certificates plus accrued interest, before deducting
expenses. The underwriter's commission will be the difference between the price
it pays to PNC Mortgage Securities Corp. for the certificates and the amount it
receives from the sale of the certificates to the public.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Underwriter
CREDIT SUISSE FIRST BOSTON
December 26, 2000
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the 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-66 in this prospectus supplement and
under the caption "Index of Terms" beginning on page 92 in the accompanying
prospectus. Capitalized terms used in this prospectus supplement and not
otherwise defined in this prospectus supplement have the meanings assigned in
the accompanying prospectus.
ADDITIONAL INFORMATION ABOUT PNC MORTGAGE SECURITIES CORP. AND THE CERTIFICATES
PNC Mortgage Securities Corp., a Delaware corporation, is a wholly-owned
indirect subsidiary of The PNC Financial Services Group, Inc., a bank holding
company, which has announced that PNC Mortgage Securities Corp. will be sold to
Washington Mutual, Inc. in the first quarter of 2001. The certificates will
represent interests only in the trust created for Series 2000-9 and will not
represent interests in or obligations of any of PNC Mortgage Securities Corp.,
The PNC Financial Services Group, Inc., Washington Mutual, Inc. or any of their
affiliates.
S-2
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TABLE OF CONTENTS
PAGE
----
SUMMARY INFORMATION ...................................................... S-4
What You Own ........................................................... S-4
Information About the Mortgage Pool ................................. S-4
The Certificates ....................................................... S-4
Initial Principal Balance of the Certificates ....................... S-5
Distributions On The Certificates ...................................... S-5
Monthly Distributions ............................................... S-5
Distributions of Interest ........................................... S-6
Compensating Interest and Interest Shortfalls ....................... S-6
Distributions of Principal .......................................... S-6
Mandatory Purchase of the Class A Certificates ......................... S-7
Credit Enhancements .................................................... S-7
Allocation Of Losses ................................................... S-8
Yield Considerations ................................................... S-8
Book-Entry Registration ................................................ S-9
Denominations .......................................................... S-9
Legal Investment ....................................................... S-9
ERISA Considerations ................................................... S-9
Federal Income Tax Consequences ........................................ S-9
Ratings ................................................................ S-9
RISK FACTORS ............................................................. S-10
THE TRUST ................................................................ S-16
DESCRIPTION OF THE MORTGAGE POOL ......................................... S-16
The Indices ............................................................ S-18
Additional Information ................................................. S-19
DESCRIPTION OF THE CERTIFICATES .......................................... S-21
General ................................................................ S-21
Book-Entry Registration ................................................ S-22
Definitive Certificates ................................................ S-23
Priority of Distributions .............................................. S-24
Distributions of Interest .............................................. S-24
Distributions of Principal ............................................. S-26
General ............................................................. S-26
Senior Principal Distribution Amount ................................ S-26
Subordinate Principal Distribution Amount ........................... S-27
Principal Prepayments ............................................... S-27
Subordination and Allocation of Losses ................................. S-28
The Residual Certificates .............................................. S-29
Advances ............................................................... S-29
Available Distribution Amount .......................................... S-30
Last Scheduled Distribution Date and Assumed Final Maturity Date ....... S-31
Mandatory Purchase of the Class A Certificates ......................... S-31
Optional Termination of the Trust ...................................... S-32
Servicing Compensation and Payment of Expenses ......................... S-32
Special Servicing Agreements ........................................... S-32
Repurchase of Delinquent Mortgage Loans ................................ S-33
Reports to Certificateholders .......................................... S-33
DELINQUENCY, LOSS AND FORECLOSURE EXPERIENCE ............................. S-34
YIELD AND PREPAYMENT CONSIDERATIONS ...................................... S-35
General ................................................................ S-35
Principal Prepayments and Compensating Interest ........................ S-35
Rate of Payments ....................................................... S-36
Prepayment Assumptions ................................................. S-36
Lack of Historical Prepayment Data ..................................... S-38
Yield Considerations with Respect to the Class X Certificates .......... S-39
Additional Yield Considerations Applicable Solely to the Residual
Certificates ........................................................ S-40
Additional Information ................................................. S-40
CREDIT ENHANCEMENTS ...................................................... S-41
Mortgage Portfolio Insurance Policy .................................... S-41
Special Hazard Insurance Policy ........................................ S-46
Subordination .......................................................... S-48
Shifting of Interests .................................................. S-48
The Class A-4 Certificate Insurance
Policy and the Certificate Insurer .................................. S-48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES .................................. S-53
Special Tax Considerations Applicable to the Residual Certificates ..... S-54
CERTAIN LEGAL INVESTMENT ASPECTS ......................................... S-56
ERISA CONSIDERATIONS ..................................................... S-57
General ................................................................ S-57
ERISA Considerations With Respect to the Mandatory Purchase ............ S-58
METHOD OF DISTRIBUTION ................................................... S-59
LEGAL MATTERS ............................................................ S-59
CERTIFICATE RATINGS ...................................................... S-59
EXPERTS .................................................................. S-60
APPENDIX A ............................................................... S-61
APPENDIX B ............................................................... S-63
INDEX OF TERMS ........................................................... S-66
S-3
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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
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
PAYMENTS TO YOU WILL COME ONLY FROM THE AMOUNTS RECEIVED IN CONNECTION WITH
THOSE ASSETS.
The Trust contains a pool of mortgage loans and certain other assets, as
described under "The Trust" in this prospectus supplement.
INFORMATION ABOUT THE MORTGAGE POOL
The mortgage pool consists of approximately 697 mortgage loans with an
aggregate principal balance as of December 1, 2000 of approximately
$258,835,943. 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.
The mortgage loans provide for a fixed interest rate during an initial period
of approximately five years from the date of origination of each mortgage loan
and thereafter provide for adjustments to the interest rate either every six
months or on an annual basis.
After the initial fixed rate period, the interest rate on each mortgage loan
will adjust to equal the sum of an index and a margin. Interest rate
adjustments may be subject to certain limitations stated in the related
mortgage note with respect to increases and decreases for any adjustment. In
addition, the interest rate may be subject to an overall maximum and minimum
interest rate.
The index will be 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, see "Description of the
Mortgage Pool" and Appendix B in this prospectus supplement.
THE 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 2000-9. The approximate initial class principal balance,
annual certificate interest rate and type of each class of the certificates
will be as follows:
<TABLE>
<CAPTION>
APPROXIMATE ANNUAL
INITIAL CLASS CERTIFICATE
CLASS PRINCIPAL BALANCE INTEREST RATE TYPE
----- ----------------- ------------- ----
<S> <C> <C> <C>
A-1 $89,637,452 Variable(1) Senior
A-2 60,006,255 Variable(2) Senior
A-3 45,312,686 Variable(3) Senior
A-4 60,644,000 Variable(4) Senior/Insured
X -- Variable(5) Sr./Interest Only
B 3,235,450 Variable(6) Subordinate
R-1 50 7.200% Senior/Residual
R-2 50 7.200% Senior/Residual
</TABLE>
(1) For the initial distribution date, the annual certificate interest rate
on these certificates will equal 7.200%. On or before the distribution
date in September 2005, the annual certificate interest rate on these
certificates will equal the lesser of (i) 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, mortgage
portfolio insurance premium and special hazard insurance premium is
calculated (the "WEIGHTED AVERAGE PASS-THROUGH RATE") and (ii) 7.200%. On
and after the distribution date in October 2005, the annual certificate
interest rate on these certificates will equal the Weighted Average
Pass-Through Rate.
See "Description of the Certificates--Distributions of Interest" in this
prospectus supplement.
(2) For the initial distribution date, the annual certificate interest rate
on these certificates will equal 6.850%. On or before the distribution
date in September 2005, the annual certificate
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interest rate on these certificates will equal the lesser of 6.850% and
the Weighted Average Pass-Through Rate (as defined above in footnote 1).
On and after the distribution date in October 2005, the annual certificate
interest rate on these certificates will equal the Weighted Average
Pass-Through Rate.
See "Description of the Certificates--Distributions of Interest" in this
prospectus supplement.
(3) For the initial distribution date, the annual certificate interest rate
on these certificates will equal 7.190%. On or before the distribution
date in September 2005, the annual certificate interest rate on these
certificates will equal the lesser of 7.190% and the Weighted Average
Pass-Through Rate (as defined above in footnote 1). On and after the
distribution date in October 2005, the annual certificate interest rate
on these certificates will equal the Weighted Average Pass-Through Rate.
See "Description of the Certificates-- Distributions of Interest" in this
prospectus supplement.
(4) For the initial distribution date, the annual certificate interest rate
on these certificates will equal 7.200%. On or before the distribution
date in September 2005, the annual certificate interest rate on these
certificates will equal the lesser of (i) 7.200% and (ii) the Weighted
Average Pass-Through Rate (as defined above in footnote 1) less 0.040%.
On and after the distribution date in October 2005, the annual
certificate interest rate on these certificates will equal the Weighted
Average Pass-Through Rate. See "Description of the Certificates--
Distributions of Interest" in this prospectus supplement.
(5) These certificates will not receive any distributions of principal, but
will accrue interest on the Class X notional amount. The initial Class X
notional amount will be approximately $255,600,493. For the initial
distribution date, the annual certificate interest rate on these
certificates will equal approximately 0.3013%. On or before the
distribution date in September 2005, the annual certificate interest rate
on the Class X Certificates will equal the excess, if any, of (i) the
Weighted Average Pass-Through Rate (as defined above in footnote 1) over
(ii) the weighted average annual certificate interest rate of the Class
A-1, Class A-2, Class A-3 and Class A-4 Certificates, provided, however,
that in making this calculation, 0.040% will be added to the Class A-4
certificate interest rate. ON AND AFTER THE DISTRIBUTION DATE IN OCTOBER
2005, THE CLASS X CERTIFICATES WILL RECEIVE ABSOLUTELY NO DISTRIBUTIONS
OF ANY KIND. See "Description of the Certificates--Distributions of
Interest" in this prospectus supplement.
(6) For the initial distribution date, the annual certificate interest rate
on these certificates will equal approximately 7.4269%. On each
distribution date, the annual certificate interest rate on these
certificates will equal the Weighted Average Pass-Through Rate (as
defined above in footnote 1). See "Description of the Certificates--
Distributions of Interest" in this prospectus supplement.
INITIAL PRINCIPAL BALANCE OF THE CERTIFICATES
The initial aggregate principal balance of the certificates issued by the Trust
is approximately $258,835,943, subject to an upward or downward variance of no
more than 5%.
The initial aggregate principal balance of the certificates have the following
composition:
o the senior certificates comprise approximately 98.75% of the principal
balance of the mortgage loans; and
o the Class B Certificates comprise approximately 1.25% of the principal
balance of the mortgage loans.
DISTRIBUTIONS ON THE CERTIFICATES
MONTHLY DISTRIBUTIONS
Each month, the trustee, State Street Bank and Trust Company, will make
distributions of interest and/or principal to the holders of the certificates.
Distributions will be made on the 25th day of each month, or if the 25th day is
not a business day, on the next business day. The first distribution date will
be January 25, 2001.
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
S-5
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servicer. The master servicer then subtracts its master servicing fee and sends
the remainder to the trustee. The trustee then distributes funds to pay the
various insurance premiums and on the distribution date for that month,
distributes the remaining amount to the holders of the certificates in the
order described in "Description of the Certificates--Priority of Distributions"
in this prospectus supplement.
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 not be required to make advances
if it determines that those advances will not be recoverable from future
payments or collections on that mortgage loan. See "Description of the
Certificates--Advances" in this prospectus supplement.
DISTRIBUTIONS OF INTEREST
Each class of certificates will accrue interest each month. On each
distribution date interest will be distributed to these classes in the order
described in "Description of the 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. As a result, some certificates, most likely
the Class B Certificates, may not receive the full amount of accrued interest
to which they are entitled. If this happens, those certificates will be
entitled to receive any shortfall in interest distributions in the following
month in the same priority as their distribution of current interest. However,
there will be no extra interest paid to make up for the delay.
The amount of interest each class of certificates accrues each month will equal
1/12th of the annual certificate interest rate for that class multiplied by the
related class principal balance or class notional amount, as applicable. The
principal balance or notional amount used for this calculation on the first
distribution date will be the applicable balance as of December 28, 2000, which
is the closing date. The principal balance or notional amount 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 for each class of certificates is described on page S-4 of this
prospectus supplement. For a description of how the notional amount is
determined, see "Description of the Certificates--Distributions of Interest" in
this prospectus supplement.
COMPENSATING INTEREST AND INTEREST SHORTFALLS
Prepayments in Full. When mortgagors make prepayments in full, they need not
pay a full month's interest. Instead, they are required to pay interest only to
the date of their prepayment. To compensate certificateholders for the
shortfall in interest this causes, the master servicer may pay compensating
interest to the certificateholders out of the master servicing fee it collects,
as well as from certain other sources. 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 Certificates--Distributions of Interest
Compensating Interest" and "Yield and Prepayment Considerations" in this
prospectus supplement.
Partial Prepayments. When mortgagors make partial prepayments, they do not pay
interest on the amount of that prepayment. Certificateholders will receive no
compensating interest to compensate them for the shortfall in interest this
causes.
DISTRIBUTIONS OF PRINCIPAL
General. As the mortgagors pay principal on the mortgage loans, that principal
is passed on to the holders of certificates. HOWEVER, NOT EVERY CLASS OF
CERTIFICATES RECEIVES PRINCIPAL ON EACH DISTRIBUTION DATE.
Class A-1, Class A-2, Class A-3 and Class A-4 Certificates. On each
distribution date, a portion of the principal received or advanced on all of
the mortgage loans will be distributed to the Class A-1, Class A-2, Class A-3
and Class A-4 Certificates in the order of priority described in "Description
of the Certificates--Distributions of Principal--Senior Principal Distribution
Amount" in this prospectus supplement. HOWEVER, NOT ALL OF THESE CERTIFICATES
WILL RECEIVE PRINCIPAL ON EACH DISTRIBUTION DATE. SEE APPENDIX A FOR A TABLE
SHOWING, FOR EACH CLASS OF CERTIFICATES, THE EXPECTED RATE OF RETURN OF
PRINCIPAL AT DIFFERENT RATES OF PREPAYMENTS ON THE MORTGAGE LOANS. However, if
the Class B Certificates are no longer outstanding
S-6
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and the coverage under the mortgage portfolio insurance policy has been
exhausted, then the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates
will not receive principal in the order of priority described in "Description
of the Certificates--Distributions of Principal--Senior Principal Distribution
Amount" in this prospectus supplement. Instead, each of these classes of
certificates will generally receive principal pro rata according to its class
principal balance.
Class B Certificates. On each distribution date, the Class B Certificates will
be entitled to receive a portion of the principal received or advanced on the
mortgage loans.
Priority of Principal Distributions. Each class of certificates receives its
principal entitlements in the order described in "Description of the
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. As a result, some certificates, most likely
the Class B Certificates, may not receive the full amount of principal
distributions to which they are entitled.
The Class X Certificates will not receive any distributions of principal.
For a more detailed description of how distributions of principal will be
allocated among the various classes of certificates, see "Description of the
Certificates--Distributions of Principal" in this prospectus supplement.
MANDATORY PURCHASE OF THE CLASS A CERTIFICATES
If you own a Class A-1, Class A-2, Class A-3 or Class A-4 Certificate on the
distribution date in September 2005, your certificate is subject to a mandatory
purchase by CDC Financial Products Inc. On that date, CDC is obligated to
purchase your certificates. CDC is not affiliated with any of PNC Mortgage
Securities Corp., the underwriter, the trustee or any insurer. Neither PNC
Mortgage Securities Corp., the underwriter, the trustee nor any insurer is
responsible for CDC's purchase obligation. If CDC fails to purchase your
certificates, or if you have purchased a Class A Certificate after the
distribution date in September 2005, your Class A Certificate will have a last
scheduled distribution date in December 2030 and no other party will be
obligated to purchase your certificate.
The purchase price for each Class A Certificate will be the sum of (i) the
outstanding principal balance of that certificate on the distribution date in
September 2005, after giving effect to distributions of principal and
allocations of principal losses otherwise made on such date and (ii) any
interest accrued during August 2005 that should have been, but was not,
distributed to certificateholders on the distribution date in September 2005.
The purchase price will not include payment of any interest accrued between
September 1, 2005 and the distribution date in September 2005.
The Class B, Class X, Class R-1 and Class R-2 Certificates are not subject to
this mandatory purchase.
See "Description of the Certificates--Mandatory Purchase of the Class A
Certificates" in this prospectus supplement.
CREDIT ENHANCEMENTS
Mortgage Portfolio Insurance Policy. Certain losses arising out of mortgagor
defaults realized on the mortgage loans with loan-to-value ratios greater than
40% will be covered by a mortgage portfolio insurance policy issued by General
Electric Mortgage Insurance Corporation. The maximum amount of coverage per
loan will be the amount needed to reduce uninsured exposure to 40% of the
lesser of the appraised value or purchase price, as the case may be, of the
related mortgaged property, in each case as of December 1, 2000. The maximum
amount of coverage available under the policy will be equal to 6.00% of the
aggregate unpaid principal balance of the mortgage loans as of December 1,
2000. See "Credit Enhancements--Mortgage Portfolio Insurance Policy" in this
prospectus supplement.
Special Hazard Insurance Policy. The mortgage loans will also be covered by a
special hazard insurance policy issued by Travelers Indemnity Company. This
policy will, subject to important limitations, cover losses on the mortgage
loans resulting from certain hazards not covered by standard hazard insurance
policies. The aggregate claims under this policy will be limited and
subject to periodic reductions. See "Credit Enhancements--Special Hazard
Insurance Policy" in this prospectus supplement.
Subordination. The senior certificates in the aggregate will receive
distributions of interest and
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principal before the subordinate certificates are entitled to receive
distributions of interest or principal. This provides credit enhancement to the
senior certificates.
Shifting of Interests. The senior certificates in the aggregate will generally
receive 100% of principal prepayments received on the mortgage loans until the
fifth anniversary of the first distribution date. During the next four years,
the senior 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 senior certificates and
increases the likelihood that holders of the senior 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 among the senior
certificates and the subordinate certificates, see "Description of the
Certificates--Distributions of Principal--Principal Prepayments" in this
prospectus supplement.
The Class A-4 Certificate Insurance Policy. In addition to the credit
enhancement provided by the insurance policies, subordinate certificates and the
shifting of interests described above, the Class A-4 Certificates will also have
the benefit of a certificate guaranty insurance policy issued by MBIA Insurance
Corporation until the distribution date in September 2005. This insurance policy
will, in general, guarantee the payment of certain principal and interest
distributions to which the Class A-4 Certificates are entitled. However, this
insurance policy will not cover certain prepayment interest shortfalls on the
Class A-4 Certificates. In addition, the insurance policy will not cover certain
other interest shortfalls. See "Credit Enhancements--The Class A-4 Certificate
Insurance Policy and the Certificate Insurer" in this prospectus supplement. THE
CLASS A-4 CERTIFICATE INSURANCE POLICY DOES NOT PROVIDE CREDIT ENHANCEMENT FOR
ANY CLASS OF CERTIFICATES OTHER THAN THE CLASS A-4 CERTIFICATES AND WILL ONLY
PROVIDE CREDIT ENHANCEMENT TO THE CLASS A-4 CERTIFICATES UNTIL THE DISTRIBUTION
DATE IN SEPTEMBER 2005.
ALLOCATION OF LOSSES
Realized 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 that mortgage loan and the amounts are less than the
outstanding principal balance of the mortgage loan and its accrued and unpaid
interest. LOSSES THAT ARE ALLOCATED TO CERTIFICATES WILL BE ALLOCATED BY
DEDUCTING THE LOSSES FROM THE PRINCIPAL BALANCE OF THE CERTIFICATES WITHOUT
MAKING ANY PAYMENTS TO THE CERTIFICATEHOLDERS. In general, after the coverage
available under the mortgage portfolio insurance policy is exhausted, the
amount of losses (other than special hazard, bankruptcy and fraud losses) will
be allocated first to the Class B Certificates. In general, these losses will
be allocated to the senior certificates only after the principal balance of the
Class B Certificates has been reduced to zero.
Special Hazard, Fraud and Bankruptcy Losses. Fraud losses and bankruptcy losses
up to a specified amount will be allocated to the Class B Certificates. Special
hazard losses up to a specified amount will be covered by a special hazard
insurance policy. Special hazard losses, fraud losses and bankruptcy losses in
excess of the specified amounts will, in general, be allocated to all
outstanding classes of certificates pro rata according to their outstanding
principal balances. For a description of how much of these types of losses will
be covered by an insurance policy or allocated to the Class B Certificates and
how much will be allocated to all of the certificates, see "Description of the
Certificates--Subordination and Allocation of Losses" in this prospectus
supplement.
For a more detailed description of the allocation of realized losses among the
certificates, see "Description of the Certificates--Subordination and
Allocation of Losses" in this prospectus supplement.
YIELD CONSIDERATIONS
The yield to maturity on your certificates will depend upon, among other
things:
o the price at which the certificates are purchased;
o the applicable certificate interest rate;
o the rate of prepayments on the mortgage loans;
o whether the optional termination of the Trust occurs; and
o in the case of the Class A Certificates, whether you hold the certificates
when the mandatory purchase occurs.
The Class X Certificates will be especially sensitive to the rate of
prepayments and will receive absolutely no payments after the distribution date
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in September 2005. For a discussion of special yield considerations applicable
to these certificates, see "Risk Factors" and "Yield and Prepayment
Considerations--Yield Considerations with Respect to the Class X Certificates"
in this prospectus supplement.
BOOK-ENTRY REGISTRATION
In general, the certificates, other than the Class R-1 and Class R-2
Certificates, will be available only in book-entry form through the facilities
of The Depository Trust Company. See "Description of the
Certificates--Book-Entry Registration" in this prospectus supplement.
DENOMINATIONS
The Class A-1, Class A-2, Class A-3 and Class A-4 Certificates are offered in
minimum denominations of $100,000 each and multiples of $1 in excess of
$100,000. The Class B Certificates are offered in minimum denominations of
$25,000 each and multiples of $1 in excess of $25,000. The Class X Certificates
are offered in minimum denominations of $100,000 initial class notional amount
each and multiples of $1 in excess of $100,000. The Class R-1 and Class R-2
Certificates will each have an initial class principal balance of $50 and will
each be offered in a single certificate that represents a 99.99% interest in
its class.
LEGAL INVESTMENT
As of the date of their issuance, all of the senior 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 certificates by regulated institutions. You
should consult your own legal advisors in determining whether and to what
extent the 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
certificates, other than the Class R-1 and Class R-2 Certificates, will be
eligible for purchase by persons investing assets of employee benefit plans or
individual retirement accounts. Because the Class A-1, Class A-2, Class A-3 and
Class A-4 Certificates will be purchased in September 2005 by CDC, these
certificates may not be acquired or held by any such plan or account before the
distribution date in September 2005 unless such acquisition and holding is
eligible for the exemptive relief available under one of the class exemptions
described in this prospectus supplement under "ERISA Considerations--
ERISA Considerations With Respect to the Mandatory Purchase." See "ERISA
Considerations" in this prospectus supplement and in the accompanying
prospectus.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, PNC Mortgage Securities Corp. will cause two
REMIC elections to be made with respect to the Trust. The certificates, other
than the Class R-1 and Class R-2 Certificates, will generally be treated as
representing ownership of debt for federal income tax purposes. For federal
income tax purposes, the Class R-1 and Class R-2 Certificates will represent
ownership of residual interests.
For further information regarding the federal income tax consequences of
investing in the certificates, including important information regarding the
tax treatment of the Class R-1 and Class R-2 Certificates, see "Certain Federal
Income Tax Consequences" in this prospectus supplement and in the accompanying
prospectus.
RATINGS
The certificates are required to receive the ratings from Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., and Moody's
Investors Service, Inc. indicated under "Certificate Ratings" in this
prospectus supplement. The ratings on the certificates address the likelihood
of the receipt by holders of certificates of all distributions on the
underlying mortgage loans to which they are entitled. They do not address the
likely actual rate of prepayments. The rate of prepayments, if different than
originally anticipated, could adversely affect the yield realized by holders of
the certificates or cause the holders of certificates entitled to interest only
to fail to recover their initial investments.
S-9
<PAGE>
RISK FACTORS
THE CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, YOU SHOULD NOT PURCHASE ANY CLASS OF CERTIFICATES UNLESS YOU
UNDERSTAND AND ARE ABLE TO BEAR THE PREPAYMENT, CREDIT, LIQUIDITY AND MARKET
RISKS ASSOCIATED WITH THAT CLASS.
THE CERTIFICATES ARE COMPLEX SECURITIES 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.
THERE IS NO GUARANTEE THAT As the mortgagors make payments of interest
YOU WILL RECEIVE PRINCIPAL and principal on their mortgage loans, you
PAYMENTS ON YOUR CERTIFICATES will receive payments. Because the mortgagors
AT ANY SPECIFIC RATE OR ON are free to make those payments faster than
ANY SPECIFIC DATES scheduled, you may receive distributions
faster than you expected. There is no
guarantee that you will receive principal
payments on your certificates at any specific
rate or on any specific dates.
THE YIELD ON YOUR The yield to maturity on your certificates is
CERTIFICATES IS DIRECTLY directly related to the rate at which the
RELATED TO THE PREPAYMENT mortgagors pay principal on the mortgage
RATE ON THE MORTGAGE LOANS 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;
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. Each mortgage
loan contains a "due-on-sale" clause;
however, the lender is prohibited from
exercising that "due-on-sale" clause if
prohibited by applicable law or if certain
conditions specified in the mortgage note
are satisfied. Therefore, the sale of any
mortgaged property 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 all of the certificates.
However, if you have purchased a Class X
Certificate, the prepayment rate will be
especially important to you.
Each mortgage loan in the Trust is an
adjustable-rate mortgage loan with an
initial fixed-rate period. We are not aware
of any publicly available statistics that
set
S-10
<PAGE>
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 adjustable-rate mortgage loan
programs during the past years have varied
significantly in response to market
conditions including the interest-rate
environment, 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.
From time to time, PNC Mortgage Securities
Corp. or certain of its servicers, including
PNC Mortgage Corp. of America, may implement
programs to solicit qualifying mortgage
loans that they service for refinance,
including mortgage loans underlying the
certificates. While those programs will not
target the mortgage loans underlying the
certificates for refinance, they may have
the effect of accelerating the prepayment
rate of those mortgage loans, which would
adversely affect the yield on all classes of
certificates purchased at a premium,
particularly those certificates only
entitled to interest.
THE YIELD ON YOUR The mortgage interest rate on each mortgage
CERTIFICATES WILL ALSO BE loan will be fixed for an initial period of
AFFECTED BY CHANGES IN THE approximately five years from the date of
MORTGAGE INTEREST RATE origination of that mortgage loan. Thereafter
each mortgage loan provides for adjustments
to the interest rate either every six months
or on an annual basis. The interest rate on
each mortgage loan will adjust to equal the
sum of an index and a margin. Interest rate
adjustments may be subject to limitations
stated in the mortgage note with respect to
increases and decreases for any adjustment
(i.e., a "periodic cap").
S-11
<PAGE>
In addition, the interest rate may be
subject to an overall maximum and minimum
interest rate. See "Description of the
Mortgage Pool" in this prospectus
supplement.
The certificate interest rates 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, the dates of adjustment, the
margins, changes in the indices and any
applicable periodic cap or lifetime rate
change limitations. Each mortgage loan has a
maximum mortgage interest rate and a minimum
mortgage interest rate. In some cases, the
minimum mortgage interest rate may be 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 limitation or a periodic
cap, the yield on the certificates could be
adversely affected. See "Description of the
Mortgage Pool" and "Yield and Prepayment
Considerations" in this prospectus
supplement.
AN OPTIONAL TERMINATION OF When the aggregate principal balance of the
THE TRUST MAY ADVERSELY mortgage loans in the Trust has been reduced
AFFECT THE CERTIFICATES to less than 10% of that balance as of
December 1, 2000, PNC Mortgage Securities
Corp. may repurchase all of the mortgage
loans in the Trust, which will terminate the
Trust. See "Description of the
Certificates--Optional Termination of the
Trust" in this prospectus supplement and
"Description of the Certificates--
Termination" in the prospectus. If this
happens, the repurchase price paid by PNC
Mortgage Securities Corp. will be passed
through to the certificateholders. This would
have the same effect as if all of the
remaining mortgagors made prepayments in
full. Since the Class X Certificates receive
only distributions of interest, an optional
termination of the Trust before September
2005 would adversely affect holders of those
certificates. In addition, any other class of
certificates purchased at a premium could be
adversely affected by an optional termination
of the Trust.
IF YOU OWN A CLASS A If you own a Class A-1, Class A-2, Class A-3
CERTIFICATE ON THE or Class A-4 Certificate on the distribution
DISTRIBUTION DATE IN date in September 2005, your certificate is
SEPTEMBER 2005, IT WILL BE subject to a mandatory purchase by CDC
SUBJECT TO A MANDATORY Financial Products Inc. ("CDC"), which is not
PURCHASE ON THAT DATE affiliated with either PNC Mortgage
Securities Corp., the underwriter, the
trustee or any insurer. If CDC fails to
purchase your certificate, or if you have
purchased the certificate after the
distribution date in September 2005, your
Class A Certificate will have a last
scheduled distribution date in
S-12
<PAGE>
December 2030 and no other party will have
any obligation to purchase your certificate.
The purchase price paid by CDC for each
Class A Certificate will be the sum of (i)
the outstanding principal balance of that
certificate on the distribution date in
September 2005, after giving effect to
distributions of principal and allocations
of principal losses otherwise made on such
date and (ii) any interest accrued during
August 2005 that should have been, but was
not, distributed to certificateholders on
the distribution date in September 2005.
Investors in the Class A Certificates should
be aware that this purchase price will not
include payment of any interest accrued
between September 1, 2005 and the
distribution date in September 2005.
See "Description of the Certificates--
Mandatory Purchase of the Class A
Certificates" in this prospectus supplement.
MANDATORY PURCHASER MAY FAIL While CDC has a contractual obligation to
TO PURCHASE THE CLASS A purchase the Class A Certificates on the
CERTIFICATES ON THE distribution date in September 2005, there
DISTRIBUTION DATE IN can be no guarantee that any Class A
SEPTEMBER 2005 Certificate will in fact be purchased from
you on that date. Neither PNC Mortgage
Securities Corp., the underwriter, the
trustee, the insurers, nor any of their
affiliates will have any obligation to
purchase the Class A Certificates. Therefore,
if you own a Class A Certificate and for any
reason CDC does not purchase your
certificate, your certificate will have a
last scheduled distribution date in December
2030.
ADDITIONAL ERISA If you are purchasing any Class A
CONSIDERATIONS CONCERNING THE Certificates before the distribution date in
MANDATORY PURCHASE OF THE September 2005 on behalf of or with "plan
CLASS A CERTIFICATES ON THE assets" of an employee benefit or other plan,
DISTRIBUTION DATE IN you should carefully review with legal
SEPTEMBER 2005 counsel whether the acquisition of these
certificates and the subsequent mandatory
purchase of your certificates will be
eligible for the exemptive relief available
under one of the class exemptions specified
under "ERISA Considerations-- ERISA
Considerations With Respect to the Mandatory
Purchase" in this prospectus supplement. See
"ERISA Considerations--ERISA Considerations
With Respect to the Mandatory Purchase" in
this prospectus supplement.
RAPID PREPAYMENTS WILL REDUCE The yields to maturity on the Class X
THE YIELD ON THE CLASS X Certificates will be extremely sensitive to
CERTIFICATES the level of prepayments on the mortgage
loans. Because the interest payable to the
Class X Certificates until September 2005 is
based on the excess of the Weighted Average
Pass-Through Rate over the weighted average
annual certificate interest rate of the Class
A Certificates (provided, however, that in
making this calculation, 0.040% will be added
to the Class A-4 certificate interest rate),
the yield to maturity
S-13
<PAGE>
on the Class X Certificates will be
adversely affected as a result of faster
than expected prepayments on the mortgage
loans--especially those with the highest
Pass-Through Rates. If the Weighted Average
Pass-Through Rate is lower than the weighted
average certificate interest rate accruing
on the Class A Certificates (adjusted as
described above), holders of the Class X
Certificates will receive no distributions
of interest that month. SINCE THE HIGHER
INTEREST MORTGAGE LOANS ARE LIKELY TO PREPAY
EARLIER, YOUR INTEREST RATE WILL LIKELY
DECREASE OVER TIME AND MAY BECOME ZERO.
THE DISTRIBUTION DATE IN SEPTEMBER 2005 WILL
BE YOUR FINAL DISTRIBUTION DATE. AFTER THIS
DISTRIBUTION DATE YOU WILL RECEIVE NO
DISTRIBUTIONS OF ANY KIND.
You should fully consider the risks
associated with an investment in the Class X
Certificates. If the mortgage loans prepay
faster than expected or if the Trust is
terminated before September 2005, you may not
fully recover your initial investment. See
"Yield and Prepayment Considerations-- Yield
Considerations with Respect to the Class X
Certificates" in this prospectus supplement
for a table showing expected yields at
different prepayment rates.
CERTIFICATES BOUGHT AT If you purchase a certificate at a discount
PREMIUMS AND DISCOUNTS MAY from its original principal balance and the
RECEIVE A LOWER YIELD THAN rate of principal payments is slower than you
EXPECTED 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 payments is faster
than you expect, your yield may be lower than
you anticipate.
LOSSES ON THE MORTGAGE LOANS The yield to maturity on the Class B
WILL REDUCE THE YIELD ON THE Certificates will be extremely sensitive to
CERTIFICATES most losses on the mortgage loans after the
coverage under the mortgage portfolio
insurance policy has been exhausted. Most
losses on the mortgage loans will be
allocated exclusively to the Class B
Certificates after the coverage under the
mortgage portfolio insurance policy has been
exhausted.
In addition, if the Class B Principal Balance
has been reduced to zero, all further losses
on the mortgage loans will be allocated to
the senior certificates. See "Description of
the Certificates--Subordination and
Allocation of Losses" in this prospectus
supplement.
SOME MORTGAGE LOANS ARE Approximately 18.4% of the mortgage loans (by
SECURED BY ADDITIONAL principal balance as of December 1, 2000) are
COLLATERAL OTHER THAN REAL secured by both the related mortgaged
ESTATE property and certain additional collateral.
This additional collateral may include
securities or a third-party guarantee secured
by securities. The securities may include
publicly traded stocks, corporate and
municipal bonds, governmental
S-14
<PAGE>
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 this additional collateral.
THE INTEREST ONLY LOANS HAVE Approximately 11.4% of the mortgage loans (by
A GREATER DEGREE OF RISK OF principal balance as of December 1, 2000) do
DEFAULT not provide for any payments of principal
before their first adjustment date. Interest
only mortgage loans may involve a greater
degree of risk since if the mortgagor
defaults, the principal balance outstanding
will be higher than for an amortizing
mortgage loan. These mortgage loans, however,
are not balloon loans, and once they begin to
pay principal, they will fully amortize over
their remaining term. All of these interest
only mortgage loans are secured by both the
related mortgaged property and additional
collateral as described in the previous risk
factor.
THE LACK OF SECONDARY MARKETS A secondary market for the certificates may
MAY MAKE IT DIFFICULT FOR YOU not develop. If a secondary market does
TO RESELL YOUR CERTIFICATES develop, it might not continue or it might
not be sufficiently liquid to allow you to
resell any of your certificates. The
certificates will not be listed on any
securities exchange.Therefore, if you own a
Class A Certificate which is not purchased by
CDC under the mandatory certificate purchase
agreement in September 2005, you may not be
able to readily resell your certificate.
THE LACK OF PHYSICAL You will NOT have a physical certificate if
CERTIFICATES FOR CERTAIN you own a Class A, Class B or Class X
CERTIFICATES MAY CAUSE DELAYS Certificate. As a result, you will be able to
IN PAYMENT AND CAUSE transfer your certificates only through The
DIFFICULTIES IN PLEDGING OR Depository Trust Company, participating
SELLING YOUR CERTIFICATES organizations, indirect participants and
certain banks. The ability to pledge a
certificate of one of these classes 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 these 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 accounts you have either directly
or indirectly through indirect participants.
Also, because investors may be unwilling to
purchase certificates without delivery of a
physical certificate, these certificates may
be less liquid in any secondary market that
may develop.
S-15
<PAGE>
THE TRUST
The pooling agreement between PNC Mortgage Securities Corp., as depositor
and master servicer, and State Street Bank and Trust Company, as trustee, will
establish a trust (the "TRUST"). A pool of mortgage loans will be assigned to
the Trust. The mortgage pool will be the primary asset of the Trust. The Trust
will own the right to receive all payments of principal and interest on the
mortgage loans due after December 1, 2000 (the "CUT-OFF DATE"). In exchange for
the mortgage loans and other property, the trustee will authenticate and
deliver the certificates to PNC Mortgage Securities Corp. A schedule to the
pooling agreement will include information about each mortgage loan, including:
o the original principal balance and the outstanding principal
balance as of the close of business on the Cut-Off Date;
o the term of the mortgage loan; and
o the initial mortgage interest rate and information about how that
mortgage interest rate adjusts.
The Trust will also contain other property, including:
o insurance policies related to individual mortgage loans, if
applicable;
o any property that PNC Mortgage Securities Corp. acquires after
the Cut-Off Date as a result of foreclosure or threatened
foreclosure of a mortgage loan;
o amounts held in the Certificate Account (as described on page 30
of the accompanying prospectus); and
o the Mortgage Portfolio Insurance Policy, the Special Hazard
Insurance Policy, the Class A-4 Certificate Insurance Policy and
the Class A-4 Reserve Fund (collectively, the "CREDIT
ENHANCEMENTS" as described in "Credit Enhancements" in this
prospectus supplement).
The pooling agreement permits PNC Mortgage Securities Corp., as the master
servicer, to place funds that would otherwise be held in the Certificate
Account into an Investment Account and invest them in Eligible Investments for
its own benefit, before those funds are to be distributed to
certificateholders.
DESCRIPTION OF THE MORTGAGE POOL*
The mortgage pool will consist of 697 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
----------
* The description of the mortgage pool and the mortgaged properties in this
section and in Appendix B 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 in this prospectus supplement to "principal balance" refer
to the principal balance as of the Cut-Off Date, unless otherwise
specifically stated or required by the context. Due to rounding,
percentages may not sum to 100%. References 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 related mortgage loans
determined in the same way. Before the issuance of the certificates,
mortgage loans may be removed from the mortgage pool as a result of
Payoffs, delinquencies or otherwise. If that happens, other mortgage
loans may be included in the mortgage pool. PNC Mortgage Securities Corp.
believes that the information in this prospectus supplement 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" in this prospectus
supplement.
S-16
<PAGE>
approximately $258,835,943. Certain of the risks of loss on certain mortgage
loans will be covered up to specified limits by primary insurance policies. In
addition, certain of the risks of loss on the mortgage loans will be covered up
to specified limits by the Mortgage Portfolio Insurance Policy and the Special
Hazard Insurance Policy. See "Credit Enhancements" in this prospectus
supplement.
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. These 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), have the
additional characteristics described below and in the prospectus.
Each mortgage loan will have a first payment date during the period from
February 1999 through December 2000, inclusive, and will have an original term
to maturity of not more than 30 years. Except for the Interest Only Loans (as
defined below), all mortgage loans will have principal and interest payable on
the first day of each month (the "DUE DATE"). The Interest Only Loans will have
interest payable on each Due Date until their first interest adjustment date,
after which they will have interest and principal payable on each Due Date.
None of the mortgage loans will be a buydown loan. As of the Cut-Off Date,
approximately 12.3% of the mortgage loans were 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 (as defined below).
As of the Cut-Off Date, approximately 0.7% of the mortgage loans impose
penalties for early prepayments. The prepayment penalty is in effect from three
to five years after origination of those mortgage loans.
Each mortgage loan will be a conventional mortgage loan evidenced by a
mortgage note. Each mortgage loan has a fixed mortgage interest rate for
approximately the first five years after the origination of such mortgage loan.
Each mortgage note will provide for adjustments to the mortgage interest rate
thereon on or about the fifth anniversary of the first Due Date and either
every six months or annually thereafter (each, an "ADJUSTMENT DATE"). On each
Adjustment Date, the mortgage interest rate will adjust to the sum of the
applicable 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 certain mortgage loans, the
mortgage interest rate after such adjustment on each Adjustment Date 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"). In addition, adjustments to the mortgage interest rate for each mortgage
loan are subject to a lifetime maximum interest rate (a "RATE CEILING"). Each
mortgage loan specifies a lifetime minimum interest rate (a "RATE FLOOR") which
in some cases is equal to the Margin for that mortgage loan. Each mortgage loan
contains a "due-on-sale" clause; however, the lender is prohibited from
exercising that "due-on-sale" clause if prohibited by applicable law or if
certain conditions specified in the mortgage note are satisfied. 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.
As of the Cut-Off Date, approximately 18.4% of the mortgage loans are
Additional Collateral Loans. "ADDITIONAL COLLATERAL LOANS" 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, which in turn is secured by a
security interest in securities.
The amount of that Additional Collateral ranges from approximately 12.0%
to 77.0% of the original principal balance of each Additional Collateral Loan,
with a weighted average of
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<PAGE>
approximately 31.8%. As of the Cut-Off Date, these Additional Collateral Loans
had loan-to value ratios ranging from 58.0% to 100.0%, with a weighted average
of 97.0%. Considering the Additional Collateral as if it were subtracted from
the principal balance of the mortgage loan, the converted loan-to-value ratios
range from 23.0% to 70.0% with a weighted average of 65.8%. The requirement to
maintain Additional Collateral generally terminates when the loan-to-value
ratio of the Additional Collateral Loan is reduced to a predetermined amount
provided 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 liquidate any 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
any liquidation will be assigned to the trustee for the benefit of the
certificateholders. No assurance, however, can be given as to the amount or
timing of proceeds, if any, that might be received by the servicer from the
Additional Collateral and remitted to the trustee for the benefit of the
certificateholders. The Additional Collateral Loans are not covered by primary
mortgage insurance policies. However, the assets of the Trust will include
rights under two limited purpose surety bonds issued by Ambac Assurance
Corporation and assigned to the trustee for the benefit of the
certificateholders which are intended to guarantee the ultimate receipt of
certain shortfalls in the net proceeds from the liquidation of Additional
Collateral (that 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 that Additional Collateral Loan. See "The
Mortgage Pools" in the accompanying prospectus.
Approximately 11.4% of the mortgage loans do not provide for any payments
of principal prior to their first Adjustment Date (each, an "INTEREST ONLY
LOAN"). These loans, however, are not balloon loans, and once they begin to pay
principal, they will fully amortize over their remaining term. All of the
Interest Only Loans are also Additional Collateral Loans.
SEE APPENDIX B FOR A DETAILED DESCRIPTION OF THE MORTGAGE LOANS.
THE INDICES
The Indices will consist of (i) One-Year CMT (as defined below), with
respect to 489 mortgage loans representing 68.4% of the principal balance of
the mortgage pool and (ii) Six-Month Libor (as defined below), with respect to
208 mortgage loans representing 31.6% 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, published in Federal Reserve
Statistical Release H.15(519) and most recently available as of the date 45
days before the applicable Adjustment Date. In the event 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, 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).
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<PAGE>
<TABLE>
<CAPTION>
ONE-YEAR CMT
---------------------------------------------------------------------------
MONTH 2000 1999 1998 1997 1996 1995
----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January ........... 6.12% 4.51% 5.24% 5.61% 5.09% 7.05%
February .......... 6.22 4.70 5.31 5.53 4.94 6.70
March ............. 6.22 4.78 5.39 5.80 5.34 6.43
April ............. 6.15 4.69 5.38 5.99 5.54 6.27
May ............... 6.33 4.85 5.44 5.87 5.64 6.00
June .............. 6.17 5.10 5.41 5.69 5.81 5.64
July .............. 6.08 5.03 5.36 5.54 5.85 5.59
August ............ 6.18 5.20 5.21 5.56 5.67 5.75
September ......... 6.13 5.25 4.71 5.52 5.83 5.62
October ........... 6.01 5.43 4.12 5.46 5.55 5.59
November .......... 5.55 4.53 5.46 5.42 5.43
December .......... 5.84 4.52 5.53 5.47 5.31
</TABLE>
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. 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, 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 2000 1999 1998 1997 1996 1995
----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January ........... 6.28875% 4.97094% 5.62500% 5.68750% 5.26563% 6.68750%
February .......... 6.33125 5.12688 5.69531 5.68750 5.29688 6.43750
March ............. 6.52625 5.06000 5.75000 5.93750 5.50000 6.50000
April ............. 6.73125 5.04250 5.81250 6.00000 5.56250 6.37500
May ............... 7.10500 5.24500 5.75000 6.00000 5.63281 6.00000
June .............. 7.00000 5.65000 5.81250 5.90625 5.78906 5.99609
July .............. 6.89375 5.70500 5.75000 5.80078 5.88281 5.87500
August ............ 6.83000 5.91875 5.59375 5.84375 5.77344 5.90625
September ......... 6.76000 5.96125 5.24609 5.84375 5.73438 5.94531
October ........... 6.72000 6.12000 4.97844 5.78516 5.56641 5.87500
November .......... 6.64000 6.06375 5.14766 5.91406 5.54297 5.68750
December .......... 6.13125 5.06563 5.84375 5.60156 5.50781
</TABLE>
ADDITIONAL INFORMATION
Appendix B contains important information about the mortgage loans
including:
o the mortgage interest rates, the Pass-Through Rates and the
original principal balances of the mortgage loans;
o the initial Adjustment Dates, the Margins and the Rate Ceilings;
o the years in which initial monthly payments on the mortgage loans
are due;
o the loan-to-value ratios of the mortgage loans as of the Cut-Off
Date;
o the types of mortgaged properties;
S-19
<PAGE>
o the geographic distribution by state of the mortgaged properties;
o the scheduled maturity years of the mortgage loans and the
weighted average remaining term to maturity of the mortgage
loans;
o the original terms to maturity of the mortgage loans;
o the number of mortgage loans originated under reduced
documentation or no documentation programs, if any;
o the stated owner occupancy status of the mortgaged properties at
the time the mortgage loans were originated;
o the mortgagor's purpose of financing;
o the number of multiple mortgage loans, if any, included in the
mortgage pool made to a single borrower; and
o the credit score ranges.
The credit score tables appearing in Appendix B show the credit scores, if
any, that the originators or underwriters of the mortgage loans collected for
some mortgagors. Third-party credit reporting organizations provide credit
scores as an aid to lenders in evaluating the creditworthiness of borrowers.
Although different credit reporting organizations use different methodologies,
higher credit scores indicate greater creditworthiness. Credit scores do not
necessarily correspond to the probability of default over the life of the
related mortgage loan because they reflect past credit history, rather than an
assessment of future payment performance. In addition, the credit scores shown
were collected from a variety of sources over a period of weeks or months, and
the credit scores do not necessarily reflect the credit scores that would be
reported as of the date of this prospectus supplement. Credit scores also only
indicate general consumer creditworthiness, and credit scores are not intended
to specifically apply to mortgage debt. Therefore, credit scores should not be
considered as an accurate predictor of the likelihood of repayment of the
related mortgage loans.
The pooling agreement will be available to purchasers of the certificates
through a Current Report on Form 8-K that will be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
certificates. In the event that mortgage loans are removed from or added to the
mortgage pool as described in the footnote on page S-16, that removal or
addition will be noted in the Current Report on Form 8-K.
S-20
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will be issued pursuant to the pooling agreement to be
dated as of the Cut-Off Date between PNC Mortgage Securities Corp., as
depositor and master servicer, and State Street Bank and Trust Company, as
trustee. A form of the pooling agreement is filed as an exhibit to the
registration statement of which this prospectus supplement is a part. The
prospectus contains important additional information regarding the terms and
conditions of the pooling agreement and the certificates. The certificates will
not be issued unless they receive the ratings from Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), and Moody's
Investors Service, Inc. ("MOODY'S") indicated under "Certificate Ratings" in
this prospectus supplement. As of December 28, 2000 (the "CLOSING DATE"), the
certificates, other than the Class B Certificates will qualify as "mortgage
related securities" within the meaning of the Secondary Mortgage Market
Enhancement Act of 1984.
The pooling agreement obligates the master servicer to make advances when
payments on the mortgage loans are delinquent and other conditions are met, as
described in this prospectus supplement under "--Advances."
The Mortgage Pass-Through Certificates, Series 2000-9 will consist of the
following classes:
o Class A-1
o Class A-2
o Class A-3
o Class A-4
o Class X
o Class B
o Class R-1
o Class R-2
Collectively, the certificates will represent the ownership of the property in
the Trust, legal title to which will be held by the trustee. The certificates
will have the following designations:
<TABLE>
<S> <C>
Class A Certificates ............... Class A-1, Class A-2, Class A-3 and Class A-4 Certificates.
Residual Certificates .............. Class R-1 and Class R-2 Certificates.
Regular Certificates ............... All classes of certificates other than the Residual Certificates.
Senior Certificates ................ Class A, Class X and Residual Certificates.
Subordinate Certificates ........... Class B Certificates.
Interest Only Certificates ......... Class X Certificates.
Physical Certificates .............. Residual Certificates.
Book-Entry Certificates ............ All classes of Certificates other than the Physical Certificates.
</TABLE>
The "CLASS PRINCIPAL BALANCE" for any Distribution Date and for any class
of certificates will equal the aggregate amount of principal to which it is
entitled on the Closing Date, reduced by all distributions of principal to that
class and all allocations of losses required to be borne by that class before
that Distribution Date.
The "CERTIFICATE PRINCIPAL BALANCE" for any certificate will be the
portion of the corresponding Class Principal Balance that it represents.
The Senior Certificates will comprise approximately 98.75% and the
Subordinate Certificates will comprise approximately 1.25% of the aggregate
principal balance of the mortgage loans as of the Cut-Off Date.
The Class A Certificates are each offered in minimum denominations
equivalent to not less than $100,000 initial Certificate Principal Balance each
and multiples of $1 in excess of that amount. The Class B Certificates are
offered in minimum denominations equivalent to not less than $25,000 initial
Certificate Principal Balance each and multiples of $1 in excess of that
amount. The Class X Certificates are offered in minimum denominations
equivalent to not less than $100,000 initial Class X
S-21
<PAGE>
Notional Amount each and multiples of $1 in excess of that amount. The Residual
Certificates each will have an initial Class Principal Balance of $50 and will
each be offered in registered, certificated form in a single denomination of a
99.99% percentage interest. The remaining 0.01% percentage interest of each of
the Residual Certificates will be retained by PNC Mortgage Securities Corp. as
described in this prospectus supplement under "Certain Federal Income Tax
Consequences."
BOOK-ENTRY REGISTRATION
Each class of Book-Entry Certificates will initially be represented by a
single certificate registered in the name of Cede & Co. ("CEDE"), as the
nominee of The Depository Trust Company ("DTC"). Cede will be the record holder
of the Book-Entry Certificates, but references to "Book-Entry
Certificateholders" should be understood to be references to the persons on
whose account DTC will be causing Cede to hold the Book-Entry Certificates. No
Book-Entry Certificateholder will be entitled to receive a registered
certificate. Unless registered certificates are issued under the limited
circumstances described in this prospectus supplement, all references to
actions by Book-Entry Certificateholders refer to actions taken by DTC
participants as described below, and all references in this prospectus
supplement to distributions, notices, reports, and statements to Book-Entry
Certificateholders refer to distributions, notices, reports, and statements to
Cede, as the registered holder of those certificates, for distribution to
Book-Entry Certificateholders in accordance with DTC procedures.
Certificateholders may hold their Book-Entry Certificates through DTC, if
they are DTC participants, or indirectly through organizations that are DTC
participants. Transfers between DTC participants will occur in accordance with
DTC rules. Cede, as nominee of DTC, will be the named certificateholder of the
registered certificates for the Book-Entry Certificates.
DTC has advised PNC Mortgage Securities Corp. 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 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, referred
to as indirect DTC participants, such as banks, brokers, dealers, and trust
companies that clear through or maintain a custodial relationship with a DTC
participant, either directly or indirectly.
Certificateholders that are not DTC participants or indirect DTC
participants but desire to purchase, sell, or otherwise transfer ownership of
or other interests in Book-Entry Certificates may do so only through DTC
participants and indirect DTC participants. In addition, unless registered
certificates are issued, certificateholders will receive all distributions of
principal and interest on the Book-Entry Certificates through DTC participants.
Under a book-entry format, certificateholders will receive payments after the
related Distribution Date because, although payments are required to be
forwarded to Cede, as nominee for DTC, on each Distribution Date, DTC will
forward payments to DTC participants, which will then be required to forward
them to indirect DTC participants or certificateholders.
It is anticipated that the sole "Certificateholder" (as that term is used
in the pooling agreement) for each class of Book-Entry Certificates will be
Cede, as nominee of DTC, and that Book-Entry Certificateholders will not be
recognized by the trustee as certificateholders under the pooling agreement.
Book-Entry Certificateholders will be permitted to exercise the rights of
certificateholders under the pooling agreement only indirectly through DTC
participants, who in turn will exercise their rights through DTC.
S-22
<PAGE>
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among DTC
participants on whose behalf it acts with respect to the Book-Entry
Certificates and is required to receive and transmit payments of principal and
interest, if any, on the Book-Entry Certificates. DTC participants and indirect
DTC participants with whom Book-Entry Certificateholders have accounts with
respect to the Book-Entry Certificates similarly are required to make
book-entry transfers and receive and transmit payments on behalf of their
respective Book-Entry Certificateholders. Accordingly, although owners of
Book-Entry Certificates will not possess registered certificates, the DTC rules
provide a mechanism by which owners of the Book-Entry Certificates through
their DTC participants will receive payments and will be able to transfer their
interest.
DTC can only act on behalf of DTC participants, who in turn act on behalf
of indirect DTC participants and certain banks. Therefore, the ability of a
Book-Entry Certificateholder to pledge Book-Entry Certificates to persons or
entities that do not participate in the DTC system, or to take other actions in
respect of Book-Entry Certificates, may be limited due to the lack of a
physical certificate for Book-Entry Certificates.
Neither DTC, Cede nor any other DTC nominee will consent or vote with
respect to the Book-Entry Certificates. Rather, DTC will assign Cede's
consenting or voting rights to those DTC participants to whose accounts the
Book-Entry Certificates are credited at the relevant time.
Although DTC has agreed to the procedures described above in order to
facilitate transfers of Book-Entry Certificates among DTC participants, it is
under no obligation to perform or continue to perform those procedures, which
may be discontinued at any time.
DEFINITIVE CERTIFICATES
The Book-Entry Certificates will be issued in fully registered,
certificated form to certificateholders or their nominees, rather than to DTC
or its nominee, only if:
o PNC Mortgage Securities Corp. advises the trustee in writing that
DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Book-Entry
Certificates and the trustee or PNC Mortgage Securities Corp. is
unable to locate a qualified successor;
o PNC Mortgage Securities Corp., at its option, elects to terminate
the book-entry system through DTC; or
o after the occurrence of an event of default under the pooling
agreement, certificateholders of Book-Entry Certificates
evidencing not less than 66% of the aggregate outstanding
Certificate Principal Balance advise the trustee and DTC through
DTC participants in writing that the continuation of a book-entry
system through DTC (or its successor) is no longer in the best
interest of the certificateholders.
If any of the above events occur, DTC is required to notify all DTC
participants of the availability of registered certificates. When DTC
surrenders its physical certificates and provides instructions for
re-registration, the trustee will issue registered certificates to replace the
Book-Entry Certificates. After that happens, the trustee will recognize the
holders of those registered certificates as certificateholders under the
pooling agreement.
The trustee or its paying agent, if any, will make distributions of
principal and interest on the registered certificates directly to holders of
those registered certificates in accordance with the pooling agreement
procedures described in this prospectus supplement. Distributions of principal
and interest on each Distribution Date will be made to holders in whose names
certificates were registered at the close of business on the related record
date. Distributions will be made by wire transfer in immediately available
funds for the account of each holder or, if a holder has not provided wire
instructions, by check mailed to the address of the holder as it appears on the
register maintained by the certificate registrar. The final payment on any
certificate will be made only on presentation and surrender of the certificate
at the offices of the trustee or its agent or such office or agency as is
S-23
<PAGE>
specified in the notice of final distribution to holders of certificates being
retired. The trustee will provide notice to registered certificateholders not
later than the fifteenth day of the month in which all remaining outstanding
certificates will be retired.
Registered certificates will be transferable and exchangeable at the
office or agency of the trustee in New York City. A reasonable service charge
may be imposed for any registration of transfer or exchange, and the trustee or
its agent may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection with registration of transfer or
exchange.
PRIORITY OF DISTRIBUTIONS
Beginning in January 2001, on the 25th day of each month, or if the 25th
day is not a business day, on the immediately succeeding business day (each, a
"DISTRIBUTION DATE"), before the Credit Support Depletion Date (as defined
below), to the extent of the Available Distribution Amount (as defined in this
prospectus supplement), distributions will be made in the order and priority as
follows:
(i) first, to the Class A, Class X and Residual Certificates, pro rata,
accrued and unpaid interest at their respective interest rates on
their respective Class Principal Balances or class notional amount,
as applicable;
(ii) second, to the Class A and Residual Certificates, as principal, the
Senior Principal Distribution Amount in the order described in
"--Distributions of Principal--Senior Principal Distribution Amount"
in this prospectus supplement;
(iii) third, to the Class B Certificates, accrued and unpaid interest at
their certificate interest rate on the Class B Principal Balance;
(iv) fourth, to the Class B Certificates, the Subordinate Principal
Distribution Amount;
(v) fifth, to the Certificate Insurer, an amount (the "REIMBURSEMENT
AMOUNT") equal to the sum of (a) all amounts previously paid by the
Certificate Insurer under the Class A-4 Certificate Insurance Policy
which have not been previously reimbursed and (b) interest on the
foregoing at the Late Payment Rate (as defined in the pooling
agreement);
(vi) sixth, to the Class B Certificates, up to the amount of unreimbursed
realized losses previously allocated, if any; provided, however,
that any amounts distributed pursuant to this clause (vi) will not
cause a further reduction in the Class B Principal Balance; and
(vii) seventh, to the Class R-1 Certificates.
The "CREDIT SUPPORT DEPLETION DATE" is the later of (i) the first
Distribution Date on which the Class B Principal Balance has been or will be
reduced to zero and (ii) the date on which coverage under the Mortgage
Portfolio Insurance Policy has been exhausted.
On each Distribution Date on or after the Credit Support Depletion Date,
distributions of the Available Distribution Amount will be made as follows:
(i) first, to the Class A and Class X Certificates, pro rata, accrued
and unpaid interest at their respective interest rates on their
respective Class Principal Balances or class notional amount, as
applicable;
(ii) second, to the Class A Certificates, pro rata, as principal, the
Senior Principal Distribution Amount; and
(iii) third, after payment of any Reimbursement Amount to the Certificate
Insurer, to the Class R-1 Certificates.
DISTRIBUTIONS OF INTEREST
With respect to each class of certificates, interest will be passed
through monthly on each Distribution Date, beginning in January 2001. For each
Distribution Date, an amount of interest will
S-24
<PAGE>
accrue on each class of certificates, generally equal to 1/12th of the
applicable annual certificate interest rate for that class multiplied by the
related Class Principal Balance or class notional amount, as applicable.
Interest to be distributed on the certificates on any Distribution Date will
consist of accrued and unpaid interest as of previous Distribution Dates and
interest accrued during the preceding calendar month.
The annual certificate interest rates for the certificates are listed in
the table on page S-4 of this prospectus supplement and in the notes to that
table.
The Class X Certificates will accrue interest on the Class X Notional
Amount. The "CLASS X NOTIONAL AMOUNT" for any Distribution Date will equal the
aggregate Class Principal Balance of the Class A and Residual Certificates
immediately before that Distribution Date. The Class X Notional Amount as of
the Closing Date will be approximately $255,600,493.
The "PASS-THROUGH RATE" for each mortgage loan is equal to the per annum
mortgage interest rate on that mortgage loan less the sum of the related master
servicing fee and servicing fee (each, as described in this prospectus
supplement under "--Servicing Compensation and Payment of Expenses") and less
the Excess Amount (as defined in the pooling agreement), which amount
represents the cost of the mortgage pool and special hazard insurance premiums.
Compensating Interest. PNC Mortgage Securities Corp., as master servicer,
is obligated to remit to the Certificate Account on the day before each
Distribution Date an amount equal to the lesser of (a) any shortfall for the
previous month in interest collections resulting from the timing of Payoffs (as
defined in this prospectus supplement) on the mortgage loans made from the 15th
day of the calendar month preceding such Distribution Date to the last day of
such month and (b) the applicable monthly master servicing fee payable to PNC
Mortgage Securities Corp., any reinvestment income realized by PNC Mortgage
Securities Corp., as master servicer, relating to Payoffs on the mortgage loans
made during the Prepayment Period (as defined in this prospectus supplement)
and interest payments on Payoffs received during the period of the first day
through the 14th day of the month of such Distribution Date. Compensating
Interest will be added to the Available Distribution Amount. Any remaining
shortfall in interest collections resulting from Curtailments (as defined in
this prospectus supplement) and the timing of Payoffs will be allocated pro
rata according to the amount of interest to which each class of certificates
would otherwise be entitled in reduction of that amount, except as otherwise
described below.
A reserve fund will be established by an initial deposit of $24,000 by the
underwriter into a separate account maintained by the trustee (the "CLASS A-4
RESERVE FUND"). The Class A-4 Reserve Fund will be beneficially owned by the
underwriter and will not be an asset of either REMIC. Any prepayment interest
shortfalls on Payoffs made from the 15th day of the calendar month preceding
the Distribution Date to the last day of the month that are not covered by the
master servicer's obligation to pay Compensating Interest that would otherwise
be allocable to the Class A-4 Certificates will be covered first by the Class
A-4 Reserve Fund and then by the Class A-4 Certificate Insurance Policy. Any
amounts remaining in the Class A-4 Reserve Fund on the earlier of (i) the
Distribution Date in September 2005 and (ii) the Distribution Date on which the
Class A-4 Principal Balance is reduced to zero will be distributed to the
underwriter.
See "Yield and Prepayment Considerations" in this prospectus supplement
and "Yield Considerations--Effective Interest Rate" in the prospectus.
S-25
<PAGE>
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 in this prospectus supplement. See "--Priority of
Distributions" in this prospectus supplement.
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 before the Distribution Date, (ii) the principal portion of
repurchase proceeds received with respect to any mortgage loan that 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 that were received on the mortgage loans
during the preceding calendar month, other than Payoffs, Curtailments or
Liquidation Principal (each, 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 that were received during the related Prepayment
Period.
With respect to each Distribution Date and each Payoff, the related
"PREPAYMENT PERIOD" will commence on the 15th day of the month preceding the
month in which the Distribution Date occurs (or, in the case of the first
Distribution Date, beginning on the Cut-Off Date) and will end on the 14th day
of the month in which the Distribution Date occurs. With respect to each
Distribution Date and each Curtailment, the related "PREPAYMENT PERIOD" will be
the month preceding the month in which the Distribution Date occurs.
"LIQUIDATION PRINCIPAL" is the principal portion of Liquidation Proceeds
(as defined in the pooling agreement and which includes payments under the
insurance policies) received with respect to each mortgage loan that became a
Liquidated Mortgage Loan (as defined below) (but not in excess of the principal
balance of that mortgage loan) during the calendar month preceding the month of
the Distribution Date. A "LIQUIDATED MORTGAGE LOAN" is a mortgage loan for
which the master servicer or a servicer has determined that it has received all
amounts that it expects to recover from or on account of the mortgage loan,
whether from Insurance Proceeds (as defined in the pooling agreement),
Liquidation Proceeds or otherwise.
The Class X Certificates will not be entitled to receive any distributions
of principal.
SENIOR PRINCIPAL DISTRIBUTION AMOUNT
On each Distribution Date before the Credit Support Depletion Date, an
amount, up to the amount of the Senior Principal Distribution Amount (as
defined below) for that Distribution Date, will be distributed as principal,
sequentially, as follows:
(i) first, sequentially, to the Class R-1 and Class R-2
Certificates, until their respective Class Principal Balances have each
been reduced to zero;
(ii) second, to the Class A-1 Certificates, until the Class A-1
Principal Balance has been reduced to zero;
(iii) third, to the Class A-2 Certificates, until the Class A-2
Principal Balance has been reduced to zero; and
(iv) fourth, to the Class A-3 and Class A-4 Certificates, pro rata,
until the Class A-3 Principal Balance and Class A-4 Principal Balance have
each 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" in this prospectus supplement) of the Principal
Prepayment Amount and (iii) the Senior Liquidation Amount (as defined below).
S-26
<PAGE>
The "SENIOR PERCENTAGE" for any Distribution Date will equal the aggregate
Class Principal Balance of the Class A and Class R Certificates divided by the
aggregate Class Principal Balance of the Class A, Class B and Class R
Certificates, in each case immediately before the Distribution Date. The
"SUBORDINATE PERCENTAGE" for any Distribution Date will equal the excess of
100% over the Senior Percentage for that date. The Senior Percentage and the
Subordinate Percentage as of the Closing Date will be approximately 98.75% and
1.25%, respectively.
The "SENIOR LIQUIDATION AMOUNT" for any Distribution Date will equal the
aggregate, for each mortgage loan that became a Liquidated Mortgage Loan during
the calendar month preceding the month of that Distribution Date, of the lesser
of (i) the Senior Percentage of the Stated Principal Balance of that mortgage
loan and (ii) the Senior Prepayment Percentage of the Liquidation Principal
with respect to that mortgage loan.
The "STATED PRINCIPAL BALANCE" of any mortgage loan as of any date of
determination is equal to its principal balance as of the Cut-Off Date, after
application of all scheduled principal payments due on or before the Cut-Off
Date, whether or not received, reduced by all amounts allocable to principal
that have been distributed to certificateholders with respect to that mortgage
loan on or before that date of determination, and as further reduced to the
extent that any realized loss on that mortgage loan has been allocated to one
or more classes of certificates on or before that date of determination.
SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT
On each Distribution Date, an amount, up to the amount of the Subordinate
Principal Distribution Amount for that Distribution Date, will be distributed
as principal to the Class B Certificates, to the extent of the Available
Distribution Amount remaining after distributions of interest and principal to
the Senior Certificates and distributions of interest to the Class B
Certificates. See "--Priority of Distributions" in this prospectus supplement.
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 aggregate Class Principal Balance of the Class A
Certificates has been reduced to zero, then the Subordinate Prepayment
Percentage will equal 100%.
The "SUBORDINATE LIQUIDATION AMOUNT" for any Distribution Date 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 that Distribution Date, over the Senior Liquidation Amount for
that Distribution Date.
The rights of the holders of the Class B Certificates to receive
distributions of interest and principal are subordinated to the rights of the
holders of the Senior Certificates to receive all distributions of interest and
principal to which they are entitled. See "--Subordination and Allocation of
Losses" in this prospectus supplement.
PRINCIPAL PREPAYMENTS
The "SENIOR PREPAYMENT PERCENTAGE" for any Distribution Date before
January 2006 will equal 100%. During the next four years, this percentage will
be calculated as follows:
o for any Distribution Date occurring in or between January 2006 and
December 2006, the Senior Percentage for that Distribution Date
plus 70% of the Subordinate Percentage for that Distribution Date;
o for any Distribution Date occurring in or between January 2007 and
December 2007, the Senior Percentage for that Distribution Date
plus 60% of the Subordinate Percentage for that Distribution Date;
S-27
<PAGE>
o for any Distribution Date occurring in or between January 2008 and
December 2008, the Senior Percentage for that Distribution Date
plus 40% of the Subordinate Percentage for that Distribution Date;
and
o for any Distribution Date occurring in or between January 2009 and
December 2009, the Senior Percentage for that Distribution Date
plus 20% of the Subordinate Percentage for that Distribution Date.
For any Distribution Date occurring in or after January 2010, the Senior
Prepayment Percentage will equal the Senior Percentage for that Distribution
Date.
There are important exceptions to the calculations of the Senior
Prepayment Percentage described in the above paragraph. On any Distribution
Date on or after the Distribution Date in January 2006, (i) if the Senior
Percentage for that Distribution Date exceeds the initial Senior Percentage as
of the Closing Date, then the Senior Prepayment Percentage for that
Distribution Date will equal 100%, and (ii) if the Subordinate Percentage for
such Distribution Date is greater than or equal to twice the Subordinate
Percentage as of the Closing Date, then the Senior Prepayment Percentage for
such Distribution Date will equal the Senior Percentage. Moreover, on any
Distribution Date, if the delinquencies or losses on the mortgage loans exceed
certain limits specified in the pooling agreement, then the Senior Prepayment
Percentage for that Distribution Date will equal 100%. Finally, if on any
Distribution Date the allocation to the Class A Certificates in the percentage
required would reduce the aggregate Class Principal Balance of the Class A
Certificates below zero, the Senior Prepayment Percentage for that Distribution
Date will be limited to the percentage necessary to reduce that balance 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 Senior Certificates to the extent described in
this prospectus supplement. The support provided by the Class B Certificates is
intended to enhance the likelihood of regular receipt by the Senior
Certificates of the full amount of the monthly distributions of interest and
principal to which they are entitled and to afford the Senior Certificates
protection against certain losses. The protection afforded to the Senior
Certificates by the Class B Certificates will be accomplished by the
preferential right on each Distribution Date of the Senior Certificates to
receive distributions of interest and principal to which they are entitled
before distributions of interest and principal to the Class B Certificates and
by the allocation of losses to the Class B Certificates prior to any allocation
of losses to the Senior Certificates.
Any loss realized with respect to a mortgage loan, except for Excess
Losses (as defined below), to the extent that (a) the loss is not covered by
the Mortgage Portfolio Insurance Policy or the Special Hazard Insurance Policy,
(b) coverage under the Mortgage Portfolio Insurance Policy has been exhausted
through the payment of claims or (c) an insurer defaults or otherwise does not
pay on a valid claim for the loss, will be allocated among the certificates as
follows:
(i) for losses allocable to principal:
(a) first, to the Class B Certificates, until the Class B Principal
Balance has been reduced to zero; and
(b) second, to the Class A Certificates, pro rata, according to, and
in reduction of, their Class Principal Balances; and
(ii) for losses allocable to interest:
(a) first, to the Class B Certificates, in reduction of accrued but
unpaid interest and then in reduction of the Class B Principal Balance; and
(b) second, to the Class A and Class X Certificates, pro rata
according to, and in reduction of, accrued but unpaid interest on such
classes, and then to the Class A Certificates, pro rata, according to, and
in reduction of, their Class Principal Balances.
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"EXCESS LOSSES" are (i) Special Hazard Losses in excess of the designated
amounts of coverage provided by the Special Hazard Insurance Policy, (ii) Fraud
Losses in excess of the Fraud Coverage (as described below), and (iii)
Bankruptcy Losses in excess of the Bankruptcy Coverage (as described below).
On each Distribution Date, if the aggregate Class Principal Balance of all
outstanding classes of certificates exceeds the aggregate Stated Principal
Balance of the mortgage loans (after giving effect to distributions of
principal and the allocation of all losses to the certificates on that
Distribution Date), that excess will be deemed a principal loss and will be
allocated to the Class B Certificates.
"PRO RATA ALLOCATION" is the allocation of the principal portion of losses
to all classes of certificates pro rata according to, and in reduction of,
their respective Class Principal Balances, and the allocation of the interest
portion of such losses pro rataaccording to, and in reduction of, the amount of
interest accrued but unpaid on each class of certificates, and then pro rata to
those classes of certificates according to, and in reduction of, their Class
Principal Balances.
Special Hazard Losses in excess of the coverage provided by the Special
Hazard Insurance Policy will be allocated to the outstanding certificates by
Pro Rata Allocation.
Fraud Losses in excess of the Fraud Coverage will be allocated to the
outstanding certificates by Pro Rata Allocation. As of the Cut-Off Date, the
"FRAUD COVERAGE" will equal 1.00% of the aggregate principal balance of the
mortgage loans. The Fraud Coverage will be reduced, from time to time, by the
amount of Fraud Losses allocated to the certificates. On each anniversary of
the Cut-Off Date, the Fraud Coverage will be reduced to the lesser of (i) on
the first anniversary of the Cut-Off Date, 1.00%, and on the second, third and
fourth anniversaries of the Cut-Off Date, 0.50% of the aggregate principal
balance of the mortgage loans as of the Due Date in the preceding month and
(ii) the excess of the Fraud Coverage as of the Cut-Off Date over cumulative
Fraud Losses allocated to the certificates since the Cut-Off Date. On the fifth
anniversary of the Cut-Off Date, the Fraud Coverage will be reduced to zero.
Bankruptcy Losses in excess of the Bankruptcy Coverage will be allocated
to the outstanding certificates by Pro Rata Allocation. As of the Cut-Off Date,
the "BANKRUPTCY COVERAGE" is expected to equal approximately $100,000. The
Bankruptcy Coverage will be reduced, from time to time, by the amount of
Bankruptcy Losses allocated to the certificates.
The Bankruptcy Coverage may also be reduced upon written confirmation from
the rating agencies that the reduction will not adversely affect the then
current ratings assigned to the certificates by the rating agencies. Such a
reduction, in the event of Bankruptcy Losses, could adversely affect the level
of protection afforded the Senior Certificates by the subordination of the
Class B Certificates.
THE RESIDUAL CERTIFICATES
The Class R-1 and Class R-2 Certificates will each receive $50 principal
on the first Distribution Date, as well as one month's interest on that amount.
These certificates will not receive any distributions of interest or principal
on any other Distribution Date. However, on each Distribution Date, the Class
R-1 Certificates will receive any amounts remaining (which are expected to be
zero) in the Certificate Account from the Available Distribution Amount after
distributions of interest and principal on the regular interests issued by
REMIC II (as defined in the pooling agreement) and payment of expenses, if any,
of the Trust, together with excess liquidation proceeds (as described in
paragraph (1)(g) of "--Available Distribution Amount" below), if any.
Distributions of any remaining amounts to the Class R-1 Certificates will be
subordinate to all payments required to be made with respect to the other
certificates and each class of REMIC I Regular Interest (as defined in the
pooling agreement) on any Distribution Date.
ADVANCES
For each mortgage loan, the master servicer will make advances to the
Certificate Account on each Distribution Date to cover any shortfall between
(i) payments scheduled to be received in
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respect of that mortgage loan and (ii) the amounts actually deposited in the
Certificate Account on account of those payments. However, if the master
servicer determines, in good faith, that an advance would not be recoverable
from insurance proceeds, liquidation proceeds or other amounts received with
respect to the mortgage loan, it will not be required to make an advance.
Advances are reimbursable to the master servicer from cash in the Certificate
Account before payments to the certificateholders if the master servicer
determines that advances previously made are not recoverable from insurance
proceeds, liquidation proceeds or other amounts recoverable for the applicable
mortgage loan.
AVAILABLE DISTRIBUTION AMOUNT
On each Distribution Date, the Available Distribution Amount for that
Distribution Date, which will generally include scheduled principal and
interest payments due on the Due Date immediately before that Distribution
Date, Curtailments received in the previous calendar month (as described
below), Payoffs received in the related Prepayment Period to the extent
described below and amounts received with respect to liquidations of mortgage
loans in the previous calendar month, will be distributed by or on behalf of
the trustee to the certificateholders, as specified in this prospectus
supplement.
The "AVAILABLE DISTRIBUTION AMOUNT" for any Distribution Date, as more
fully described in the pooling agreement, will equal the sum, with respect to
the mortgage loans, 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 (which will be at least ten days before that Distribution Date) and
not previously distributed (including advances made by servicers, proceeds
of mortgage loans that are liquidated, scheduled amounts of distributions
from buydown funds respecting buydown loans, if any, and amounts received
pursuant to the Credit Enhancements), except:
(a) all scheduled payments of principal and interest collected
but due on a date after that Distribution Date;
(b) all Curtailments received after the previous calendar month;
(c) all Payoffs received after the related Prepayment Period
immediately preceding that Distribution Date (together with any
interest payment received with those Payoffs to the extent that it
represents the payment of interest accrued on the mortgage loans for
the period subsequent to the previous calendar month), and interest
that was accrued and received on Payoffs received during the period
from the first to the 14th day of the month of that Distribution Date,
which interest will not be included in the calculation of the
Available Distribution Amount for any Distribution Date;
(d) Liquidation Proceeds and Insurance Proceeds received after
the previous calendar month;
(e) all amounts in the Certificate Account that are due and
reimbursable to a servicer or the master servicer under the pooling
agreement;
(f) the sum of the servicing fee, master servicing fee and the
Excess Amount for each mortgage loan and the insurance premium for the
Class A-4 Certificate Insurance Policy; and
(g) excess liquidation proceeds, which equals the excess, if any,
of aggregate Liquidation Proceeds received during the previous
calendar month over the amount that would have been received if
Payoffs had been made with respect to the mortgage loans on the date
those Liquidation Proceeds were received;
(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:
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(a) all advances made by the master servicer with respect to that
Distribution Date; and
(b) any amounts payable as Compensating Interest by the master
servicer on that Distribution Date; and
(3) the total amount of any cash received during the calendar month
prior to that Distribution Date by the trustee or the master servicer in
respect of the obligation or right of PNC Mortgage Securities Corp. to
repurchase any mortgage loans.
For each Distribution Date on or before September 2005, the trustee, on
behalf of the holders of the Class A-4 Certificates, may make a claim on the
Class A-4 Certificate Insurance Policy for the Deficiency Amount (as defined in
"Credit Enhancements--The Class A-4 Certificate Insurance Policy and the
Certificate Insurer" in this prospectus supplement).
LAST SCHEDULED DISTRIBUTION DATE AND ASSUMED FINAL MATURITY DATE
The Last Scheduled Distribution Date for the Class A, Class B and Residual
Certificates is the Distribution Date in December 2030, which is the
Distribution Date in the month after the scheduled maturity date for the latest
maturing mortgage loan.
Because the Class A Certificates are subject to the Mandatory Certificate
Purchase Agreement (as defined in the pooling agreement), the "ASSUMED FINAL
MATURITY DATE" for the Class A Certificates purchased before the Distribution
Date in September 2005 is the Distribution Date in September 2005. If the
Mandatory Purchase does not occur for any reason and for investors who purchase
the Class A Certificates after the Distribution Date in September 2005, the
Last Scheduled Distribution Date will be as described in the above paragraph.
The Last Scheduled Distribution Date for the Class X Certificates is the
Distribution Date in September 2005.
The actual rate of principal payments 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.
MANDATORY PURCHASE OF THE CLASS A CERTIFICATES
The Class A Certificates are subject to a mandatory purchase (the
"MANDATORY PURCHASE") on the Distribution Date in September 2005 pursuant to
the Mandatory Certificate Purchase Agreement. On that date, CDC Financial
Products Inc. ("CDC") will be obligated to purchase the Class A Certificates.
CDC is not affiliated with PNC Mortgage Securities Corp., the underwriter, the
trustee or any insurer in this transaction. Neither PNC Mortgage Securities
Corp., the trustee, the underwriter, the insurers nor any of their affiliates
is responsible for CDC's obligation to purchase the Class A Certificates. If
you have purchased a Class A Certificate and CDC fails to purchase your Class A
Certificate, or if you have purchased a Class A Certificate after the
Distribution Date in September 2005, your Class A Certificates will have a last
scheduled distribution date in December 2030 and no other party will be
obligated to purchase your certificates.
The purchase price for each Class A Certificate will be the sum of (i) the
outstanding principal balance of that certificate on the Distribution Date in
September 2005, after giving effect to distributions of principal and
allocations of principal losses otherwise made on such date and (ii) any
interest accrued during August 2005 that should have been, but was not,
distributed to certificateholders on the Distribution Date in September 2005.
The purchase price will not include payment of any interest accrued between
September 1, 2005 and the Distribution Date in September 2005.
The Class B, Class R-1 and Class R-2 Certificates are not subject to this
mandatory purchase.
CDC, a Delaware corporation and indirect subsidiary of Caisse des Depots
et Consignations, transacts capital markets operations with the guarantee of
Caisse des Depots et Consignations, which
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guarantee covers CDC's obligation to purchase the Class A Certificates. CDC has
a long-term rating of "AAA/Aaa" from Standard & Poor's and Moody's,
respectively.
The 1999 audited financial statements of Caisse des Depot et Consignations
are available for review at http://www.caissedesdepots.fr/cdd/uk/sommaire.htm.
Any investor who wishes to review copies of these financial statements may
request a written copy from CDC at 9 West 57th Street, NY, NY 10019.
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, PNC
Mortgage Securities Corp. may repurchase the mortgage loans and all property
acquired in respect of any mortgage loan remaining in the Trust, which will
cause the termination of the Trust and the retirement of the certificates. The
repurchase price will equal, after deductions of related advances by the master
servicer, the sum of (1) the aggregate outstanding principal balance of the
mortgage loans (other than Liquidated Mortgage Loans), plus accrued interest
thereon at the applicable Pass-Through Rates (without reduction for any Excess
Amount) through the last day of the month of repurchase, less any Bankruptcy
Losses realized with respect to the mortgage loans not already allocated to the
certificates and (2) the fair market value of all other property remaining in
the Trust.
The proceeds of such repurchase will be treated as a prepayment of the
mortgage loans for purposes of distributions to certificateholders.
Accordingly, an optional termination of the Trust will cause the outstanding
principal balance of the certificates to be paid in full through the
distribution of those 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 sum of the principal balance of the related mortgage
loan and advances made, and expenses incurred, with respect to that mortgage
loan as of the time that the Trust acquired the mortgaged property, and upon
that 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 AND PAYMENT OF EXPENSES
The master servicer will receive a fee for its services as master servicer
under the pooling agreement. The master servicing fee and the servicing fee are
calculated as a per annum percentage for each mortgage loan. The sum of the
master servicing fee, the servicing fee and the Excess Amount will range from
0.486% to 1.366%, with a weighted average of approximately 0.630%. The
servicing fee for some of the mortgage loans will increase by 0.125% per annum
after their first Adjustment Date. After all of the mortgage loans have reached
their first Adjustment Date, the sum of the master servicing fee, the servicing
fee and the Excess Amount will range from 0.486% to 1.491%, with a weighted
average of approximately 0.676%. Any prepayment penalty on a mortgage loan will
be paid as additional servicing compensation to the related servicer.
PNC Mortgage Securities Corp., 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 for certain expenses
such as those incurred by it in connection with the liquidation of defaulted
mortgage loans and the restoration of damaged mortgaged properties), including,
without limitation, the various items of expense described in the prospectus.
In particular, 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.
SPECIAL SERVICING AGREEMENTS
After the later of the exhaustion of coverage under the Mortgage Portfolio
Insurance Policy and the Distribution Date in September 2005, the pooling
agreement permits the master servicer to enter into one or more special
servicing agreements with unaffiliated owners of the Class B Certificates or of
a class of securities representing interests in the Class B Certificates. Under
those agreements, the owner may, with respect to delinquent mortgage loans:
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(a) instruct the master servicer to commence or delay foreclosure
proceedings, provided that the owner 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 those delinquent mortgage loans from the Trust
immediately before the commencement of foreclosure proceedings at a price
equal to the aggregate outstanding principal balance of the mortgage loans,
plus accrued interest thereon at the applicable mortgage interest rates
through the last day of the month in which the mortgage loans are
purchased; and/or
(c) assume all of the servicing rights and obligations with respect to
the delinquent mortgage loans so long as (i) the master servicer has the
right to transfer the servicing rights and obligations of the mortgage
loans to another servicer and (ii) the owner will service the mortgage
loans according to PNC Mortgage Securities Corp.'s servicing guidelines.
REPURCHASE OF DELINQUENT MORTGAGE LOANS
Under the pooling agreement, PNC Mortgage Securities Corp.:
o may purchase from the trustee any delinquent mortgage loan that
has been delinquent for 90 consecutive days or more; provided,
however, that the aggregate purchase price of the delinquent
mortgage loans so purchased by PNC Mortgage Securities Corp. may
not exceed 0.50% of the aggregate principal balance of all the
mortgage loans as of the Cut-Off Date;
o may direct the trustee to sell any delinquent mortgage loan that
has been delinquent for 90 consecutive days or more to a third
party, on receipt by the trustee of the purchase price of the
delinquent mortgage loan; or
o upon discovery of a breach of any representation or warranty made
to PNC Mortgage Securities Corp. in connection with its purchase
or acquisition of a delinquent mortgage loan, has the right, but
not the obligation, to repurchase that mortgage loan from the
trustee.
The purchase price of each delinquent mortgage loan purchased by PNC
Mortgage Securities Corp. or a third party will equal the sum of (i) the
scheduled principal balance of the mortgage loan, (ii) one month's interest on
the mortgage loan at the applicable Pass-Through Rate (without reduction for
any Excess Amount) and (iii) in the case of a purchase by a third party, the
amount of any related unreimbursed advances by the master servicer. The
proceeds of the purchase (except for the amount of any related unreimbursed
advances, which will be paid to the master servicer) will be treated as a
prepayment of the mortgage loans for purposes of distributions to
certificateholders.
REPORTS TO CERTIFICATEHOLDERS
The trustee may make available any reports required to be delivered by the
trustee pursuant to the pooling agreement and certain other information through
its corporate trust home page on the world wide web. The web page is currently
located at "corporatetrust.statestreet.com." Mortgage-backed securities
information is currently available by clicking the "Bondholder Reporting"
button and selecting the appropriate transaction. PNC Mortgage Securities Corp.
may make available any reports required to be delivered by PNC Mortgage
Securities Corp. pursuant to the prospectus or the pooling agreement and
certain other information through its home page on the world wide web. The web
page is located at "www.pncmsc.com" and reports are available by clicking on
"Investor Information."
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<PAGE>
DELINQUENCY, LOSS AND FORECLOSURE EXPERIENCE
The following table sets forth certain information, as reported to PNC
Mortgage Securities Corp. by its various servicers, concerning recent
delinquency, loss and foreclosure experience on mortgage loans included in
various mortgage pools underlying all series of PNC Mortgage Securities Corp.'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 shown in the following table (which includes mortgage loans with
various terms to stated maturity and 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 PNC Mortgage Securities Corp.'s mortgage pass-through
certificates have been recently originated, the current level of delinquencies,
losses and foreclosures may not be representative of the levels that may be
experienced over the lives of those mortgage loans.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED AT OR FOR THE YEAR ENDED AT OR FOR THE NINE MONTHS
DECEMBER 31, 1998 DECEMBER 31, 1999 ENDED SEPTEMBER 30, 2000
--------------------------- --------------------------- --------------------------
BY DOLLAR BY DOLLAR BY DOLLAR
AMOUNT OF AMOUNT OF AMOUNT OF
BY NO. OF LOANS BY NO. OF LOANS BY NO. OF LOANS
LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS)
----------- --------------- ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Total Rated Mortgage
Pass-Through Certificate
Portfolio .................. 74,769 $ 16,647.8 105,213 $ 21,983.8 103,995 $ 22,096.0
Average Balance(1) .......... 47,628 10,998.8 94,255 20,234.2 104,598 22,007.9
Period of Delinquency(2)
31 to 59 days ............ 2,178 488.8 2,068 362.7 2,203 383.4
60 to 89 days ............ 173 35.5 322 52.1 460 78.3
90 days or more .......... 108 23.1 261 44.2 405 72.8
------ ---------- ------- ---------- ------- ----------
Total Delinquent Loans ...... 2,459 $ 547.3 2,651 $ 459.0 3,068 $ 534.5
Delinquency Rate ............ 3.29% 3.29% 2.52% 2.09% 2.95% 2.42%
Foreclosures(3) ............. 217 $ 43.3 340 $ 68.1 536 $ 93.8
Foreclosure Ratio(4) ........ 0.29% 0.26% 0.32% 0.31% 0.52% 0.42%
Covered Losses(5) ........... $ 8.6 $ 2.8 $ 3.1
Applied Losses(6) ........... $ 0.6 $ 0.7 $ 2.4
</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 begun.
(3) Includes mortgage loans for which foreclosure proceedings had been
instituted or for 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 that 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) that 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 the 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 the 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.
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YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity of each class of certificates will depend upon,
among other things, the price at which the certificates are purchased, the
applicable interest rate on the certificates, the actual characteristics of the
mortgage loans, the rate of principal payments (including prepayments) on the
mortgage loans, the rate of liquidations on the mortgage loans and whether, in
the case of the Class A Certificates, the Mandatory Purchase occurs. The yield
to maturity to holders of the certificates will be lower than the yield to
maturity otherwise produced by the applicable interest rate and purchase price
of the certificates because principal and interest distributions will not be
payable to the certificateholders until the 25th day of the month following the
month of accrual (without any additional distribution of interest or earnings
with respect to the delay).
The mortgage interest rates on the mortgage loans will be fixed for
approximately the first five years after origination and thereafter will adjust
either every six months or annually and may vary significantly over time. When
a mortgage loan begins its adjustable period, increases and decreases in the
mortgage interest rate on that mortgage loan will be limited by the Periodic
Cap, if any, the Rate Ceiling and the Rate Floor, if any, and will be based on
the applicable Index in effect on the applicable date prior to the related
Adjustment Date plus the applicable Margin. The applicable Index may not rise
and fall consistently with mortgage interest rates. 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, each mortgage loan has a Rate Ceiling, and each mortgage loan has a
Rate Floor, which in some cases is equal to the related 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. These 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 these 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 interest rate on the certificates 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 the
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 that Due Date, but the principal
is not distributed to certificateholders until the Distribution Date in the
next month; therefore, one month of interest shortfall accrues on the amount of
such Curtailment.
To reduce the adverse effect on certificateholders from the deficiency in
interest payable as a result of a Payoff on a mortgage loan between its Due
Dates, the master servicer will pass through Compensating Interest to the
certificateholders to the limited extent and in the manner described below. The
master servicer is obligated to remit to the Certificate Account on the day
before each Distribution Date with respect to the mortgage loans that
experience a Payoff between the 15th day and the last day of the month before
the Distribution Date, an amount equal to the lesser of (a) any shortfall for
the previous month in interest collections resulting from the timing of Payoffs
made from
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the 15th day of the calendar month before the Distribution Date to the last day
of the month and (b) the applicable monthly master servicing fee payable to the
master servicer, any reinvestment income realized by the master servicer
relating to Payoffs made during the Prepayment Period, and interest payments on
the Payoffs received during the period of the first day through the 14th day of
the month of the Distribution Date. Payoffs received from the first day through
the 14th day of any month will be passed through to the certificateholders on
the Distribution Date of the same month (except for Payoffs received from the
Cut-Off Date through December 14, 2000, which will be passed through to the
certificateholders on the January 2001 Distribution Date), rather than on the
Distribution Date of the following month, together with a full month's interest
with respect to the prior month. Accordingly, no Compensating Interest will be
payable with respect to Payoffs received during that period. Payoffs received
during the period from the 15th day through the last day of any month will be
passed through on the Distribution Date in the following month, and, in order
to provide for a full month's interest payment with respect to the prior month,
Compensating Interest will be passed through to certificateholders with respect
to that period.
To the extent that the amount allocated to pay Compensating Interest is
insufficient to cover the deficiency in interest payable as a result of the
timing of a Payoff, or to the extent that there is an interest deficiency from
a Curtailment, such remaining deficiency will be allocated to the certificates
pro rata according to the amount of interest to which each class of
certificates would otherwise be entitled in reduction thereof.
RATE OF PAYMENTS
The rate of principal payments on the certificates entitled to receive
principal generally is directly related to the rate of principal payments on
the mortgage loans, which may be in the form of scheduled payments, principal
prepayments or liquidations. See "Risk Factors" in this prospectus supplement
and "Yield Considerations" in the prospectus. Except for approximately 0.7% (by
principal balance) of the mortgage loans, which have prepayment penalties if
mortgagors make any prepayments during a period ranging from three to five
years after origination, mortgagors may prepay the mortgage loans at any time
without penalty.
A higher than anticipated rate of prepayments would reduce the aggregate
principal balance of the mortgage loans more quickly than expected. As a
consequence, aggregate interest payments with respect to the mortgage loans
would be substantially less than expected. Therefore, a higher rate of
principal prepayments could result in a lower than expected yield to maturity
on each class of certificates purchased at a premium, and in certain
circumstances investors may not fully recover their initial investments.
Conversely, a lower than expected rate of principal prepayments would reduce
the return to investors on any classes of certificates purchased at a discount,
in that principal payments with respect to the mortgage loans would occur later
than anticipated. There can be no assurance that certificateholders will be
able to reinvest amounts received with respect to the certificates at a rate
that is comparable to the applicable interest rate on such certificates.
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 "CONSTANT PREPAYMENT RATE" or "CPR") assumes that the
outstanding principal balance of a pool of mortgage loans prepays at a
specified constant annual rate. In generating monthly cash flows, this rate is
converted to an equivalent monthly rate. A 5% CPR assumes a constant per annum
rate of prepayment of 5.0% of the then outstanding principal balance of the
pool of mortgage loans. Likewise, a 12% CPR, 18% CPR, 20% CPR and 25% CPR
assumes a constant per annum rate of prepayment of 12%, 18%, 20% and 25%,
respectively, of the then outstanding principal balance of the pool of mortgage
loans.
None of the prepayment rates purports 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
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<PAGE>
pool of mortgage loans, including the mortgage pool underlying the
certificates. Furthermore, there is no assurance that the mortgage loans will
prepay at any given percentage of the CPR. 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 underlying the certificates, those
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing rates mortgage interest 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 underlying the certificates, the rate of prepayment
would be expected to decrease. A comparatively low interest-rate environment
may result in a higher than expected rate of prepayments on the mortgage loans
and, correspondingly, an earlier than expected retirement of the certificates.
This prospectus supplement does not describe the specific factors that
will affect the prepayment of the mortgage loans or their relative importance.
Factors not identified in this prospectus supplement may significantly affect
the prepayment rate of the mortgage loans. In particular, this prospectus
supplement makes no representation as to either the percentage of the principal
amount of the mortgage loans that will be paid as of any date or the overall
rate of prepayment.
For purposes of the tables in Appendix A, it is assumed (collectively, the
"MODELING ASSUMPTIONS") that the mortgage loans are comprised of the groups of
hypothetical mortgage loans, which have the common characteristics indicated:
GROUPS OF HYPOTHETICAL MORTGAGE LOANS
<TABLE>
<CAPTION>
STATED
HYPOTHETICAL UNPAID REMAINING CALCULATED MORTGAGE PASS-
LOAN PRINCIPAL TERM AGE INTEREST THROUGH RATE
NUMBER BALANCE (MONTHS) (MONTHS) RATE (%) RATE (%) MARGIN (%) CEILING (%)
------ ------- -------- -------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 94,759,383.08 357 3 7.95995553 7.45020265 2.82440116 12.96066968
2 $ 21,057,760.49 351 9 7.87521064 7.22984159 2.79549816 12.88820171
3 $ 17,887,640.39 353 7 7.91910469 7.29347105 2.76853329 12.91910469
4 $ 15,762,887.23 354 6 7.94030117 7.32151733 2.76145218 12.94030117
5 $ 13,215,484.09 355 5 8.12058971 7.49410897 2.76548074 13.12058971
6 $ 13,841,728.85 356 4 8.00955337 7.39855337 2.75000000 13.00955337
7 $ 492,846.96 355 5 8.10213463 7.31925219 2.75000000 14.10213463
8 $ 15,386,023.90 356 4 8.35912411 7.52955137 2.00000000 14.35912411
9 $ 36,708,473.43 358 2 8.26720213 7.40620213 2.00000000 14.26720213
10 $ 29,723,714.80 359 1 8.21578928 7.58584673 2.00000000 14.21578928
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM
INTEREST INCREASE ON
HYPOTHETICAL MONTHS TO ONLY FIRST
LOAN RATE FIRST RATE PERIOD ADJUSTMENT PERIODIC
NUMBER FLOOR (%) ADJUSTMENT (MONTHS) DATE (%) CAP (%) INDEX
------ --------- ---------- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
1 2.82550271 57 None 4.96856310 2.00000000 1 YR. CMT
2 2.79549816 51 None 5.00000000 2.00000000 1 YR. CMT
3 2.76853329 53 None 5.00000000 2.00000000 1 YR. CMT
4 2.76145218 54 None 5.00000000 2.00000000 1 YR. CMT
5 2.76548074 55 None 5.00000000 2.00000000 1 YR. CMT
6 2.75000000 56 None 5.00000000 2.00000000 1 YR. CMT
7 2.75000000 55 55 6.00000000 2.00000000 1 YR. CMT
8 2.00000000 56 56 6.00000000 None 6 MO. LIBOR
9 2.00000000 58 58 6.00000000 None 6 MO. LIBOR
10 2.00000000 59 59 6.00000000 None 6 MO. LIBOR
</TABLE>
S-37
<PAGE>
and that:
o the One-Year CMT Index remains constant at 5.72%;
o the Six-Month Libor Index remains constant at 6.45125%;
o all servicing fees remain constant;
o scheduled payments on all mortgage loans are received on the
first day of each month beginning January 1, 2001;
o any Payoffs on the mortgage loans are received on the last day of
each month beginning in December 2000 and include 30 days of
interest thereon;
o there are no defaults or delinquencies on the mortgage loans;
o optional termination of the Trust does not occur;
o there are no partial prepayments on the mortgage loans and
prepayments are computed after giving effect to scheduled
payments received on the following day;
o the mortgage loans prepay at the indicated CPR;
o the date of issuance for the certificates is December 28, 2000;
o cash distributions are received by the certificateholders on the
25th day of each month when due; and
o the scheduled monthly payments for each hypothetical mortgage
loan are computed based upon its unpaid principal balance,
mortgage interest rate and stated remaining term such that each
hypothetical mortgage loan will fully amortize on its maturity
date.
Any discrepancy between the actual characteristics of the mortgage loans
underlying the certificates 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 tables in Appendix A and the weighted
average lives of the certificates. In addition, to the extent that the
characteristics of the actual mortgage loans and the initial Class Principal
Balances differ from those assumed in preparing the tables in Appendix A, the
outstanding Class Principal Balance of any class of certificates may be reduced
to zero earlier or later than indicated by the tables.
IN THE CASE OF THE CLASS A CERTIFICATES, TWO TABLES HAVE BEEN PROVIDED FOR
EACH CLASS OF CERTIFICATES. THE FIRST SET OF TABLES ASSUMES THAT THE MANDATORY
PURCHASE WILL OCCUR AND THUS SHOWS THE WEIGHTED AVERAGE LIVES USING AN ASSUMED
FINAL MATURITY DATE OF SEPTEMBER 2005. THE SECOND SET OF TABLES IS PROVIDED FOR
HOLDERS OF CLASS A CERTIFICATE AFTER THE DISTRIBUTION DATE IN SEPTEMBER 2005
AND THEREFORE ASSUMES THAT YOU WILL CONTINUE RECEIVING PRINCIPAL AND INTEREST
UNTIL THE CLASS PRINCIPAL BALANCE OF THE CLASS A CERTIFICATES IS REDUCED TO
ZERO.
Variations in actual prepayment experience may increase or decrease the
percentages of the original outstanding Class Principal Balances and the
weighted average lives shown in the tables in Appendix A. Variations may occur
even if the average prepayment experience of all the mortgage loans equals the
indicated CPR. There is no assurance, however, that prepayments of the mortgage
loans will conform to any given CPR.
Based on the assumptions described above, the tables in Appendix A
indicate the projected weighted average lives of the certificates and provide
the percentages of the initial outstanding Class Principal Balance of each
class of certificates that would be outstanding after each of the dates shown
at various CPR percentages.
LACK OF HISTORICAL PREPAYMENT DATA
There are no historical prepayment data available for the mortgage pool
underlying the certificates, and comparable data are not available because the
mortgage loans underlying the certificates are not a representative sample of
mortgage loans generally. In addition, historical data
S-38
<PAGE>
available with respect to mortgage loans underlying mortgage pass-through
certificates issued by the Government National Mortgage Association ("GNMA"),
Fannie Mae and Freddie Mac may not be comparable to prepayments expected to be
experienced by the mortgage pool because the mortgage loans underlying the
certificates may have characteristics, which differ from the mortgage loans
underlying certificates issued by GNMA, Fannie Mae and Freddie Mac.
PNC Mortgage Securities Corp. makes no representation that the mortgage
loans will prepay in the manner or at any of the rates assumed in the tables in
Appendix A or below in "--Yield Considerations with Respect to the Class X
Certificates" and "--Yield Considerations with Respect to the Class B
Certificates." Each investor must make its own decision as to the appropriate
prepayment assumptions to be used in deciding whether or not to purchase any of
the certificates. Since the rate of principal payments (including prepayments)
with respect to, and repurchases of, the mortgage loans will significantly
affect the yields to maturity on the certificates (and especially the yields to
maturity on the Class X and Class B Certificates), prospective investors are
urged to consult their investment advisors as to both the anticipated rate of
future principal payments (including prepayments) on the mortgage loans and the
suitability of the certificates to their investment objectives.
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS X CERTIFICATES
The yields to maturity on the Class X Certificates will be extremely
sensitive to the level of prepayments on the mortgage loans. Because the
interest payable to the Class X Certificates until September 2005 is based on
the excess of the Weighted Average Pass-Through Rate over the weighted average
certificate interest rate of the Class A Certificates (provided, however, that
in making this calculation, 0.040% will be added to the Class A-4 certificate
interest rate), the yield to maturity on those certificates will be adversely
affected as a result of faster than expected prepayments on the mortgage
loans--especially those with the highest Pass-Through Rates. If the Weighted
Average Pass-Through Rate is lower than the amount of interest needed to pay
the Class A Certificates their interest (adjusted as described above), holders
of the Class X Certificates will receive no distributions of interest that
month. Prospective investors should fully consider the risks associated with an
investment in the Class X Certificates, including the possibility that if the
rate of prepayments on the mortgage loans is rapid or an optional termination
of the Trust occurs, investors may not fully recover their initial investment.
AFTER THE DISTRIBUTION DATE IN SEPTEMBER 2005, THE CLASS X CERTIFICATES
WILL NO LONGER BE ENTITLED TO DISTRIBUTIONS OF ANY KIND.
To illustrate the significance of different rates of prepayment on the
distributions on the Class X Certificates, the following table indicates the
approximate pre-tax yields to maturity (on a corporate bond equivalent basis)
under the different percentages of the CPR indicated.
Any differences between the assumptions and the actual characteristics and
performance of the mortgage loans and of the certificates may result in yields
to maturity being different from those shown in the table. DISCREPANCIES
BETWEEN ASSUMED AND ACTUAL CHARACTERISTICS AND PERFORMANCES UNDERSCORE THE
HYPOTHETICAL NATURE OF THE TABLE, WHICH IS PROVIDED ONLY TO GIVE A GENERAL
SENSE OF THE SENSITIVITY OF YIELDS TO MATURITY IN VARYING PREPAYMENT
SCENARIOS. In addition, it is highly unlikely that the mortgage loans will
prepay at a constant level of the CPR until maturity or that all of such
mortgage loans will prepay at the same rate. The timing of changes to the rate
of prepayments may significantly affect the actual yield to maturity to an
investor, even if the average rate of prepayments is consistent with an
investor's expectation. In general, the earlier a payment of principal on the
mortgage loans, the greater the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield to maturity of prepayments occurring
at a rate higher (or lower) than the rate anticipated by the investor during
the period immediately following the issuance of the certificates will not be
equally offset by a subsequent like reduction (or increase) in the rate of
prepayments.
The sensitivity table for the Class X Certificates below is based on the
Modeling Assumptions and assumes further that the certificates are purchased at
the price set forth in the table plus accrued interest from the Cut-Off Date.
There can be no assurance that the mortgage loans will have the
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<PAGE>
assumed characteristics or will prepay at any of the rates shown below, that
the purchase price of the certificates will be as assumed or that the pre-tax
yields to maturity will correspond to any of the pre-tax yields shown in the
table below. The actual price to be paid on the Class X Certificates has not
been determined and will depend on the characteristics of the mortgage pool as
ultimately constituted. In addition to any other factors an investor may deem
material, each investor must make its own decision as to the appropriate
prepayment assumptions to be used in deciding whether or not to purchase a
class of certificates.
PRE-TAX YIELD TO MATURITY OF THE CLASS X CERTIFICATES AT AN
ASSUMED PURCHASE PRICE OF 0.65625% OF THE INITIAL CLASS X NOTIONAL AMOUNT
PLUS ACCRUED INTEREST FROM THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENTAGE OF THE CPR
--------------------------------------------------------------------
5% 12% 18% 20% 25%
------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
35.38% 28.16% 18.12% 14.44% 5.32%
</TABLE>
On the basis of a constant prepayment rate of approximately 27% of the
CPR, the assumed purchase price set forth above, plus accrued interest from the
Cut-Off Date, and the assumptions described above, the pre-tax yield to
maturity of the Class X Certificates would be approximately 0%. If the actual
prepayment rate were to exceed the rates assumed above, even for one month,
while equaling such rates for all other months, an investor in the Class X
Certificates would not fully recover the initial purchase price of the
certificates.
The pre-tax yields to maturity set forth in the preceding table were
calculated by determining the monthly discount rates (whether positive or
negative), which, when applied to the assumed streams of cash flows to be paid
on the Class X Certificates, would cause the discounted present values of those
assumed streams of cash flows to equal the assumed purchase price, plus accrued
interest, where applicable. These monthly discount rates were converted to
corporate bond equivalent rates, which are higher than the monthly discount
rates because they are based on semiannual compounding. These yields to
maturity do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as distributions on
these certificates and thus do not reflect the return on any investment in
these certificates when any reinvestment rates other than the discount rates
are considered.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The Residual Certificateholders' after-tax rate of return on their
certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their
certificates during the early years of the REMIC's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
certificates the present value of which substantially exceeds the present value
of distributions payable thereon and of any tax benefits that may arise with
respect thereto. Accordingly, the after-tax rate of return on the Residual
Certificates may be negative or may otherwise be significantly adversely
affected. The timing and amount of taxable income attributable to the Residual
Certificates will depend on, among other things, the timing and amounts of
prepayments and losses experienced with respect to the mortgage pool.
The Residual Certificateholders should consult their own tax advisors as
to the effect of taxes and the receipt of any payments received in connection
with the purchase of the Residual Certificates on after-tax rates of return on
the Residual Certificates. See "Certain Federal Income Tax Consequences" in
this prospectus supplement and in the prospectus.
ADDITIONAL INFORMATION
PNC Mortgage Securities Corp. intends to file with the Securities and
Exchange Commission additional yield tables and other computational materials
with respect to one or more classes of the
S-40
<PAGE>
certificates on a Current Report on Form 8-K. Those tables and materials were
prepared by the underwriter at the request of certain prospective investors,
based on assumptions provided by, and satisfying the special requirements of,
those prospective investors. Those tables and materials are preliminary in
nature, and the information contained in the Current Report is subject to, and
superseded by, the information in this prospectus supplement.
CREDIT ENHANCEMENTS
MORTGAGE PORTFOLIO INSURANCE POLICY
Subject to the limitations described below, certain losses realized on the
mortgage loans because of defaults by the mortgagors, to the extent those
losses are not covered by any primary insurance policy, will be covered by a
mortgage portfolio insurance policy (the "MORTGAGE PORTFOLIO INSURANCE
POLICY"), as endorsed and as otherwise modified, issued by General Electric
Mortgage Insurance Corporation ("GEMICO"), a North Carolina corporation with
its administrative offices in Raleigh, North Carolina. The Mortgage Portfolio
Insurance Policy will include a schedule of mortgage loans covered (each, an
"INSURED LOAN"), and such schedule will include the loan-to-value ratio and
Insured Loan coverage percentage (PROVIDED THAT COVERAGE UNDER THE MORTGAGE
PORTFOLIO INSURANCE POLICY WILL REDUCE UNINSURED EXPOSURE TO AN AMOUNT EQUAL TO
40% OF THE LESSER OF THE APPRAISED VALUE OR PURCHASE PRICE, AS THE CASE MAY BE,
OF THE RELATED MORTGAGED PROPERTY, IN EACH CASE, ON THE CUT-OFF DATE). THE
MORTGAGE LOANS WITH LOAN-TO-VALUE RATIOS LESS THAN 40% ARE NOT COVERED BY THE
MORTGAGE PORTFOLIO INSURANCE POLICY. The master servicer will present claims
thereunder on behalf of itself, the trustee and certificate holders and,
subject to certain limitations set forth in the pooling agreement, is required
to use commercially reasonable efforts to maintain the Mortgage Portfolio
Insurance Policy during the term of the pooling agreement, unless coverage
under the Mortgage Portfolio Insurance Policy has been exhausted through the
payment of claims. However, in no case will the master servicer be required to
expend its own funds to maintain the Mortgage Portfolio Insurance Policy.
The information provided by GEMICO with respect to its mortgage guaranty
insurance is limited to matters relating to the provision of such insurance and
is not intended to address matters respecting investment in the certificates
which are the subject of this prospectus supplement.
GEMICO furnished the information contained in this section titled "Credit
Enhancements--Mortgage Portfolio Insurance Policy" but has made no independent
verification of any other information in this prospectus supplement and makes no
representation as to the correctness or completeness thereof. Neither PNC
Mortgage Securities Corp., the underwriter, the trustee nor any of their
affiliates makes any representations as to the accuracy or completeness of the
information furnished.
The following description of the Mortgage Portfolio Insurance Policy is
only a brief summary thereof and does not purport to be complete with respect
to any nonuniform amendment thereto required by a particular jurisdiction. In
addition, the description does not purport to be comprehensive or definitive,
and such summary is qualified in its entirety by reference to the Mortgage
Portfolio Insurance Policy that will be issued by GEMICO. For a more complete
description of the provisions, terms and conditions of the Mortgage Portfolio
Insurance Policy described herein, prospective certificate holders are
encouraged to review the Mortgage Portfolio Insurance Policy, copies of which
are available upon request from the Trustee.
GEMICO, a North Carolina corporation with its administrative offices in
Raleigh, North Carolina, is a monoline private mortgage insurance company.
GEMICO was organized in May 1980 with an initial capitalization of $25 million
to provide primary mortgage guaranty insurance coverage on residential mortgage
loans, as well as mortgage pool and portfolio insurance policies which enhance
insurance coverage for various types of mortgage-related securities. GEMICO is
an indirect wholly owned subsidiary of General Electric Capital Corporation, a
New York corporation, which is an indirect wholly owned subsidiary of General
Electric Company. GEMICO is licensed in 50 states and the District of Columbia
to offer such insurance and is approved as a private mortgage insurer by FHLMC
and FNMA.
S-41
<PAGE>
As of December 31, 1999, GEMICO reported on its annual report, which is
maintained on a statutory accounting basis, assets of $2,947,600,000,
policyholders' surplus of $694,022,000 and a statutory contingency reserve of
$1,638,862,000. As of December 31, 1999, GEMICO reported on its annual report
total insurance in force (including primary and mortgage pool insurance) of
$105,693,125,000. An Annual Statement for GEMICO for the year ended December
31, 1999, prepared on the Convention Form prescribed by the National
Association of Insurance Commissioners, is available upon request to the
trustee. As of September 30, 2000, GEMICO reported on its unaudited quarterly
report, which is maintained on a statutory accounting basis, assets of
$3,195,114,000 policyholders' surplus of $810,131,000 and a statutory
contingency reserve of $1,859,613,000. As of September 30, 2000, GEMICO
reported on its unaudited quarterly report total insurance in force (including
primary and mortgage pool insurance) of $110,072,529,000.
The trustee will be the named insured (the "INSURED") under the Mortgage
Portfolio Insurance Policy. Consistent with its obligations under the pooling
agreement, the master servicer may act on behalf of the Insured with respect to
fulfilling certain conditions to payment of a claim by GEMICO under the
Mortgage Portfolio Insurance Policy.
Under the Mortgage Portfolio Insurance Policy, GEMICO agrees, subject to
the terms and conditions of the Mortgage Portfolio Insurance Policy, to pay to
the Insured benefits as set forth in the Mortgage Portfolio Insurance Policy
upon a default by a mortgagor on an Insured Loan. A default on an Insured Loan
is the failure by the mortgagor to pay when due one (1) or more regular monthly
periodic payments due under the terms of the mortgage loan or the violation by
the mortgagor of any due-on-sale clause but does not mean the violation by the
mortgagor of any other term or condition of the mortgage loan or any instrument
securing the mortgage loan and creating a lien or charge on the mortgaged
property which is the basis for an acceleration of maturity of the mortgage
loan and a foreclosure action under the instrument securing the mortgage loan
and creating a lien or charge on the mortgaged property. A loss under the
Mortgage Portfolio Insurance Policy is deemed to have occurred when a default
occurs, notwithstanding that the amount of the loss is not then either
presently ascertainable or due and payable.
Subject to compliance with the terms and conditions of the Mortgage
Portfolio Insurance Policy by the Insured, the coverage for each Insured Loan
shall continue in force until (i) the mortgage loan has been paid in full, (ii)
the mortgage loan has given rise to a claim for loss which GEMICO has paid, or
(iii) the mortgage loan has been repurchased or otherwise removed from the
transaction. There is no refund of premium on cancellation by the Insured of
coverage on a mortgage loan. GEMICO may cancel coverage on an individual
mortgage loan, to the extent permitted by applicable law, (i) if any of the
Insured's representations were materially inaccurate with respect to the
related mortgage loan or (ii) if the Insured has breached its obligation to pay
subsequent premiums, or (iii) if the Insured has otherwise materially breached
any of its obligations under the Mortgage Portfolio Insurance Policy in
connection with such mortgage loan. There shall be no refund of premium on
cancellation by GEMICO of coverage on a mortgage loan, except where GEMICO
chooses rescission of coverage as a remedy, in which case GEMICO will return
all paid premiums applicable to such Insured Loan retroactively to the
Insurance Effective Date (as defined in the Mortgage Portfolio Insurance
Policy) or the continuation date, as applicable. Coverage on a mortgage loan
automatically terminates without refund of premium if: (i) unless advance
written approval is obtained from GEMICO, the Insured (a) makes any change in
the terms of the mortgage loan, except as permitted by the terms of the
mortgage note, (b) allows any change in the mortgaged property or (c) releases
the mortgagor from liability on the mortgage loan; (ii) unless advance written
approval is obtained from GEMICO, the mortgage loan is assumed with the prior
approval of the Insured (it being understood that coverage will continue if the
Insured cannot exercise a due-on-sale clause under the related mortgage note or
applicable law); and (iii) GEMICO is not notified, in accordance with the
Mortgage Portfolio Insurance Policy, of a sale, assignment or transfer of
servicing of the mortgage loans covered by the Mortgage Portfolio Insurance
Policy.
The Insured may terminate the Mortgage Portfolio Insurance Policy on
thirty (30) days' written notice to GEMICO if (i) GEMICO ceases to be qualified
under applicable state law to write the
S-42
<PAGE>
insurance provided by the Mortgage Portfolio Insurance Policy or if GEMICO
fails to maintain a rating of "AA" or its equivalent by two or more nationally
recognized rating agencies during the term of the Mortgage Portfolio Insurance
Policy or (ii) the total outstanding unpaid principal balance of the mortgage
loans has been reduced to no more than ten percent (10%) of the total unpaid
principal balance of the mortgage loans as of the Cut-Off Date (however, the
Insured has agreed in the pooling agreement not to exercise such option unless
the Trust has been terminated). The Insured does not have any other right to
cancel the Mortgage Portfolio Insurance Policy. There is no refund of premium
on cancellation of the Mortgage Portfolio Insurance Policy by the Insured,
except if cancellation occurs because GEMICO ceases to be Qualified (as such
term is defined in the Mortgage Portfolio Insurance Policy), where a pro rata
refund will be paid retroactively to the date of cancellation. In the event of
cancellation by the Insured, no default of any Insured Loan existing at the
time that coverage is cancelled will be covered by the Mortgage Portfolio
Insurance Policy.
The premium for the Mortgage Portfolio Insurance Policy shall be paid
monthly and at the rate specified in the Mortgage Portfolio Insurance Policy.
Failure to pay the premium in accordance with the terms of the Mortgage
Portfolio Insurance Policy shall terminate the liability of GEMICO on the
anniversary of the due date of the most recent prior premium. The Insured is
required, at the request of GEMICO, to provide the information on which the
premium calculation is based and, if it fails to do so, GEMICO shall calculate
the premium based on the information used for the most recent prior premium
calculation and GEMICO's only refund obligation shall be to refund any excess
premium (without interest thereon) upon the Insured providing the requested
information within (12) twelve months after the premium due date. If the
aggregate benefits paid by GEMICO under the Mortgage Portfolio Insurance Policy
equal the aggregate benefit limit (an amount equal to 6.00% of the total unpaid
principal balance of the mortgage loans as of the Cut-Off Date), the total
premium due under the Mortgage Portfolio Insurance Policy is due and shall
remain due, provided that the premium shall continue to be calculated and paid
in the manner specified in the Mortgage Portfolio Insurance Policy. GEMICO has
the right to offset for unpaid premium.
Unless advance written approval is obtained from GEMICO, if a mortgage
loan is sold, assigned or transferred by the Insured, the coverage under the
Mortgage Portfolio Insurance Policy will not be assigned, and coverage for such
loan will be terminated by GEMICO. The Mortgage Portfolio Insurance Policy may
only be assigned with the approval of GEMICO.
To the extent permitted by applicable law, GEMICO has the right to cancel
coverage with respect to an Insured Loan if any representations made by (i) the
Insured in an application for insurance coverage under the Mortgage Portfolio
Insurance Policy or (ii) the mortgagor or any other person in connection with
the mortgage loan were materially inaccurate.
As set forth in the Mortgage Portfolio Insurance Policy, GEMICO shall not
be liable for, and the Mortgage Portfolio Insurance Policy shall not apply to,
extend to or cover, (i) any claim on any mortgage loan arising out of or in
connection with the failure of the mortgagor to make any payment of principal
and/or interest due under the Insured Loan, which payment arises because the
Insured exercised its right to call the Insured Loan or because the term of the
Insured Loan is shorter than the amortization period, and which payment is for
an amount more than twice the regular periodic payments of principal and
interest that are set forth in the Insured Loan (commonly referred to as a
balloon payment), except this exclusion shall not apply if a lender
unconditionally offers the mortgagor in writing, among other things, a renewal
or extension of the Insured Loan or a new loan at market rates in an amount not
less than the then outstanding principal balance of the Insured Loan with no
decrease in the amortization period and no other changes except as permitted by
the terms of the Insured Loan; (ii) any claim resulting from a default
occurring before the effective date of the Mortgage Portfolio Insurance Policy
or after its lapse or after cancellation of coverage of a mortgage loan by the
Insured; (iii) any claim when construction of the mortgaged property is not
completed in accordance with the construction plans and specifications as of
the date of the claim; (iv) (a) any claim involving or arising out of any
fraudulent, criminal or knowingly wrongful act or out of any misrepresentation
by the borrower, the Insured, the servicer or any agent or employee of the
Insured or the servicer or any third party misrepresentation if GEMICO
determines that the same borrower
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or other person has made one or more misrepresentations with respect to three
or mortgage loans Insured by GEMICO for the insured within twelve (12) months
before such misrepresentation or (b) any claim involving or arising out of
negligence of the Insured or any person which originated the mortgage loan,
which negligence is material either to the acceptance of the risk or to the
hazard assumed by GEMICO, materially contributed to the default resulting in
such claim, or increased the loss, except that if GEMICO can, in its opinion,
reasonably determine the amount of such increase, such claim will not be
excluded, but the loss will be reduced to the extent of such amount, (v) any
claim occurring when the servicer was not approved by GEMICO, (vi) any claim
where there is Physical Damage (as defined in the Mortgage Portfolio Insurance
Policy) to the mortgaged property, except this exclusion shall not apply if the
Insured has restored the mortgaged property to its condition as of the
effective date of the Mortgage Portfolio Insurance Policy, ordinary wear and
tear excepted, or if GEMICO in good faith determines that the cost of restoring
the damage is less than $1,500 dollars, (vii) any claim resulting from a
default occurring after any material breach by the Insured of the obligations
of the Insured, or material failure by the Insured to comply with the
conditions set forth in the Mortgage Portfolio Insurance Policy relating to a
mortgage loan; (viii) any claim if there is an Environmental Condition (as
defined in the Mortgage Portfolio Insurance Policy) which existed on the
property, unless (a) such fact was specifically disclosed to GEMICO in the
application or(b) that fact was not a principal cause of the defect or the
property remains habitable; (x) any claim if the related claim was excluded
under any Primary Insurance Policy; (xi) the amount of any claim payment which
the insurer under any Primary Insurance Policy has not paid, or should have
paid, if the Insured fails to obtain the Primary Insurance Policy in accordance
with the Mortgage Portfolio Insurance Policy, (xii) any claim involving a
mortgage loan which is for the purchase of the mortgaged property and for which
the borrower did not make a down payment as described in the Application, and
(xiii) any claim if the mortgage, deed of trust or similar instrument executed
by the Borrower did not provide the Insured at origination with a first lien on
the mortgaged property.
As a condition precedent to coverage under the Mortgage Portfolio
Insurance Policy, the Insured must maintain a Primary Insurance Policy on each
mortgage loan that had a Primary Insurance Policy in effect prior to or as of
the Policy Effecitve Date, issued by a mortgage guaranty insurance company
which is acceptable to GEMICO. With respect to primary mortgage guaranty
insurance, the Mortgage Portfolio Insurance Policy further provides that (a)
the primary responsibility for providing appropriate servicing and mitigation
of delinquencies lies with the Insured through its Primary Insurance Policy, if
applicable; (b) in no event shall the Insured take any action, or fail to take
any action, which would impair its rights under the Primary Insurance Policy
unless the procedure for obtaining written direction by GEMICO is followed; and
(c) the risk of collection under the, and the insolvency of the issuer of any,
Primary Insurance Policy are not covered by the Mortgage Portfolio Insurance
Policy.
Subject to applicable endorsements, other provisions and conditions of the
Mortgage Portfolio Insurance Policy provide that (i) unless GEMICO approves in
writing in advance, the Insured may not modify the terms of the mortgage loan
except as permitted by the terms of the mortgage loan; (ii) the coverage under
the Mortgage Portfolio Insurance Policy shall be the excess over any other
insurance which may apply to the mortgaged property or the mortgage loan,
regardless of the type or effective date of such other coverage; (iii) the
Insured shall notify GEMICO (a) within forty-five (45) days of Default, if it
occurs when the first payment is due under the mortgage loan or (b) within (10)
ten days of the earlier of (i) the date when the mortgagor becomes three (3)
months in Default on the mortgage loan or (ii) the date when any judicial
proceeding including Appropriate Proceedings (as defined in the Mortgage
Portfolio Insurance Policy), which affects the mortgage loan or the mortgaged
property or the Insured's or mortgagor's interest therein has been started and
shall report monthly thereafter to GEMICO the status of such mortgage loan
until such mortgage loan is brought current or a claim has been filed with
GEMICO; (iv) the Insured may accept a conveyance of title from the mortgagor
only if the prior written approval of GEMICO is obtained (and such approval
shall not be considered as an acknowledgment of liability with respect to that
Insured Loan); (v) the Insured must begin Appropriate Proceedings (as defined
in the Mortgage Portfolio Insurance Policy) when the Insured Loan becomes six
(6) months in default unless GEMICO provides written instructions that
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some other action be taken and the procedures involving such proceedings must
be followed as specified in the Mortgage Portfolio Insurance Policy; (vi) the
Insured must actively cooperate with GEMICO to prevent and mitigate any loss,
including following the procedures as provided in the Mortgage Portfolio
Insurance Policy; and (vii) for amounts due and payable after default by a
mortgagor, the Insured must advance the reasonable and necessary hazard
insurance premiums, real estate property taxes, protection and preservation
expenses, sales expenses and foreclosure costs including court costs and
reasonable attorneys' fees with respect to the mortgaged property.
No claim under the Mortgage Portfolio Insurance Policy may be filed
without GEMICO's consent until, but must be filed within, sixty (60) days
after, the later of (i) an Approved Sale (as such term is defined in the
Mortgage Portfolio Insurance Policy), described below, or (ii) the date the
claim has been settled and paid under the applicable Primary Insurance Policy.
An Approved Sale is (i) a sale of a mortgaged property acquired by the Insured
because of a default by the mortgagor and to which GEMICO has given prior
approval, (ii) a foreclosure or trustee's sale of a mortgaged property at a
price exceeding the maximum amount specified by GEMICO to be bid by the
Insured, or (iii) the acquisition of the mortgaged property pursuant to a
Primary Insurance Policy. If the Insured negotiates a claim settlement under a
Primary Insurance Policy on a basis other than the conditions stated in that
Primary Insurance Policy, the Insured must obtain the prior written consent of
GEMICO.
Subject to the requirement for a Primary Insurance Policy, described
above, and to the aggregate benefit limit, described above, the amount of a
claim for each Insured Loan consists of (a) the unpaid principal balance of a
mortgage loan at the time of default without capitalization of delinquent
interest, penalties or advances, (b) the amount of accumulated delinquent
interest due on such Insured Loan to the date of the payment of the loss by
GEMICO at the contract rate stated in such mortgage loan, but excluding
applicable late charges and other penalty interest, computed on the principal
balance of such mortgage loan at default and (c) the sums reasonably and
necessarily advanced by the Insured pursuant to the provisions of the Mortgage
Portfolio Insurance Policy, but only such amounts which become due and payable
after default by the mortgagor, less (d) the amount of rents and other payments
(excluding proceeds of fire and extended coverage insurance or the net proceeds
in an Approved Sale) collected or received by the Insured, which are derived
from or in any way related to the mortgaged property, (e) the amount of cash
remaining in any escrow account as of the last payment date, (f) the amount of
cash to which the Insured has retained the right of possession as security for
such Insured Loan and all sums as to which the Insured has the right of
set-off, (g) the amount paid under applicable fire and extended coverage
policies which is in excess of the cost of restoring and repairing the
mortgaged property, if the mortgaged property suffered Physical Damage (as
defined in the Mortgage Portfolio Insurance Policy) and which has not been
applied to the payment of such Insured Loan, (h) the amounts of any payments of
loss previously made by GEMICO in connection with such Insured Loan, (i) the
net proceeds upon an Approved Sale, (j) the amounts of any due and unpaid
premiums payable under the Mortgage Portfolio Insurance Policy, (k) any amount
of claim payment the Insured received or should have received pursuant to any
required or applicable Primary Insurance Policy, and (l) amounts claimed but
subject to an exclusion from coverage.
Subject to the requirement for a Primary Insurance Policy, and to the
aggregate benefit limit, each described above, whenever a loss becomes payable,
GEMICO shall pay the Insured within sixty (60) days after the Insured has filed
a claim in accordance with the terms of the Mortgage Portfolio Insurance Policy
(i) if there has been an Approved Sale, the lesser of (a) the claim amount (as
described above) less the proceeds realized by the Insured in connection with
the Approved Sale , or (b) the aggregate benefit limit less the aggregate
benefits (which means the total of all losses paid by GEMICO reduced by the net
proceeds (as defined in the Mortgage Portfolio Insurance Policy) received by
GEMICO upon disposal of any mortgaged property acquired by GEMICO in connection
with payment of a loss, but not any other recoveries made by GEMICO) , or (ii)
if there has not been an Approved Sale, subject to the aggregate benefit limit,
the claim amount (as described above) less any payments previously made by
GEMICO with respect thereto, in which event it is a condition
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precedent to payment by GEMICO that the Insured provide GEMICO with Good and
Merchantable Title to and Possession (as defined in the Mortgage Portfolio
Insurance Policy) of the mortgaged property (unless Possession is waived in
writing by GEMICO). If GEMICO subsequently determines there was no loss on an
Insured Loan, GEMICO is entitled to a cash refund or to offset its payment
against any loss thereafter becoming payable. When the aggregate benefits equal
the aggregate benefit limit, GEMICO shall have no further obligation to pay a
loss with respect to the mortgage loans insured under the Mortgage Portfolio
Insurance Policy, notwithstanding the potential for additional premium to be
due during such period.
The Mortgage Portfolio Insurance Policy also contains the following
provisions: (a) if any part of the mortgaged property is taken or conveyed or
if compensable damages are incurred, by or under threat of eminent domain,
condemnation or any other proceedings, the Insured shall require the mortgagor
to apply the maximum permissible amount of any compensation received to reduce
the principal balance of and interest due under the Insured Loan; (b) GEMICO
shall be subrogated to all of the Insured's rights of recovery against the
mortgagor and any other person (subject to applicable state law) and the
Insured shall cooperate with GEMICO in securing those rights and if the Insured
executes a release or waiver of the right to collect the unpaid balance of an
Insured Loan, such execution shall release GEMICO from its obligation to the
extent and amount of the release; (c) if a dispute arises concerning the
Insured Loan, GEMICO has the right to protect its interest by defending the
suit and may direct the Insured to institute a suit on the Insured's behalf, if
this suit is necessary or appropriate to protect GEMICO's rights; (d) if the
mortgagor may successfully assert defenses which have the effect of releasing,
in whole or in part, the mortgagor's obligation to repay the Insured Loan,
GEMICO shall be released to the same extent and amount from its liability under
the Mortgage Portfolio Insurance Policy; and (e) GEMICO and the Insured may
modify or amend the Mortgage Portfolio Insurance Policy or rescind or terminate
the Mortgage Portfolio Insurance Policy without the consent of or notice to any
other person.
If the Mortgage Portfolio Insurance Policy is canceled or terminated for
any reason other than the exhaustion of the coverage thereunder, or GEMICO
ceases to be Qualified (as such term is defined in the Mortgage Portfolio
Insurance Policy), and, consequently, the ratings of the certificates are
reduced by such ratings agency below the level of the ratings originally given
to such certificates by such rating agency, the master servicer is required to
use commercially reasonable efforts to obtain a comparable policy from an
insurer that is acceptable to S&P and Moody's. Such replacement policy will be
required to provide coverage in an amount equal to the then-remaining coverage
amount of the Mortgage Portfolio Insurance Policy; provided, however, that if
the premium cost of the replacement policy exceeds the premium cost of the
Mortgage Portfolio Insurance Policy, the coverage amount of the replacement
policy will be reduced so that the premium cost therefor will not exceed 100%
of the premium cost of the Mortgage Portfolio Insurance Policy.
SPECIAL HAZARD INSURANCE POLICY
A special hazard insurance policy (the "SPECIAL HAZARD INSURANCE POLICY")
will be issued to the trustee to cover certain losses (subject to the
limitations described below) by reason of damage to the related mortgaged
property, to the extent that those losses are not covered by a Standard Hazard
Insurance Policy (as defined below). The master servicer will present claims
and provide certain notices under the policy on behalf of itself, the trustee
and certificateholders and, subject to limitations described in the pooling
agreement, the master servicer is required to use commercially reasonable
efforts to maintain the policy during the term of the pooling agreement, unless
coverage under the Special Hazard Insurance Policy has been exhausted through
the payment of claims. However, in no case will the master servicer be required
to expend its own funds to maintain the policy.
The Special Hazard Insurance Policy will be issued by Travelers Indemnity
Company of Illinois ("TRAVELERS"), a property and casualty insurance company
which is a member of the Travelers Property Casualty Group, organized under the
laws of the State of Illinois. As of December 31, 1999,
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Travelers reported, on a statutory accounting basis, total assets of
$237,808,861, policyholders' surplus of $74,127,346, loss reserves and loss
adjustment expense reserves aggregating $111,432,213 and unearned premium
reserves (inclusive of accrued retrospective premiums of $2,268,014) of
$17,633,659.
As of June 30, 2000, Travelers reported, on a statutory accounting basis,
total assets of $228,783,511, policyholders' surplus of $78,561,187, loss
reserves and loss adjustment expense reserves aggregating $108,890,900 and
unearned premium reserves (inclusive of accrued retrospective premiums of
$2,345,369) of $17,908,331. The claims paying ability of Travelers Indemnity
Company of Illinois is rated "AA-" by S&P.
The information set forth above has been supplied by Travelers. Neither
PNC Mortgage Securities Corp. nor the underwriter makes any representation as
to the accuracy or completeness of such information.
The following summary describes certain provisions of the Special Hazard
Insurance Policy. However, this summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the actual
provisions of the Special Hazard Insurance Policy.
The trustee will be the named insured (the "SPECIAL HAZARD POLICY
INSURED") under the Special Hazard Insurance Policy. Consistent with its
obligations under the pooling agreement, the master servicer may act on behalf
of the Special Hazard Policy Insured with respect to fulfilling certain
conditions to payment of a claim by Travelers under the Special Hazard
Insurance Policy.
The Special Hazard Insurance Policy will, subject to certain limitations
described below, protect the certificateholders from loss by reason of damage
to related mortgaged properties caused by certain hazards to the extent that
(i) that loss is not covered under the standard form of hazard insurance policy
("STANDARD HAZARD INSURANCE POLICY") described in the prospectus under "Primary
Insurance, FHA Mortgage Insurance, VA Mortgage Guaranty, Hazard Insurance;
Claims Thereunder--Hazard Insurance" for the respective states in which the
mortgaged properties are located or under a flood insurance policy if the
related mortgaged property is located in a federally designated flood area, or
(ii) in the event the related mortgagor or the Special Hazard Policy Insured
does not maintain a Standard Hazard Insurance Policy or (if applicable) a flood
insurance policy, that loss would not have been covered had such insurance been
maintained; provided, however, that a loss by reason of the operation of a
coinsurance clause of a Standard Hazard Insurance Policy will be covered under
the Special Hazard Insurance Policy provided that all requirements for coverage
under the Special Hazard Insurance Policy have been satisfied. The Special
Hazard Insurance Policy will not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear
reaction, chemical contamination or certain other risks. It will be a condition
precedent to payment of a claim under the Special Hazard Insurance Policy that
the premiums be advanced for maintenance of standard hazard and, if applicable,
flood insurance on the related mortgaged property and other protection and
preservation expenses and foreclosure costs.
It is anticipated that aggregate claims under the Special Hazard Insurance
Policy will be limited, on any given date, to the lesser of (i) the greater of
(a) 1.00% of the aggregate unpaid principal balance of the mortgage loans, (b)
twice the unpaid principal balance of the mortgage loan with the greatest
unpaid principal balance and (c) the aggregate unpaid principal balance of
mortgage loans secured by mortgaged properties located in the California
five-digit postal zip code with the highest concentration of mortgage loans and
(ii) the initial coverage amount reduced by the amount of claims paid under the
policy less any net proceeds received by Travelers upon disposal of any
mortgaged property. The required amount of coverage under the Special Hazard
Insurance Policy will be established by S&P and Moody's and may differ from the
amount described above.
The Special Hazard Insurance Policy will initially be issued in an amount
currently anticipated to be approximately $4,000,000.
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Subject to the foregoing limitations, the Special Hazard Insurance Policy
will provide that the amount of any loss on a mortgage loan payable by
Travelers under the Special Hazard Insurance Policy will be the lesser of (i)
the cost of repair or replacement of the related mortgaged property and (ii)
the unpaid principal balance of that mortgage loan at the time of acquisition
of such property by the Special Hazard Policy Insured, plus accrued interest at
the mortgage interest rate to the date of claim settlement but excluding
applicable late charges and penalty interest and reduced by the amount of
coverage available under the related Standard Hazard Insurance Policy or, if
applicable, flood insurance policy (or that would have been available
thereunder, had that insurance been maintained) and further reduced by any
other amounts collected or recovered by the Special Hazard Policy Insured from
other sources. If any advance required to be made as a condition for coverage
of a loss in accordance with the terms of the Special Hazard Insurance Policy
is not so made by the Special Hazard Policy Insured, such loss will not be
covered by the Special Hazard Insurance Policy.
If the Special Hazard Insurance Policy is cancelled or terminated for any
reason other than the exhaustion of the coverage thereunder, or Travelers
ceases to be a property and casualty insurer duly qualified as such under
applicable laws, or in the event that the claims-paying ability of Travelers is
reduced to such a level that the ratings of the certificates are reduced below
the original ratings thereof, the master servicer is required to use
commercially reasonable efforts to obtain a comparable policy from an insurer
that is acceptable to S&P and Moody's. The replacement policy will be required
to provide coverage in an amount equal to the then-remaining coverage amount of
the Special Hazard Insurance Policy; provided, however, that if the premium
cost of the replacement policy exceeds the premium cost of the Special Hazard
Insurance Policy, the coverage amount of the replacement policy will be reduced
so that the premium cost therefor will not exceed 100% of the premium cost of
the Special Hazard Insurance Policy.
For additional information, see "Description of Credit Enhancements--
Special Hazard Insurance" in the Prospectus.
SUBORDINATION
The Senior 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 Certificates--Priority of
Distributions" in this prospectus supplement.
Losses on mortgage loans that are not covered by insurance policies will
be allocated, in each case, until their Class Principal Balances have been
reduced to zero, first, to the Class B Certificates; and second, to the Class A
and Class X Certificates as described under "Description of the
Certificates--Subordination and Allocation of Losses" in this prospectus
supplement; provided, however, that only a certain specified amount of Special
Hazard Losses, Fraud Losses and Bankruptcy Losses will be allocated solely to
the Class B Certificates or covered by an insurance policy, following which
such losses will be allocated by Pro Rata Allocation.
SHIFTING OF INTERESTS
The Class A Certificates, in the aggregate, will generally receive 100% of
principal prepayments received with respect to the mortgage loans until the
fifth anniversary of the first Distribution Date. During the next four years,
the Class A Certificates, in the aggregate, will generally receive a
disproportionately large, but decreasing, share of principal prepayments
received with respect to the mortgage loans. This will result in an
acceleration of the amortization of the Class A Certificates, in the aggregate,
subject to the priorities described in "Description of the
Certificates--Distributions of Principal" in this prospectus supplement,
enhancing the likelihood that holders of those classes of certificates will be
paid the full amount of principal to which they are entitled. See the second
paragraph of "Description of the Certificates--Distributions of
Principal--Principal Prepayments" in this prospectus supplement for important
limitations on the accelerated amortization of the Class A Certificates.
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THE CLASS A-4 CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by MBIA Insurance Corporation
(the "CERTIFICATE INSURER") for inclusion in this prospectus supplement. The
Certificate Insurer does not accept any responsibility for the accuracy or
completeness of this prospectus supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Class A-4 Certificate Insurance Policy and the
Certificate Insurer set forth under the heading "--The Class A-4 Certificate
Insurance Policy and the Certificate Insurer" herein. Additionally, the
Certificate Insurer makes no representation regarding the certificates or the
advisability of investing in the certificates. The following constitutes a
summary of the provisions of the Class A-4 Certificate Insurance Policy and it
does not purport to be complete and is qualified in its entirety by reference
to the Class A-4 Certificate Insurance Policy, a copy of which may be obtained
from the trustee upon request.
The Certificate Insurer, in consideration of the payment of a premium and
subject to the terms of the certificate guaranty insurance policy (the "CLASS
A-4 CERTIFICATE INSURANCE POLICY") with respect to the Class A-4 Certificates
(the "INSURED CERTIFICATES"), thereby unconditionally and irrevocably
guarantees to any Class A-4 Certificateholder that an amount equal to each full
and complete Insured Payment will be received from the Certificate Insurer by
the trustee or its successors, as trustee for the Class A-4 Certificateholders,
on behalf of the Class A-4 Certificateholders, for distribution by the trustee
to each Class A-4 Certificateholder of that Class A-4 Certificateholder's
proportionate share of the Insured Payment.
The Certificate Insurer's obligations under the Class A-4 Certificate
Insurance Policy, with respect to a particular Insured Payment, will be
discharged to the extent funds equal to the applicable Insured Payment are
received by the trustee, whether or not those funds are properly applied by the
trustee. Insured Payments will be made only at the time set forth in the Class
A-4 Certificate Insurance Policy, and no accelerated Insured Payments will be
made regardless of any acceleration of the Insured Certificates, unless the
acceleration is at the sole option of the Certificate Insurer. THE CLASS A-4
CERTIFICATE INSURANCE POLICY DOES NOT PROVIDE CREDIT ENHANCEMENT FOR ANY CLASS
OF CERTIFICATES OTHER THAN THE CLASS A-4 CERTIFICATES, NOR DOES IS PROVIDE ANY
CREDIT ENHANCEMENT TO THE CLASS A-4 CERTIFICATEHOLDERS AFTER THE DISTRIBUTION
DATE IN SEPTEMBER 2005.
Notwithstanding the foregoing paragraph, the Class A-4 Certificate
Insurance Policy does not cover shortfalls, if any, attributable to the
liability of the Trust, the REMICs or the trustee for withholding taxes, if any
(including interest and penalties in respect of any liability for withholding
taxes).
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the business day following receipt on a business day by the
Certificate Insurer's fiscal agent of the following:
o a certified copy of the order requiring the return of a
preference payment;
o an opinion of counsel satisfactory to the Certificate Insurer
that the order is final and not subject to appeal;
o an assignment in a form that is reasonably required by the
Certificate Insurer, irrevocably assigning to the Certificate
Insurer all rights and claims of the Class A-4 Certificateholder
relating to or arising under the Insured Certificates against the
debtor which made the preference payment or otherwise with
respect to the preference payment; and
o appropriate instruments to effect the appointment of the
Certificate Insurer as agent for the Class A-4 Certificateholder
in any legal proceeding related to the preference payment, which
instruments are in a form satisfactory to the Certificate
Insurer;
provided that if these documents are received after 12:00 p.m., New York time,
on that business day, they will be deemed to be received on the following
business day. Payments by the Certificate Insurer will be disbursed to the
receiver or the trustee in bankruptcy named in the final order of the court
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exercising jurisdiction on behalf of the Class A-4 Certificateholder and not to
any Class A-4 Certificateholder directly unless the Class A-4 Certificateholder
has returned principal or interest paid on the Insured Certificates to the
receiver or trustee in bankruptcy, in which case that payment will be disbursed
to the Class A-4 Certificateholder.
The Certificate Insurer will pay any other amount payable under the Class
A-4 Certificate Insurance Policy no later than 12:00 p.m., New York time, on
the later of the Distribution Date on which the related Deficiency Amount is
due or the second business day following receipt in New York, New York on a
business day by State Street Bank and Trust Company, N.A., as fiscal agent for
the Certificate Insurer or any successor fiscal agent appointed by the
Certificate Insurer of a notice from the trustee specifying the Insured Payment
which is due and owing on the applicable Distribution Date; provided that if
the notice is received after 12:00 p.m., New York time, on that business day,
it will be deemed to be received on the following business day. If any notice
received by the Certificate Insurer's fiscal agent is not in proper form or is
otherwise insufficient for the purpose of making a claim under the Class A-4
Certificate Insurance Policy, it will be deemed not to have been received by
the Certificate Insurer's fiscal agent for purposes of this paragraph, and the
Certificate Insurer or the fiscal agent, as the case may be, will promptly so
advise the trustee and the trustee may submit an amended notice.
Insured Payments due under the Class A-4 Certificate Insurance Policy,
unless otherwise stated therein, will be disbursed by the Certificate Insurer's
fiscal agent to the trustee, on behalf of the Class A-4 Certificateholders, by
wire transfer of immediately available funds in the amount of the Insured
Payment less, in respect of Insured Payments related to Preference Amounts, any
amount held by the trustee for the payment of the Insured Payment and legally
available therefor.
The fiscal agent is the agent of the Certificate Insurer only and the
fiscal agent will in no event be liable to Class A-4 Certificateholders for any
acts of the fiscal agent or any failure of the Certificate Insurer to deposit
or cause to be deposited sufficient funds to make payments due under the Class
A-4 Certificate Insurance Policy.
As used in this section "--The Class A-4 Certificate Insurance Policy and
the Certificate Insurer," the following terms shall have the following
meanings:
"Deficiency Amount" means, with respect to any Distribution Date on or
before the Distribution Date in September 2005, the sum of (i) the amount, if
any, by which the amount available to be paid as interest to the Class A-4
Certificates, pursuant to the priority of payment set forth in the pooling
agreement, plus amounts available from the Class A-4 Reserve Fund, is less than
(A) the product of (1) 1/12 of the Certificate Interest Rate applicable to the
Class A-4 Certificates and (2) the Class A-4 Principal Balance immediately
prior to such Distribution Date, minus (B) the sum of the amounts allocable to
the Class A-4 Certificates of (1) any prepayment interest shortfalls relating
to Curtailments, (2) any prepayment interest shortfalls relating to the master
servicer's failure to pay Compensating Interest and (3) any interest shortfalls
related to the Soldiers' and Sailors' Civil Relief Act of 1940, as amended and
(ii) the principal portion of any realized losses allocated to the Class A-4
Certificates on such Distribution Date.
"Insured Payment" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"Preference Amount" means any amount previously distributed to a Class A-4
Certificateholder on the Insured Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy pursuant to
the United States Bankruptcy Code (11 U.S.C.), as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Class A-4 Certificate Insurance Policy and
not otherwise defined in the Class A-4 Certificate Insurance Policy shall have
the meanings set forth in the pooling agreement as of the date of execution of
the Class A-4 Certificate Insurance Policy, without giving effect to any
subsequent amendment or modification to the pooling agreement unless such
amendment or modification has been approved in writing by the Certificate
Insurer.
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The Class A-4 Certificate Insurance Policy is not cancelable for any
reason, except, that the Class A-4 Certificate Insurance Policy shall terminate
on the day after the Distribution Date in September 2005, provided, that the
Class A-4 Certificate Insurance Policy shall remain in effect with respect to
any claims for Insured Payments relating to Preference Amounts resulting from
distributions made on the Class A-4 Certificates on or prior to the
Distribution Date in September 2005. The premium on the Class A-4 Certificate
Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to maturity of the Insured
Certificates.
The Class A-4 Certificate Insurance Policy is being issued under and
pursuant to, and will be construed under, the laws of the State of New York,
without giving effect to the conflict of laws principles thereof.
The insurance provided by the Class A-4 Certificate Insurance Policy is
not covered by the Property/Casualty Insurance Security Fund specified in
Article 76 of the New York Insurance Law.
THE CERTIFICATE INSURER
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in
and is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Certificate Insurer, changes in
control and transactions among affiliates. Additionally, the Certificate
Insurer is required to maintain contingency reserves on its liabilities in
specified amounts and for specified periods of time.
FINANCIAL INFORMATION ABOUT THE CERTIFICATE INSURER
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1999 and
December 31, 1998 and for each of the three years in the period ended December
31, 1999, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1999, and the consolidated financial statements of the Certificate
Insurer and its subsidiaries as of September 30, 2000 and for the nine months
ended September 30, 2000 and September 30, 1999 included in the Quarterly
Report on Form 10-Q of MBIA Inc. for the period ended September 30, 2000, are
hereby incorporated by reference into this prospectus supplement and shall be
deemed to be a part hereof. Any statement contained in a document incorporated
by reference herein shall be modified or superseded for purposes of this
prospectus supplement to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated by reference
herein modifies or supersedes that 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 its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this prospectus supplement and prior to the termination of the offering
of the certificates shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part hereof from the respective dates of
filing those documents.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities and generally accepted
accounting principles:
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<PAGE>
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING PRACTICES
----------------------------------
DECEMBER 31, SEPTEMBER 30,
1999 2000
---------------- -----------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets .............. $ 7,045 $ 7,525
Liabilities .................. 4,632 5,101
Capital and Surplus .......... 2,413 2,424
<CAPTION>
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
----------------------------------------
DECEMBER 31, SEPTEMBER 30,
1999 2000
----------- ---------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets ....................... $ 7,446 $ 8,124
Liabilities .................. 3,218 3,531
Shareholder's Equity ......... 4,228 4,593
</TABLE>
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE CERTIFICATE INSURER
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1999 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
FINANCIAL STRENGTH RATINGS OF THE CERTIFICATE INSURER
Moody's Investors Service, Inc. rates the financial strength of the
Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., rates the financial strength of the Certificate Insurer "AAA."
Fitch rates the financial strength of the Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect each respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on
its policies of insurance. Any further explanation as to the significance of
the above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Insured
Certificates, and the ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Insured
Certificates. The Certificate Insurer does not guaranty the market price of the
Insured Certificates nor does it guaranty that the ratings on the Insured
Certificates will not be revised or withdrawn.
S-52
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, PNC Mortgage Securities Corp. will cause
two REMIC elections to be made with respect to the Trust. The certificates,
other than the Class R-1 and Class R-2 Certificates, will generally represent
ownership of debt for federal income tax purposes. For federal income tax
purposes the Class R-1 and Class R-2 Certificates will be the residual interest
in REMIC I and REMIC II respectively.
During the period prior to the mandatory purchase, the Class A
Certificates might be treated as representing ownership of REMIC regular
interests subject to a forward purchase contract requiring their delivery
against a specified payment at the time of the mandatory purchase or they might
be treated as representing ownership of debt of the obligor under the Mandatory
Certificate Purchase Agreement. The Class B and Class X Certificates, and,
following the mandatory purchase, the Class A Certificates, will represent
ownership of REMIC regular interests. In preparing federal income tax reports
to certificateholders and the Internal Revenue Service, PNC Mortgage Securities
Corp, as master servicer, will treat the Class A Certificates as representing
ownership of REMIC regular interests subject to the Mandatory Purchase
Certificate Agreement, but the Internal Revenue Service might not agree with so
treating them. All interest and original issue discount ("OID") on certificates
that represent ownership of REMIC regular interests will be includable in
certificateholders' income using the accrual method of accounting regardless of
the certificateholders' usual methods of accounting. If the Class A
Certificates were determined to be debt of the obligor under the Mandatory
Certificate Purchase Agreement, the taxation of holders of such interests
during the period prior to the mandatory purchase generally will be the same as
that described in this prospectus supplement and in the prospectus for holders
of REMIC Regular Interests with the following exceptions: Holders not otherwise
required to use the accrual method of accounting for tax purposes would not be
required to adopt that method of accounting for the Class A Certificates. The
Class A Certificates would NOT qualify for treatment as "qualifying real
property loans," "loans secured by an interest in real property," "real estate
assets" or "qualified mortgages" as described under "Certain Federal Income Tax
Consequences--Characterization of Investments in REMIC Certificates" in the
prospectus. Gain on the sale of Class A Certificates would not be subject to
re-characterization as ordinary income solely as a result of failure of income
otherwise accrued on the Class A Certificates to have accrued at a rate
exceeding 110% of the "applicable federal rate" as described for REMIC Regular
Interests in the first paragraph of "Certain Federal Income Tax
Consequences--Sales of REMIC Certificates" in the prospectus. The discussion
under "Certain Federal Income Tax Consequences--Pass-Through of Servicing Fees"
in the prospectus would not apply. See "Certain Federal Income Tax
Consequences" in the prospectus.
In preparing federal income tax reports to certificateholders and the
Internal Revenue Service, PNC Mortgage Securities Corp, as master servicer,
will treat the Class X Certificates, and may treat the Class A-2 and Class B
Certificates, as having been issued with OID. 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 18% of the CPR, as described in this
prospectus supplement under "Yield and Prepayment Considerations." PNC Mortgage
Securities Corp. does not represent that the mortgage loans will prepay at any
given percentage of the CPR. In making the foregoing determinations, the master
servicer has treated the interest of the Class A Certificateholders in the
Mandatory Certificate Purchase Agreement as having only nominal value. The
Internal Revenue Service. could assert that the value of the Mandatory Purchase
contract was more than nominal and could require that a portion of the initial
Class A Certificateholders' purchase price be allocated to their rights under
the Mandatory Certificate Purchase Agreement. If that assertion were
successful, classes of Class A Certificates determined by the master servicer
not to have OID could be treated as having OID by the Internal Revenue Service
and the amount of OID on Class A Certificates treated by the master servicer as
having OID could be increased. The effect would be an increase in ordinary
income currently includible by the holders of the affected Class A Certificates
over the period before the mandatory purchase and a reduction of any gain or
increase in any loss realized on the consummation of the mandatory purchase.
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<PAGE>
In certain circumstances, OID regulations (as described under "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 PNC
Mortgage Securities Corp. 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 certain classes of 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.
Certain classes of certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a
certificate will be treated as holding a certificate with amortizable bond
premium will depend on the certificateholder's purchase price and the
distributions remaining to be made on the certificate at the time of its
acquisition by the certificateholder. Holders of those 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 certificates that represent ownership of REMIC regular interests
exclusive of any portion of the value thereof representing an interest in the
Mandatory Certificate Purchase Agreement will generally be treated as
"qualifying real property loans" for mutual savings banks and domestic building
and loan associations, "loans secured by an interest in real property" for
domestic building and loan associations, and "real estate assets" for real
estate investment trusts, or REITs, in the same proportion that the assets in
the REMIC would be so treated. In addition, interest on the certificates that
represent ownership of REMIC regular interests exclusive of any portion of the
value thereof representing an interest in the Mandatory Certificate Purchase
Agreement will generally be treated as "interest on obligations secured by
mortgages on real property" for REITs to the extent that the certificates are
treated as "real estate assets."
Foreign holders of Class A Certificates who directly or indirectly own 10%
of the stock of the obligor under the Mandatory Certificate Purchase Agreement
could be denied treatment of the interest on the certificates as portfolio
interest which is exempt from United States withholding tax if the Internal
Revenue Service were successfully to assert that the certificates represented
debt of the obligor under the Mandatory Certificate Purchase Agreement.
See "Certain Federal Income Tax Consequences" in the prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO THE RESIDUAL CERTIFICATES
The Internal Revenue Service has issued regulations under the provisions
of the Internal Revenue Code related to REMICs that significantly affect
holders of the Residual Certificates. The REMIC regulations impose restrictions
on the transfer or acquisition of certain residual interests, including the
Residual Certificates. In addition, the REMIC regulations contain restrictions
that apply to the transfer of "noneconomic" residual interests to U.S. Persons.
Pursuant to the pooling agreement, the Residual Certificates may not be
transferred to non-U.S. Persons.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 (or thrift) institutions to use net operating
losses and other allowable deductions to offset their excess inclusion income
from REMIC residual certificates that have "significant value" within the
meaning of the REMIC regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First,
S-54
<PAGE>
alternative minimum taxable income for a residual holder is determined without
regard to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual holder's alternative minimum taxable income for
a tax year cannot be less than excess inclusions for the year. Third, the
amount of any alternative minimum tax net operating loss deductions must be
computed without regard to any excess inclusions. These rules are effective for
tax years beginning after December 31, 1986, unless a residual holder elects to
have them apply only to tax years beginning after August 20, 1996.
The REMIC Regulations provide that a transfer to a U.S. Person of
"noneconomic" residual interests will be disregarded for all federal income tax
purposes, and that the purported transferor of "noneconomic" residual interests
will continue to remain liable for any taxes due with respect to the income on
those residual interests, unless "no significant purpose of the transfer was to
impede the assessment or collection of tax." Based on the REMIC Regulations,
the Residual Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, unless no significant purpose of a transfer is to impede the
assessment or collection of tax, transfers of the Residual Certificates may be
disregarded and purported transferors may remain liable for any taxes due with
respect to the income on the Residual Certificates. All transfers of the
Residual Certificates will be subject to certain restrictions under the terms
of the pooling agreement that are intended to reduce the possibility of any
transfer being disregarded to the extent that the Residual Certificates
constitute noneconomic residual interests. The Internal Revenue Service has
issued proposed changes to the REMIC regulations that would add to the
conditions necessary to assure that a transfer of a noneconomic residual
interest would be respected. The proposed additional condition would require
that the amount received by the transferee be no less on a present value basis
than the present value of the net tax detriment attributable to holding the
residual interest reduced by the present value of the projected payments to be
received on the residual interest. In Revenue Procedure 2001-12, pending
finalization of the new regulations, the Internal Revenue Service has expanded
the "safe harbor" for transfers of non-economic residual interests to include
certain transfers to domestic taxable corporations with large amounts of gross
and net assets where agreement is made that all future transfers will be to
taxable domestic corporations in transactions that qualify for one of the "safe
harbor" provisions. Eligibility for this safe harbor requires, among other
things, that the facts and circumstances known to the transferor at the time of
transfer not indicate to a reasonable person that the taxes with respect to the
residual interest will not be paid, with an unreasonably low cost for the
transfer specifically mentioned as negating eligibility. The change is proposed
to be effective for transfers of residual interests occurring after February 4,
2000. See "Certain Federal Income Tax Consequences--Taxation of Owners of REMIC
Residual Certificates--Noneconomic REMIC Residual Certificates" in the
prospectus.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the REMIC's term
that significantly exceeds the amount of cash distributions received by the
Residual Certificateholders from the REMIC with respect to those periods.
Consequently, the Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due in the earlier years of
the REMIC as a result of their ownership of Residual Certificates. In addition,
the required inclusion of this amount of taxable income during the REMIC's
earlier accrual periods and the deferral of corresponding tax losses or
deductions until later accrual periods or until the ultimate sale or
disposition of a Residual Certificate (or possibly later under the "wash sale"
rules of Section 1091 of the Internal Revenue Code) may cause the Residual
Certificateholders' after-tax rate of return to be zero or negative even if the
Residual Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Residual Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on the Residual Certificates over their life.
As discussed above, the rules for accrual of OID with respect to certain
classes of certificates are subject to significant complexity and uncertainty.
Because OID on the certificates will be deducted by
S-55
<PAGE>
the REMIC in determining its taxable income, any changes required by the
Internal Revenue Service in the application of those rules to the certificates
may significantly affect the timing of OID deductions to the REMIC and
therefore the amount of the REMIC's taxable income allocable to holders of the
Residual Certificates.
Purchasers of the Residual Certificates are strongly advised to consult
their own tax advisors as to the economic and tax consequences of investment in
the Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Residual Certificates, see "Certain Yield and Prepayment
Considerations--Additional Yield Considerations Applicable Solely to the
Residual Certificates" in this prospectus supplement and "Certain Federal
Income Tax Consequences--Taxation of Owners of REMIC Residual Certificates" in
the prospectus.
An individual, trust or estate that holds (whether directly or indirectly
through certain pass-through entities) a Residual Certificate, may have
significant additional gross income with respect to, but may be subject to
limitations on the deductibility of, servicing and trustee's fees and other
administrative expenses properly allocable to the REMIC in computing that
certificateholder's regular tax liability and will not be able to deduct those
fees or expenses to any extent in computing that certificateholder's
alternative minimum tax liability. See "Certain Federal Income Tax
Consequences--Pass-Through of Servicing Fees" and "--Taxation of Owners of
REMIC Residual Certificates" in the prospectus.
PNC Mortgage Securities Corp. will be designated as the "tax matters
persons" with respect to the Trust as defined in the REMIC Regulations, and in
connection therewith will be required to hold not less than 0.01% of the
Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the certificates, see "Certain Federal Income Tax Consequences" in
the prospectus.
CERTAIN LEGAL INVESTMENT ASPECTS
For purposes of the Secondary Mortgage Market Enhancement Act of 1984, or
SMMEA, the certificates, other than the Class B Certificates, will constitute
"mortgage related securities" when they are issued. These mortgage related
securities, or SMMEA Certificates, 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 of the United States constitute legal investments for such
entities. Under SMMEA, if a state enacted legislation before October 4, 1991
specifically limiting the legal investment authority of any type of those
entities with respect to "mortgage related securities," the SMMEA Certificates
will constitute legal investments for those types of entities only to the
extent provided by the legislation. Certain states have enacted such
legislation. Investors should consult their own legal advisors in determining
whether and to what extent the certificates, constitute legal investments for
them.
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 SMMEA
Certificates without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in the SMMEA Certificates
and national banks may purchase the SMMEA Certificates for their own accounts
without regard to the limitations generally applicable to investment securities
prescribed by 12 U.S.C. 24 (Seventh), in each case subject to such regulations
as the applicable federal regulatory authority may adopt.
Institutions whose investment activities are subject to review by certain
regulatory authorities may be or may become subject to restrictions on
investment in the certificates, which could be retroactively imposed. The
Federal Financial Institutions Examination Council, the Federal Deposit
Insurance
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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
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 certificates.
When adopted, the regulations could apply to the certificates retroactively.
Investors should consult their own legal advisors in determining whether and to
what extent the certificates constitute legal investments for them.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase the certificates or to
purchase the 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 certificates constitute legal
investments for them.
ERISA CONSIDERATIONS
GENERAL
ERISA and Section 4975 of the Internal Revenue Code contain provisions
that may affect a fiduciary of a employee benefit plan or other plan or
arrangement, such as individual retirement accounts. Plans, insurance companies
or other persons investing Plan Assets (see "ERISA Considerations--Plan Asset
Regulation" in the prospectus) should carefully review with their legal counsel
whether owning the certificates is permitted under ERISA or Section 4975 of the
Internal Revenue Code. The Underwriter's Exemption, as described under "ERISA
Considerations--
Underwriter's Exemption" in the prospectus and as recently amended (see below),
may provide an exemption from restrictions imposed by ERISA or Section 4975 of
the Internal Revenue Code and may permit a Plan to own, or Plan Assets to be
used to purchase, the certificates other than the Residual Certificates.
However, the Underwriter's Exemption contains several conditions, including the
requirement that an affected 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.
The Underwriter's Exemption, or any similar exemption that might be
available, will not likely apply to the purchase, sale or holding of the
Residual Certificates. Therefore, the trustee will not register transfers of
the Residual Certificates to a Plan, a trustee or other person acting on behalf
of any Plan or any other person using Plan Assets to purchase the Residual
Certificates without first receiving an opinion of counsel. The opinion of
counsel must:
o be satisfactory to PNC Mortgage Securities Corp., the trustee and
the master servicer;
o not be at the expense of PNC Mortgage Securities Corp., the
trustee or master servicer; and
o conclude that the purchase of the certificates by or on behalf of
the Plan:
o is permissible under applicable law;
o will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Internal
Revenue Code; and
o will not subject PNC Mortgage Securities Corp., the trustee
or the master servicer to any obligation in addition to
those undertaken in the pooling agreement.
The Department of Labor amended the Underwriter's Exemption to permit
Plans to purchase and hold the Class B Certificates if those certificates are
rated "BBB-" or better (or its equivalent) at the time of purchase. See
Department of Labor Prohibited Transaction Exemption 2000-58, 65 Fed. Reg.
67765 (November 13, 2000). By its purchase of a Class B Certificate, the Plan,
or other purchaser acting on its behalf or with Plan Assets, will be deemed to
have represented that:
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o the rating condition was satisfied at the time of purchase; or
o the following condition is satisfied:
o it is an insurance company;
o the source of funds used to acquire or hold the Class B
Certificates is an "insurance company general account" as
that term is defined in PTCE 95-60; and
o the conditions in Section I and III of PTCE 95-60 have been
satisfied.
The pooling and servicing agreement will require that if neither condition
is satisfied the Plan, or other purchaser acting on its behalf or with Plan
Assets, will:
o indemnify and hold harmless PNC Mortgage Securities Corp., the
trustee, the master servicer, the underwriter and the Trust from
and against all liabilities, claims, costs or expenses incurred
by them as a result of the purchase; and
o be disregarded as purchaser and the immediately preceding
permitted beneficial owner will be treated as the beneficial
owner of that certificate.
Any fiduciary or other investor of Plan Assets that proposes to own the
certificates on behalf of or with Plan Assets of any Plan should consult with
legal counsel about: (i) whether the specific and general conditions and the
other requirements in the Underwriter's Exemption would be satisfied, or
whether any other prohibited transaction exemption would apply, and (ii) the
application of the general fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code to the proposed investment. See "ERISA Considerations" in the
prospectus.
ERISA CONSIDERATIONS WITH RESPECT TO THE MANDATORY PURCHASE
The Mandatory Purchase feature of the Class A Certificates is not eligible
for the exemptive relief available under the Underwriter's Exemption. The
Mandatory Purchase is likely to be characterized under ERISA and Section 4975
of the Code as a principal transaction between the owner of a Class A
Certificate and CDC, the party who has the contractual obligation to purchase
those certificates on the Distribution Date in September 2005 under the
Mandatory Certificate Purchase Agreement. Therefore, the purchase by CDC under
the Mandatory Certificate Purchase Agreement could be characterized under
certain circumstances as a prohibited transaction under ERISA and Section 4975
of the Code between a Plan which holds a Class A Certificate before the
Distribution Date in September 2005 and a Party in Interest (as defined in the
prospectus) which acquires or exercises the obligation to purchase those
certificates under the Mandatory Certificate Purchase Agreement, unless an
exemption is available.
Accordingly, no Plan or other person using Plan Assets may acquire or hold
a Class A Certificate before the Distribution Date in September 2005 unless
such acquisition or holding is eligible for the exemptive relief available
under Prohibited Transaction Class Exemption 84-14 (for transactions by
independent "qualified professional asset managers," 91-38 (for transactions by
bank collective investment funds), 90-1 (for transactions by insurance company
pooled separate accounts), 95-60 (for transactions by insurance company general
accounts) or 96-23 (for transactions effected by "in-house asset managers").
Plan fiduciaries should consult their legal counsel concerning these issues.
Each beneficial owner of a Class A Certificate, or any interest therein, shall
be deemed to have represented, by virtue of its acquisition or holding of that
certificate, or interest therein, that either (i) it is not a Plan or person
using Plan Assets or (ii) the acquisition and holding of that certificate are
eligible for the exemptive relief available under one of the five Prohibited
Transaction Class Exemptions described immediately above.
If any Class A Certificate, or any interest therein, is acquired or held
in violation of the provisions of the preceding paragraph, the next preceding
permitted beneficial owner will be treated as the beneficial owner of that
certificate, retroactive to the date of transfer to the purported beneficial
owner. Any purported beneficial owner whose acquisition or holding of any such
certificate,
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or interest therein, was effected in violation of the provisions of the
preceding paragraph shall indemnify and hold harmless PNC Mortgage Securities
Corp., the trustee, the master servicer and the Trust from and against any and
all liabilities, claims, costs or expenses incurred by such parties as a result
of such acquisition or holding.
PNC Mortgage Securities Corp. makes no representation that the sale of any
of the certificates to a Plan or other purchaser acting on its behalf meets any
relevant legal requirement for investments by Plans generally or any particular
Plan, or that the investment is appropriate for Plans generally or any
particular Plan.
METHOD OF DISTRIBUTION
PNC Mortgage Securities Corp. has agreed to sell to the underwriter, and
the underwriter has agreed to purchase, all of the certificates other than the
0.01% percentage interest of the Residual Certificates that PNC Mortgage
Securities Corp. will retain. An underwriting agreement between PNC Mortgage
Securities Corp. and the underwriter governs the sale of the certificates. The
aggregate proceeds (excluding accrued interest) to PNC Mortgage Securities
Corp. from the sale of the certificates, before deducting expenses estimated to
be $370,000, will be approximately 100.15% of the initial aggregate principal
balance of the certificates. Under the underwriting agreement, the underwriter
has agreed to take and pay for all of the certificates, if any are taken. The
underwriter will distribute the certificates from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The difference between the purchase price for the certificates paid to
PNC Mortgage Securities Corp. and the proceeds from the sale of the
certificates realized by the underwriter will constitute underwriting discounts
and commissions.
PNC Mortgage Securities Corp. has agreed to indemnify the underwriter
against certain civil liabilities, including liabilities under the Securities
Act of 1933.
LEGAL MATTERS
PNC Mortgage Securities Corp.'s General Counsel, Vice President and
Secretary, Thomas G. Lehmann, and its special counsel, Orrick, Herrington &
Sutcliffe LLP, San Francisco, California, will deliver legal opinions required
by the underwriting agreement. Brown & Wood LLP, New York, New York, will pass
upon certain legal matters on behalf of the underwriter. The enforceability of
the Class A-4 Certificate Insurance Policy will be passed upon by Kutak Rock
LLP, Omaha, Nebraska, special counsel to the Certificate Insurer.
CERTIFICATE RATINGS
It is a condition to the issuance of the certificates that they receive
ratings from S&P and Moody's indicated:
<TABLE>
<CAPTION>
RATING AGENCY
----------------
CLASS S&P MOODY'S
---------------- ----- --------
<S> <C> <C>
A-1 ............ AAA Aaa
A-2 ............ AAA Aaa
A-3 ............ AAA Aaa
A-4 ............ AAA Aaa
</TABLE>
<TABLE>
<CAPTION>
RATING AGENCY
----------------
CLASS S&P MOODY'S
---------------- ----- --------
<S> <C> <C>
X ........... AAA Aaa
B ........... Baa2
R-1 ......... AAA Aaa
R-2 ......... AAA Aaa
</TABLE>
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 on the Class A Certificates are
determined without regard to the Mandatory Certificate Purchase Agreement. The
ratings on the Class A-4 Certificates are determined without regard to the
Class A-4 Certificate Insurance Policy. The ratings
S-59
<PAGE>
do not address the effect on the certificates' yield attributable to
prepayments or recoveries on the underlying mortgage loans. Further, the
ratings on the Class X Certificates do not address whether investors will
recover their initial investment. Additionally, the ratings on the Residual
Certificates address only the return of the Class R-1 and Class R-2 Principal
Balance and interest on that balance at the stated rate.
The ratings on the certificates address the likelihood of the receipt by
certificateholders of all distributions with respect to the underlying mortgage
loans to which they are entitled. 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 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" in this prospectus supplement.
PNC Mortgage Securities Corp. has not requested a rating on the
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
certificates, or, if it does, what rating would be assigned by any other rating
agency. A rating on the certificates by another rating agency, if assigned at
all, may be lower than the rating assigned to the certificates by S&P or
Moody's.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1999 and December 31, 1998 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1999
incorporated by reference in this Prospectus Supplement have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
S-60
<PAGE>
APPENDIX A+
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS PERCENTAGES OF THE CONSTANT PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1
ASSUMING A FINAL
MATURITY DATE IN
SEPTEMBER 2005 CLASS A-1
-------------------------------------------- --------------------------------------------
DISTRIBUTION DATE 5% 12% 18% 20% 25% 5% 12% 18% 20% 25%
------------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
December 25, 2001 ....... 84 64 47 41 27 84 64 47 41 27
December 25, 2002 ....... 69 32 3 0 0 69 32 3 0 0
December 25, 2003 ....... 54 4 0 0 0 54 4 0 0 0
December 25, 2004 ....... 40 0 0 0 0 40 0 0 0 0
December 25, 2005 ....... 0 0 0 0 0 27 0 0 0 0
December 25, 2006 ....... 0 0 0 0 0 14 0 0 0 0
December 25, 2007 ....... 0 0 0 0 0 1 0 0 0 0
December 25, 2008 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2009 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2010 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2011 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2012 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2013 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2014 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2015 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2016 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2017 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2018 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2019 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2020 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2021 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2022 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2023 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2024 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2025 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2026 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2027 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2028 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2029 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2030 ....... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(Years)(1) ............. 3.1 1.5 1.0 0.9 0.7 3.4 1.5 1.0 0.9 0.7
<CAPTION>
CLASS A-2
ASSUMING A FINAL
MATURITY DATE IN
SEPTEMBER 2005 CLASS A-2
-------------------------------------------- ---------------------------------------------
DISTRIBUTION DATE 5% 12% 18% 20% 25% 5% 12% 18% 20% 25%
------------------------- -------- -------- -------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ...... 100 100 100 100 100 100 100 100 100 100
December 25, 2001 ....... 100 100 100 100 100 100 100 100 100 100
December 25, 2002 ....... 100 100 100 91 58 100 100 100 91 58
December 25, 2003 ....... 100 100 51 35 0 100 100 51 35 0
December 25, 2004 ....... 100 70 8 0 0 100 70 8 0 0
December 25, 2005 ....... 0 0 0 0 0 100 38 0 0 0
December 25, 2006 ....... 0 0 0 0 0 100 9 0 0 0
December 25, 2007 ....... 0 0 0 0 0 100 0 0 0 0
December 25, 2008 ....... 0 0 0 0 0 84 0 0 0 0
December 25, 2009 ....... 0 0 0 0 0 66 0 0 0 0
December 25, 2010 ....... 0 0 0 0 0 50 0 0 0 0
December 25, 2011 ....... 0 0 0 0 0 34 0 0 0 0
December 25, 2012 ....... 0 0 0 0 0 19 0 0 0 0
December 25, 2013 ....... 0 0 0 0 0 5 0 0 0 0
December 25, 2014 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2015 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2016 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2017 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2018 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2019 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2020 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2021 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2022 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2023 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2024 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2025 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2026 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2027 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2028 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2029 ....... 0 0 0 0 0 0 0 0 0 0
December 25, 2030 ....... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(Years)(1) ............. 4.7 4.3 3.1 2.8 2.2 10.1 4.7 3.1 2.8 2.2
</TABLE>
-------
+ The following tables have been prepared based on the assumptions described
herein under "Yield and Prepayment Considerations--General" (including the
assumptions regarding the characteristics and performance of the mortgage
loans which differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
* Indicates an amount above zero and less than 0.5% of the original
principal balance outstanding.
(1) The weighted average life of any class of certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal amount
on each Distribution Date on such class of certificates by the number of
years from the date of issuance of the certificate 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
such class of certificates.
S-61
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS PERCENTAGES OF THE CONSTANT PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-3 AND CLASS A-4
ASSUMING A FINAL
MATURITY DATE IN
SEPTEMBER 2005 CLASS A-3 AND CLASS A-4
-------------------------------------------- ----------------------------------------------
DISTRIBUTION DATE 5% 12% 18% 20% 25% 5% 12% 18% 20% 25%
---------------------- -------- -------- -------- -------- -------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ... 100 100 100 100 100 100 100 100 100 100
December 25, 2001 .... 100 100 100 100 100 100 100 100 100 100
December 25, 2002 .... 100 100 100 100 100 100 100 100 100 100
December 25, 2003 .... 100 100 100 100 98 100 100 100 100 98
December 25, 2004 .... 100 100 100 94 72 100 100 100 94 72
December 25, 2005 .... 0 0 0 0 0 100 100 84 74 53
December 25, 2006 .... 0 0 0 0 0 100 100 68 59 39
December 25, 2007 .... 0 0 0 0 0 100 91 55 46 29
December 25, 2008 .... 0 0 0 0 0 100 79 45 36 21
December 25, 2009 .... 0 0 0 0 0 100 69 36 29 16
December 25, 2010 .... 0 0 0 0 0 100 59 29 23 12
December 25, 2011 .... 0 0 0 0 0 100 51 23 18 9
December 25, 2012 .... 0 0 0 0 0 100 44 19 14 6
December 25, 2013 .... 0 0 0 0 0 100 38 15 11 5
December 25, 2014 .... 0 0 0 0 0 95 32 12 8 3
December 25, 2015 .... 0 0 0 0 0 87 27 9 6 2
December 25, 2016 .... 0 0 0 0 0 80 23 7 5 2
December 25, 2017 .... 0 0 0 0 0 73 20 6 4 1
December 25, 2018 .... 0 0 0 0 0 66 16 5 3 1
December 25, 2019 .... 0 0 0 0 0 59 14 4 2 1
December 25, 2020 .... 0 0 0 0 0 53 11 3 2 *
December 25, 2021 .... 0 0 0 0 0 47 9 2 1 *
December 25, 2022 .... 0 0 0 0 0 41 8 2 1 *
December 25, 2023 .... 0 0 0 0 0 35 6 1 1 *
December 25, 2024 .... 0 0 0 0 0 29 5 1 * *
December 25, 2025 .... 0 0 0 0 0 24 4 1 * *
December 25, 2026 .... 0 0 0 0 0 19 3 * * *
December 25, 2027 .... 0 0 0 0 0 13 2 * * *
December 25, 2028 .... 0 0 0 0 0 8 1 * * *
December 25, 2029 .... 0 0 0 0 0 3 * * * *
December 25, 2030 .... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(Years)(1) .......... 4.7 4.7 4.7 4.6 4.3 20.9 12.7 8.8 7.9 6.2
<CAPTION>
CLASS B CLASS R-1 AND CLASS R-2
---------------------------------------------- --------------------------------------------
DISTRIBUTION DATE 5% 12% 18% 20% 25% 5% 12% 18% 20% 25%
---------------------- --------- --------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage ... 100 100 100 100 100 100 100 100 100 100
December 25, 2001 .... 99 99 99 99 99 0 0 0 0 0
December 25, 2002 .... 99 99 99 99 99 0 0 0 0 0
December 25, 2003 .... 98 98 98 98 98 0 0 0 0 0
December 25, 2004 .... 97 97 97 97 97 0 0 0 0 0
December 25, 2005 .... 96 96 96 96 96 0 0 0 0 0
December 25, 2006 .... 94 89 78 76 71 0 0 0 0 0
December 25, 2007 .... 91 77 63 60 53 0 0 0 0 0
December 25, 2008 .... 87 67 51 47 39 0 0 0 0 0
December 25, 2009 .... 82 58 41 37 29 0 0 0 0 0
December 25, 2010 .... 76 50 33 29 21 0 0 0 0 0
December 25, 2011 .... 71 43 27 23 16 0 0 0 0 0
December 25, 2012 .... 66 37 21 18 11 0 0 0 0 0
December 25, 2013 .... 61 32 17 14 8 0 0 0 0 0
December 25, 2014 .... 56 27 14 11 6 0 0 0 0 0
December 25, 2015 .... 52 23 11 8 4 0 0 0 0 0
December 25, 2016 .... 47 20 9 6 3 0 0 0 0 0
December 25, 2017 .... 43 17 7 5 2 0 0 0 0 0
December 25, 2018 .... 39 14 5 4 2 0 0 0 0 0
December 25, 2019 .... 35 12 4 3 1 0 0 0 0 0
December 25, 2020 .... 31 10 3 2 1 0 0 0 0 0
December 25, 2021 .... 28 8 2 2 1 0 0 0 0 0
December 25, 2022 .... 24 6 2 1 * 0 0 0 0 0
December 25, 2023 .... 21 5 1 1 * 0 0 0 0 0
December 25, 2024 .... 17 4 1 1 * 0 0 0 0 0
December 25, 2025 .... 14 3 1 * * 0 0 0 0 0
December 25, 2026 .... 11 2 * * * 0 0 0 0 0
December 25, 2027 .... 8 1 * * * 0 0 0 0 0
December 25, 2028 .... 5 1 * * * 0 0 0 0 0
December 25, 2029 .... 2 * * * * 0 0 0 0 0
December 25, 2030 .... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(Years)(1) .......... 16.0 11.5 9.3 8.9 8.1 0.1 0.1 0.1 0.1 0.1
</TABLE>
-------
* Indicates an amount above zero and less than 0.5% of the original
principal balance outstanding.
(1) The weighted average life of any class of certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such class of certificates by the
number of years from the date of issuance of the certificate 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 such class of certificates.
S-62
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
MORTGAGE INTEREST RATES AS OF THE CUT-OFF DATE
-----------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
MORTGAGE NUMBER OF MORTGAGE BALANCE OF
INTEREST MORTGAGE LOANS AS OF THE ALL MORTGAGE
RATE (%) LOANS CUT-OFF DATE LOANS
------------------- ----------- ------------------- -------------
<S> <C> <C> <C>
6.375 ............. 1 $ 387,055.92 0.15%
6.500 ............. 2 898,229.43 0.35
6.750 ............. 1 597,387.82 0.23
6.875 ............. 2 673,354.63 0.26
7.000 ............. 5 2,026,002.83 0.78
7.125 ............. 5 2,487,045.31 0.96
7.250 ............. 10 4,135,790.31 1.60
7.375 ............. 18 6,314,744.99 2.44
7.500 ............. 38 14,471,974.45 5.59
7.625 ............. 39 13,565,854.70 5.24
7.750 ............. 50 22,281,207.89 8.61
7.875 ............. 84 29,851,724.39 11.53
8.000 ............. 50 17,887,467.11 6.91
8.125 ............. 66 24,773,588.54 9.57
8.250 ............. 146 50,508,850.80 19.51
8.375 ............. 87 32,189,262.57 12.44
8.500 ............. 42 14,935,090.13 5.77
8.625 ............. 16 8,135,057.94 3.14
8.750 ............. 22 6,988,301.85 2.70
8.875 ............. 9 4,256,568.50 1.64
9.000 ............. 1 259,640.92 0.10
9.125 ............. 1 493,662.73 0.19
9.250 ............. 1 358,079.96 0.14
9.375 ............. 1 359,999.50 0.14
--- ---------------- ------
Total ........... 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
<TABLE>
<CAPTION>
YEARS OF INITIAL MONTHLY PAYMENTS
-----------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
YEAR OF BALANCE OF THE PRINCIPAL
INITIAL NUMBER OF MORTGAGE BALANCE OF
MONTHLY MORTGAGE LOANS AS OF THE ALL MORTGAGE
PAYMENT LOANS CUT-OFF DATE LOANS
------------------- ----------- ------------------- -------------
<S> <C> <C> <C>
1999 .............. 10 $ 2,731,194.25 1.06%
2000 .............. 687 256,104,748.97 98.94
--- ---------------- ------
Total ........... 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
<TABLE>
<CAPTION>
PASS-THROUGH RATES
-------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL WEIGHTED WEIGHTED
BALANCE OF THE AVERAGE AVERAGE
MORTGAGE MORTGAGE SCHEDULED
RANGE OF LOANS AS OF THE INTEREST REMAINING TERM
PASS-THROUGH RATES (%) CUT-OFF DATE RATES (IN MONTHS)
------------------------ ------------------- ------------ ---------------
<S> <C> <C> <C>
5.751-6.000 ............ $ 387,055.92 6.375% 357
6.001-6.250 ............ 898,229.43 6.500 358
6.251-6.500 ............ 1,980,185.40 6.907 351
6.501-6.750 ............ 7,002,112.00 7.224 356
6.751-7.000 ............ 24,246,247.06 7.498 355
7.001-7.250 ............ 30,546,426.16 7.703 355
7.251-7.500 ............ 64,258,727.37 7.998 356
7.501-7.750 ............ 67,722,840.32 8.226 357
7.751-8.000 ............ 44,982,982.61 8.405 357
8.001-8.250 ............ 13,879,340.68 8.666 356
8.251-8.500 ............ 2,078,134.04 8.887 356
8.501-8.750 ............ 493,662.73 9.125 355
8.751-9.000 ............ 359,999.50 9.375 354
---------------- ------ ---
$ 258,835,943.22 8.057%* 356*
================
</TABLE>
----------------------
* Represents a weighted average of all the mortgage loans.
As of the Cut-Off Date, the Pass-Through Rates for the mortgage loans
ranged from approximately 5.889% per annum to 8.764% per annum, with a weighted
average of approximately 7.427% per annum.
<TABLE>
<CAPTION>
ORIGINAL PRINCIPAL BALANCES
------------------------------------------------------------------------
AGGREGATE PERCENTAGE
PRINCIPAL OF THE
BALANCE OF THE AGGREGATE
MORTGAGE PRINCIPAL
NUMBER OF LOANS AS OF BALANCE OF
RANGE OF ORIGINAL MORTGAGE THE ALL MORTGAGE
PRINCIPAL BALANCES LOANS CUT-OFF DATE LOANS
-------------------------- ----------- ------------------- -------------
<S> <C> <C> <C>
$ 50,000 or less ......... 1 $ 47,000.00 0.02%
$ 50,001-75,000 .......... 4 264,950.00 0.10
$ 75,001-100,000 ......... 11 1,033,798.44 0.40
$100,001-150,000 ......... 23 2,862,330.43 1.11
$150,001-200,000 ......... 25 4,475,696.40 1.73
$200,001-250,000 ......... 32 7,243,282.52 2.80
$250,001-300,000 ......... 150 41,810,467.28 16.15
$300,001-350,000 ......... 148 47,784,391.29 18.46
$350,001-400,000 ......... 94 35,313,159.81 13.64
$400,001-450,000 ......... 44 18,691,256.96 7.22
$450,001-500,000 ......... 68 32,567,135.26 12.58
Over $500,000 ............ 97 66,742,474.83 25.79
--- ---------------- ------
Total ................ 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
As of the Cut-Off Date, the principal balances of the mortgage loans
ranged from approximately $47,000 to $2,000,000 with an average of
approximately $371,357.
<TABLE>
<CAPTION>
CURRENT LOAN-TO-VALUE RATIOS
---------------------------------------------------------------------
PERCENTAGE
OF THE
AGGREGATE AGGREGATE
PRINCIPAL BALANCE PRINCIPAL
CURRENT NUMBER OF OF THE MORTGAGE BALANCE OF
LOAN-TO-VALUE MORTGAGE LOANS AS OF THE ALL MORTGAGE
RATIO (%) LOANS CUT-OFF DATE LOANS
----------------------- ----------- ------------------- -------------
<S> <C> <C> <C>
60.00 or less ......... 63 $ 23,873,761.47 9.22%
60.01- 70.00 .......... 72 28,349,602.57 10.95
70.01- 75.00 .......... 53 21,430,338.33 8.28
75.01- 80.00 .......... 283 105,788,353.33 40.87
80.01- 85.00 .......... 14 5,597,386.34 2.16
85.01- 90.00 .......... 74 26,475,845.47 10.23
90.01- 95.00 .......... 29 8,940,964.76 3.45
95.01-100.00 .......... 109 38,379,690.95 14.83
--- ---------------- ------
Total ............. 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
At origination, the weighted average loan-to-value ratio of the mortgage
loans was approximately 79.5%. As of the Cut-Off Date, the weighted average
loan-to-value ratio of the mortgage loans was approximately 79.2%.
S-63
<PAGE>
<TABLE>
<CAPTION>
TYPES OF MORTGAGED PROPERTIES
---------------------------------------------------------------------------------------
AGGREGATE PERCENTAGE
PRINCIPAL OF THE
BALANCE OF THE AGGREGATE
NUMBER OF MORTGAGE PRINCIPAL
MORTGAGE LOANS AS OF THE BALANCE OF ALL
PROPERTY TYPES LOANS CUT-OFF DATE MORTGAGE LOANS
-------------------------------- ----------- -------------------- ---------------
<S> <C> <C> <C>
Single Family Detached ......... 400 $ 160,770,034.04 62.11%
Duplex ......................... 6 2,617,882.56 1.01
Triplex ........................ 2 975,000.00 0.38
Fourplex ....................... 1 359,999.50 0.14
Condominium .................... 113 30,838,706.90 11.91
Planned Unit Development 52 19,566,738.74 7.56
Hi-Rise Condominium ............ 5 1,685,977.16 0.65
Deminimus PUD .................. 115 41,490,604.32 16.03
Housing Cooperatives ........... 3 531,000.00 0.21
--- ----------------- ------
Total ...................... 697 $ 258,835,943.22 100.00%
=== ================= ======
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION BY STATE
----------------------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
NUMBER OF MORTGAGE LOANS BALANCE OF
MORTGAGE AS OF THE ALL MORTGAGE
STATE LOANS CUT-OFF DATE LOANS
------------------------------ ----------- ------------------- -------------
<S> <C> <C> <C>
Alabama ...................... 2 $ 595,000.00 0.23%
Alaska ....................... 1 336,865.76 0.13
Arizona ...................... 18 7,211,756.03 2.79
Arkansas ..................... 2 573,959.55 0.22
California ................... 243 96,618,425.05 37.33
Colorado ..................... 37 11,751,077.21 4.54
Connecticut .................. 19 7,728,245.58 2.99
District of Columbia ......... 2 654,025.10 0.25
Florida ...................... 22 7,077,643.23 2.73
Georgia ...................... 23 7,392,153.95 2.86
Idaho ........................ 1 703,262.60 0.27
Illinois ..................... 40 14,756,993.29 5.70
Indiana ...................... 2 532,900.46 0.21
Kansas ....................... 4 1,319,082.38 0.51
Kentucky ..................... 1 333,335.55 0.13
Louisiana .................... 3 1,322,572.16 0.51
Maine ........................ 2 430,982.06 0.17
Maryland ..................... 14 4,658,299.59 1.80
Massachusetts ................ 24 8,820,415.18 3.41
Michigan ..................... 13 5,211,088.66 2.01
Minnesota .................... 6 1,927,528.79 0.74
Missouri ..................... 3 2,269,750.00 0.88
Montana ...................... 2 708,538.98 0.27
Nevada ....................... 6 2,869,930.95 1.11
New Hampshire ................ 1 387,055.92 0.15
New Jersey ................... 23 8,502,640.26 3.28
New Mexico ................... 1 289,000.00 0.11
New York ..................... 18 7,773,378.27 3.00
North Carolina ............... 15 4,608,146.09 1.78
Ohio ......................... 20 5,996,381.41 2.32
Oklahoma ..................... 1 447,964.60 0.17
Oregon ....................... 6 2,057,070.26 0.79
Pennsylvania ................. 15 5,523,413.90 2.13
South Carolina ............... 8 2,164,331.84 0.84
Tennessee .................... 6 1,919,844.51 0.74
Texas ........................ 30 10,226,471.17 3.95
Utah ......................... 2 855,517.44 0.33
Vermont ...................... 2 198,282.71 0.08
Virginia ..................... 19 7,520,655.48 2.91
Washington ................... 33 12,432,953.26 4.80
Wisconsin .................... 3 612,476.76 0.24
Wyoming ...................... 4 1,516,527.23 0.59
--- ---------------- ------
Total .................... 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
No more than approximately 1.1% of the mortgage loans will be secured by
mortgaged properties in any one California zip code area, and no more than
approximately 0.6% of the mortgage loans will be secured by mortgaged
properties in any single zip code area outside of California.
<TABLE>
<CAPTION>
ORIGINAL TERMS
------------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
NUMBER OF MORTGAGE BALANCE OF
LOAN TERM MORTGAGE LOANS AS OF THE ALL MORTGAGE
(IN MONTHS) LOANS CUT-OFF DATE LOANS
------------------- ----------- -------------------- -------------
<S> <C> <C> <C>
360 ............... 697 $ 258,835,943.22 100.00%
--- ----------------- ------
Total ........... 697 $ 258,835,943.22 100.00%
=== ================= ======
</TABLE>
<TABLE>
<CAPTION>
SCHEDULED MATURITY YEARS
-----------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
NUMBER OF MORTGAGE BALANCE OF
MORTGAGE LOANS AS OF THE ALL MORTGAGE
YEAR OF MATURITY LOANS CUT-OFF DATE LOANS
------------------- ----------- ------------------- -------------
<S> <C> <C> <C>
2029 .............. 13 $ 3,591,326.55 1.39
2030 .............. 684 255,244,616.67 98.61
--- ---------------- ------
Total ........... 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
The latest scheduled maturity of any of the mortgage loans is November
2030.
<TABLE>
<CAPTION>
DOCUMENTATION PROGRAM TYPES
--------------------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
NUMBER OF MORTGAGE BALANCE OF
LOAN DOCUMENTATION MORTGAGE LOANS AS OF THE ALL MORTGAGE
PROGRAM TYPE LOANS CUT-OFF DATE LOANS
--------------------------- ----------- -------------------- -------------
<S> <C> <C> <C>
Full Documentation ........ 634 $ 234,904,383.25 90.75%
No Documentation .......... 24 8,401,588.58 3.25
No Ratio .................. 13 6,304,532.55 2.44
Reduced Documentation ..... 26 9,225,438.84 3.56
--- ---------------- ------
Total ................. 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
As of the Cut-Off Date, the weighted average loan-to-value ratio of the
mortgage loans originated under a reduced or no documentation program was
approximately 81.4%.
As of the Cut-Off Date, the weighted average loan-to-value ratio of the
mortgage loans originated under a no ratio program was approximately 73.5%.
Under a no ratio program, income information is not obtained from the related
mortgagors or verified.
<TABLE>
<CAPTION>
PURPOSE
-----------------------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
NUMBER OF MORTGAGE BALANCE OF
PURPOSE MORTGAGE LOANS AS OF THE ALL MORTGAGE
OF LOAN LOANS CUT-OFF DATE LOANS
------------------------------ ----------- -------------------- -------------
<S> <C> <C> <C>
Purchase Loans ............... 632 $ 234,650,695.97 90.66%
Rate/Term Refinances ......... 32 11,629,300.15 4.49
Cash Out Refinances .......... 33 12,555,947.10 4.85
--- ---------------- ------
Total .................... 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
S-64
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS
-----------------------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
NUMBER OF MORTGAGE BALANCE OF
MORTGAGE LOANS AS OF THE ALL MORTGAGE
OCCUPANCY STATUS LOANS CUT-OFF DATE LOANS
------------------------------ ----------- -------------------- -------------
<S> <C> <C> <C>
Owner Occupied ............... 633 $ 238,789,320.85 92.26%
Owner Occupied--2nd Home ..... 44 15,536,786.72 6.00
Non-Owner Occupied ........... 20 4,509,835.65 1.74
--- ---------------- ------
Total .................... 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
<TABLE>
<CAPTION>
CREDIT SCORE DISTRIBUTION
----------------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
NUMBER OF MORTGAGE BALANCE OF
MORTGAGE LOANS AS OF THE ALL MORTGAGE
CREDIT SCORE LOANS CUT-OFF DATE LOANS
------------------------ ----------- ------------------- -------------
<S> <C> <C> <C>
599 or less ............ 11 $ 3,856,871.90 1.49%
600-619 ................ 12 4,288,432.59 1.66
620-639 ................ 22 8,309,500.18 3.21
640-659 ................ 37 15,044,403.84 5.81
660-679 ................ 48 17,803,344.56 6.88
680-699 ................ 72 26,357,349.56 10.18
700-719 ................ 82 31,149,452.61 12.03
720-739 ................ 106 40,364,493.82 15.59
740-759 ................ 113 40,618,566.48 15.69
760-779 ................ 132 48,993,173.99 18.93
780-799 ................ 49 17,956,507.58 6.94
800 or greater ......... 13 4,093,846.11 1.58
--- ----------------- ------
Total .............. 697 $ 258,835,943.22 100.00%
=== ================= ======
</TABLE>
<TABLE>
<CAPTION>
FIRST INTEREST RATE ADJUSTMENT DATE
-----------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
NUMBER OF MORTGAGE BALANCE OF
MORTGAGE LOANS AS OF THE ALL MORTGAGE
MONTH/YEAR LOANS CUT-OFF DATE LOANS
------------------- ----------- ------------------- -------------
<S> <C> <C> <C>
01/2004 ........... 1 $ 271,228.15 0.10%
03/2004 ........... 1 99,000.00 0.04
07/2004 ........... 1 300,000.00 0.12
09/2004 ........... 1 266,934.59 0.10
10/2004 ........... 3 899,294.01 0.35
11/2004 ........... 3 894,737.50 0.35
12/2004 ........... 3 860,132.30 0.33
01/2005 ........... 9 2,508,805.28 0.97
02/2005 ........... 8 2,298,669.15 0.89
03/2005 ........... 17 4,611,354.88 1.78
04/2005 ........... 34 11,579,377.30 4.47
05/2005 ........... 60 19,035,423.59 7.35
06/2005 ........... 49 17,330,921.95 6.70
07/2005 ........... 51 18,533,264.06 7.16
08/2005 ........... 88 32,641,663.84 12.61
09/2005 ........... 148 56,969,781.61 22.01
10/2005 ........... 119 47,746,324.29 18.45
11/2005 ........... 101 41,989,030.72 16.22
--- ---------------- ------
Total ........... 697 $ 258,835,943.22 100.00%
=== ================ ======
</TABLE>
<TABLE>
<CAPTION>
MARGINS
-----------------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
MORTGAGE BALANCE OF
NUMBER OF LOANS AS OF THE ALL MORTGAGE
MARGIN (%) MORTGAGE LOANS CUT-OFF DATE LOANS
------------------- ---------------- -------------------- -------------
<S> <C> <C> <C>
2.000 ............. 208 $ 81,818,212.13 31.61%
2.500 ............. 1 365,659.90 0.14
2.750 ............. 424 151,191,872.32 58.41
2.875 ............. 6 2,230,342.10 0.86
3.000 ............. 41 16,292,712.92 6.29
3.125 ............. 5 1,641,199.27 0.63
3.250 ............. 2 1,355,829.10 0.52
3.375 ............. 2 529,006.04 0.20
3.500 ............. 6 2,074,193.33 0.80
3.625 ............. 1 417,529.59 0.16
3.750 ............. 1 919,386.52 0.36
--- ----------------- ------
Total ........... 697 $ 258,835,943.22 100.00%
=== ================= ======
</TABLE>
The weighted average Margin of the mortgage loans with a Six-Month Libor
Index is 2.000%. The weighted average Margin of the mortgage loans with a
One-Year CMT Index is approximately 2.799%.
The Rate Floor for each mortgage loan is identical to the Margin, except
that the mortgage loan with a Margin of 3.625% has a Rate Floor of 3.875%.
<TABLE>
<CAPTION>
INTEREST RATE CEILING
-----------------------------------------------------------------------------
PERCENTAGE
AGGREGATE OF THE
PRINCIPAL AGGREGATE
BALANCE OF THE PRINCIPAL
MORTGAGE BALANCE OF
NUMBER OF LOANS AS OF THE ALL MORTGAGE
CEILING RATE (%) MORTGAGE LOANS CUT-OFF DATE LOANS
------------------- ---------------- -------------------- -------------
<S> <C> <C> <C>
11.375 ............ 1 $ 387,055.92 0.15%
11.500 ............ 2 898,229.43 0.35
11.750 ............ 1 597,387.82 0.23
11.875 ............ 1 284,042.76 0.11
12.000 ............ 5 2,026,002.83 0.78
12.125 ............ 3 2,088,045.31 0.81
12.250 ............ 8 3,245,040.31 1.25
12.375 ............ 17 5,936,744.99 2.29
12.500 ............ 36 14,108,196.79 5.45
12.625 ............ 34 11,698,055.43 4.52
12.750 ............ 44 16,333,519.35 6.31
12.875 ............ 81 29,053,563.86 11.22
13.000 ............ 47 16,535,253.27 6.39
13.125 ............ 51 18,435,394.51 7.12
13.250 ............ 61 21,655,477.45 8.37
13.375 ............ 44 15,902,125.71 6.14
13.500 ............ 28 9,306,487.13 3.60
13.625 ............ 14 5,320,576.69 2.06
13.750 ............ 20 10,483,257.55 4.05
13.875 ............ 10 3,462,784.72 1.34
14.000 ............ 3 1,027,642.42 0.40
14.125 ............ 18 7,230,856.76 2.79
14.250 ............ 86 29,196,997.55 11.28
14.375 ............ 42 15,990,281.38 6.18
14.500 ............ 17 6,576,593.00 2.54
14.625 ............ 7 4,682,280.52 1.81
14.750 ............ 9 2,999,858.64 1.16
14.875 ............ 5 2,656,111.66 1.03
15.250 ............ 1 358,079.96 0.14
15.375 ............ 1 359,999.50 0.14
-- ----------------- ------
Total ........... 697 $ 258,835,943.22 100.00%
=== ================= ======
</TABLE>
S-65
<PAGE>
INDEX OF TERMS
Below is a list of selected significant terms used in this prospectus
supplement and the pages on which their definition can be found.
PAGE
----
Additional Collateral Loans ............................................ S-17
Adjustment Date ........................................................ S-17
Available Distribution Amount .......................................... S-30
Bankruptcy Coverage .................................................... S-29
Certificate Principal Balance .......................................... S-21
CDC .................................................................... S-31
Class Principal Balance ................................................ S-21
Closing Date ........................................................... S-21
CPR .................................................................... S-36
Credit Enhancements .................................................... S-16
Credit Support Depletion Date .......................................... S-24
Curtailments ........................................................... S-26
Cut-Off Date ........................................................... S-16
Distribution Date ...................................................... S-24
Due Date ............................................................... S-17
Fraud Coverage ......................................................... S-29
Interest Only Loan ..................................................... S-18
Liquidated Mortgage Loan ............................................... S-26
Liquidation Principal .................................................. S-26
Mandatory Purchase ..................................................... S-31
Margin ................................................................. S-17
Modeling Assumptions ................................................... S-37
Mortgage Portfolio Insurance Policy .................................... S-41
Pass-Through Rate ...................................................... S-25
Payoffs ................................................................ S-26
Periodic Cap ........................................................... S-17
Prepayment Period ...................................................... S-26
Principal Payment Amount ............................................... S-26
Principal Prepayment Amount ............................................ S-26
Pro Rata Allocation .................................................... S-29
Rate Ceiling ........................................................... S-17
Rate Floor ............................................................. S-17
Senior Percentage ...................................................... S-27
Senior Prepayment Percentage ........................................... S-27
Senior Principal Distribution Amount ................................... S-26
Special Hazard Insurance Policy ........................................ S-46
Stated Principal Balance ............................................... S-27
Subordinate Principal Distribution Amount .............................. S-27
Trust .................................................................. S-16
Weighted Average Pass-Through Rate ..................................... S-4
S-66
<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 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.
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 Financial Services Group, Inc.
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.
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.
November 28, 2000
<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 92.
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 ..................................... 13
YIELD CONSIDERATIONS ................................ 13
General ....................................... 13
Effective Interest Rate ....................... 14
MATURITY, AVERAGE LIFE AND
PREPAYMENT ASSUMPTIONS ........................... 15
Redemption of Certificates or
Underlying Mortgage Loans ................... 16
THE COMPANY ......................................... 17
Mortgage Purchase Program ..................... 17
Loan Standards ................................ 17
Credit, Appraisal and Underwriting
Standards ................................... 18
Seller Warranties and
Indemnification of the Company .............. 19
Relationships with Affiliates ................. 20
DESCRIPTION OF CERTIFICATES ......................... 20
General ....................................... 20
Assignment of Mortgage Loans .................. 21
Substitution of Mortgage Loans ................ 23
Representations and Warranties ................ 23
Servicing ..................................... 25
Retained Yield ................................ 26
Payments on Mortgage Loans; Custodial
Accounts for P&I, Investment Account,
Certificate Account and Reserve
Account ..................................... 26
Distributions on Certificates ................. 31
Reports to Certificateholders ................. 33
Advances ...................................... 34
Collection and Other Servicing Procedures...... 35
Servicing Compensation and Payment of
Expenses .................................... 36
Evidence as to Compliance ..................... 38
Certain Matters Regarding the Master
Servicer, the Servicer, the Certificate
Administrator and the Company ............... 38
Events of Default ............................. 39
Rights Upon Event of Default .................. 40
Amendment ..................................... 41
List of Certificateholders .................... 41
Termination ................................... 42
Redemption Agreement .......................... 42
Put Option .................................... 42
The Trustee ................................... 42
PRIMARY INSURANCE, FHA
MORTGAGE INSURANCE, VA
MORTGAGE GUARANTY, HAZARD
INSURANCE; CLAIMS THEREUNDER ..................... 44
Primary Insurance ............................. 44
FHA Mortgage Insurance ........................ 46
<CAPTION>
PAGE
---------
<S> <C>
VA Mortgage Guaranty .......................... 46
Hazard Insurance .............................. 47
DESCRIPTION OF CREDIT
ENHANCEMENTS ..................................... 48
Mortgage Pool Insurance ....................... 49
Subordination ................................. 51
The Fraud Bond ................................ 52
The Bankruptcy Bond ........................... 52
Special Hazard Insurance ...................... 53
Letter of Credit .............................. 53
Reserve Fund .................................. 54
Certificate Insurance Policies ................ 54
Maintenance of Credit Enhancements;
Claims Thereunder and Other
Realization Upon Defaulted Mortgage
Loans ....................................... 54
CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS ................................... 57
Cooperative Loans ............................. 58
Tax Aspects of Cooperative Ownership .......... 59
Foreclosure ................................... 59
Foreclosure on Shares of Cooperatives ......... 60
Rights of Redemption .......................... 62
Anti-Deficiency Legislation and Other
Limitations on Lenders ...................... 62
Enforceability of Certain Provisions .......... 63
Applicability of Usury Laws ................... 64
Alternative Mortgage Instruments .............. 64
Environmental Risks ........................... 65
ERISA CONSIDERATIONS ................................ 66
Plan Asset Regulation ......................... 66
Underwriter's Exemption ....................... 67
Other Exemptions .............................. 69
Insurance Company General Accounts ............ 69
Representations from Investing Plans .......... 70
Tax-Exempt Plan Investors ..................... 70
Consultation with Counsel ..................... 70
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ..................................... 72
Classification of REMIC Trust Funds ........... 72
Characterization of Investments in
REMIC Certificates .......................... 72
Taxation of Owners of REMIC Regular
Certificates ................................ 73
Original Issue Discount ..................... 73
Market Discount and Premium ................. 77
Realized Losses ............................. 79
Callable Class Certificates ................. 79
Taxation of Owners of REMIC Residual
Certificates ................................ 81
General ..................................... 81
Taxable Income or Net Loss of the
REMIC Trust Fund ......................... 81
Basis Rules and Distributions ............... 82
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Excess Inclusions ............................. 82
Noneconomic REMIC Residual
Certificates ............................... 83
Tax-Exempt Investors .......................... 84
Real Estate Investment Trusts ................. 84
Mark-to-Market Rules .......................... 84
Sales of REMIC Certificates ..................... 84
Pass-Through of Servicing Fees .................. 86
Prohibited Transactions and Other Possible
REMIC Taxes ................................... 86
Termination of a REMIC Trust Fund ............... 87
Reporting and Other Administrative
Matters of REMICs ............................. 87
<CAPTION>
PAGE
-----
<S> <C>
Backup Withholding with Respect to
REMIC Certificates ............................ 88
Foreign Investors in REMIC Certificates ......... 88
REMIC Regular Certificates .................... 88
REMIC Residual Certificates ................... 88
New Withholding Regulations ..................... 89
State and Local Taxation ........................ 89
Call Right ...................................... 89
METHODS OF DISTRIBUTION ............................... 90
TRANSFERABILITY OF CERTIFICATES ....................... 90
LEGAL MATTERS ......................................... 91
FINANCIAL INFORMATION ................................. 91
ADDITIONAL INFORMATION ................................ 91
INDEX OF TERMS ........................................ 92
</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.
LACK OF SECONDARY MARKETS MAY A secondary market for the certificates
LIMIT YOUR ABILITY TO RESELL YOUR of any series may not develop. If a
CERTIFICATES 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 When you buy a certificate, you will not
FOR YOUR CERTIFICATES OTHER THAN own an interest in PNC Mortgage
PAYMENTS ON THE MORTGAGE LOANS Securities Corp., The PNC Financial
IN THE TRUST Services Group, Inc. or any of their
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 Mortgage 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 Because your certificates represent an
MORTGAGOR DEFAULTS; CERTAIN OF THE interest in the mortgage loans, your
MORTGAGE LOANS MAY BE ESPECIALLY investment may be affected by a decline
PRONE TO DEFAULTS in 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
5
<PAGE>
enhancements, you will bear all of the
risks resulting from defaults by
mortgagors. In addition, certain types of
mortgage loans which have higher than
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 The prospectus supplement related to your
LIMITED OR REDUCED AND THIS certificates may specify that credit
MAY CAUSE YOUR CERTIFICATES TO enhancements will provide some protection
BEAR MORE RISK OF MORTGAGOR to cover certain losses on the underlying
DEFAULTS 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;
6
<PAGE>
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;
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 The yield to maturity of your
MORTGAGE LOANS IS DIFFERENT THAN certificates will depend primarily on the
EXPECTED, YOUR YIELD MAY BE price you paid for your certificates and
CONSIDERABLY LOWER THAN the rate of principal payments on the
ANTICIPATED 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 Your certificates may be subject to
OR THE UNDERLYING MORTGAGE LOANS redemption or other call features.
WILL AFFECT YOUR YIELD 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.
7
<PAGE>
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
----------
* 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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related Prospectus Supplement, will calculate amounts distributable to the
Certificateholders, prepare tax returns on behalf of the Trust Fund and provide
certain other services specified in the Pooling Agreement (in such capacity, the
"Certificate Administrator"). Unless otherwise specified in the related
Prospectus Supplement, in the event that a Servicing Entity is the only Master
Servicer with respect to any Series, such Servicing Entity will be the
Certificate Administrator with respect to such Series. If so specified in the
applicable Prospectus Supplement, however, (i) the servicing of the Mortgage
Loans will be performed by the Seller which sold the Mortgage Loans to the
Company for inclusion in the Trust Fund, or by a qualified servicer selected by
the Company (either entity acting in such capacity, the "Servicer"), (ii) there
will not be a Master Servicer and (iii) the Company will act as the Certificate
Administrator. The Servicer and the Certificate Administrator may perform their
respective servicing and administrative responsibilities through agents or
independent contractors, but shall not thereby be released from any of their
obligations under the Pooling Agreement. See "Description of
Certificates--Servicing". The applicable Prospectus Supplement will set forth
information respecting the number and principal amount of Mortgage Loans which
were originated for the purpose of (a) purchasing and (b) refinancing the
related Mortgaged Properties.
To the extent specified in the applicable Prospectus Supplement, Mortgage
Loans with loan-to-value ratios and/or principal balances exceeding certain
limits will be covered partially by Primary Insurance Policies. A Mortgage Pool
may include Mortgage Loans insured by the Federal Housing Administration ("FHA")
or guaranteed by the Department of Veterans Affairs ("VA"), which loans will be
covered by FHA insurance policies ("FHA Insurance Policies") and VA guaranties
("VA Guaranties"), respectively. Mortgage Loans guaranteed by the VA ("VA
Loans") may also be covered by supplemental Primary Insurance Policies. In
addition, if specified in the applicable Prospectus Supplement, the Company or a
Servicing Entity, as applicable, as Master Servicer, the Seller or the Servicer,
as applicable, may obtain or establish one or more credit enhancements for a
Mortgage Pool. Any such credit enhancement will be described in the applicable
Prospectus Supplement. Such credit 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.
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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.
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 servicing 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
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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 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
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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
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
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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 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
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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 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.
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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.
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
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"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 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
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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 The PNC Financial Services Group, Inc., a bank holding company which has
announced that the Company will be sold to Washington Mutual, Inc. in the first
quarter of 2001. 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).
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The Mortgage Loans to be included in each Mortgage Pool will be "one- to
four-family" mortgage loans, which means permanent loans (as opposed to
construction or land development loans) secured by Mortgages on non-farm
properties, including attached or detached single-family or second/vacation
homes, two- to four-family primary residences and condominiums or other
attached dwelling units, including individual condominiums, row houses,
townhouses and other separate dwelling units even when located in buildings
containing five or more such units. Each Mortgage Loan must be secured by an
owner occupied primary residence or second/vacation home, or by a nonowner
occupied residence. The Mortgaged Property may not be a mobile home.
CREDIT, APPRAISAL AND UNDERWRITING STANDARDS
The Mortgage Loans to be included in each Mortgage Pool will be subject to
the various credit, appraisal and underwriting standards described herein. The
Company's credit, appraisal and underwriting standards with respect to certain
Mortgage Loans will generally conform to those published in the Company's
Selling Guide (together with the Company's Servicing Guide, the "Guide", as
modified from time to time). The credit, appraisal and underwriting standards
as set forth in the Guide are continuously revised based on opportunities and
prevailing conditions in the residential mortgage market and the market for the
Company's mortgage pass-through certificates. The Mortgage Loans may be
underwritten by the Company or by designated third parties.
In addition, the Company may purchase Mortgage Loans which do not conform
to the underwriting standards set forth in the Guide. Such Mortgage Loans may be
purchased in negotiated transactions from Sellers who will represent that the
Mortgage Loans have been originated in accordance with credit, appraisal and
underwriting standards agreed to by the Company. The Company will generally
review only a limited portion of the Mortgage Loans in any delivery of such
Mortgage Loans for conformity with the applicable credit, appraisal and
underwriting standards. Certain other Mortgage Loans will be purchased from
Sellers who will represent that the Mortgage Loans were originated pursuant to
credit, appraisal and underwriting standards determined by a 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
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require evidence regarding the Mortgagor's employment and income, and of the
amount of deposits made to financial institutions where the Mortgagor maintains
demand or savings accounts. In some instances, Mortgage Loans which were
originated under a Limited Documentation Origination Program may be sold to the
Company. For a mortgage loan originated under a Limited Documentation
Origination Program to qualify for purchase by the Company, the prospective
mortgagor must have a good credit history and be financially capable of making
a larger cash down payment, in a purchase, or be willing to finance less of the
appraised value, in a refinancing, than would otherwise be required by the
Company. Currently, the Company's underwriting standards provide that only
mortgage loans with certain loan-to-value ratios will qualify for purchase. If
the mortgage loan qualifies, the Company waives some of its documentation
requirements and eliminates verification of income and employment for the
prospective mortgagor.
The Company's underwriting standards generally follow guidelines acceptable
to 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
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make representations and warranties to the Company with respect to such
Mortgage Loans or Mortgage Loans in the related Mortgage Loan Servicing Group,
as applicable, and the Company will assign such representations and warranties
to the Trustee and the Certificateholders under the Pooling Agreement. Upon the
breach of any representation or warranty made by such Seller or Servicing
Entity that materially and adversely affects the interests of the
Certificateholder in a Mortgage Loan (other than those breaches which have been
cured), the Seller or Servicing Entity will be required to repurchase the
related Mortgage Loan. See "Description of Certificates--Assignment of Mortgage
Loans" and "--Representations and Warranties".
RELATIONSHIPS WITH AFFILIATES
PNC Mortgage Corp. of America, an affiliate of the Company, may be a
Seller, a Seller/Servicer or a Servicer. Two of the Company's directors are
also directors of PNC Mortgage Corp. of America.
DESCRIPTION OF CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate Pooling
Agreement. With respect to Series of Certificates as to which there will be a
Master Servicer, the Pooling Agreement will be between the Company, as Depositor
and, if applicable, as Master Servicer, the Servicing Entity, if applicable, as
Master Servicer, and the Trustee named in the Prospectus Supplement, and the
Mortgage Loans will be serviced by Seller/Servicers pursuant to selling and
servicing contracts ("Selling and Servicing Contracts") between the Company or
the Servicing Entity, as applicable, and such Seller/Servicers, or will be
serviced by servicers pursuant to servicing arrangements approved by the Company
or the Servicing Entity, as applicable. With respect to Series of Certificates
as to which there will be no Master Servicer, the Pooling Agreement will be
among the Company, as Depositor and Certificate Administrator, the Servicer and
the Trustee named in the Prospectus Supplement. A form of Pooling Agreement and
a form of the Selling and Servicing Contract are filed as exhibits to the
Registration Statement of which this Prospectus is a part. The following
discussion summarizes certain provisions expected to be contained in each
Pooling Agreement which governs the Trust Funds consisting principally of one-
to four-family residential properties. The applicable Prospectus Supplement will
describe material features of the related Pooling Agreement, which may differ
from 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
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certain of which may be subordinated to others. Any such Class of Certificates
may also provide for payments of principal only or interest only or for
disproportionate payments of principal and interest. Subordinated Classes of a
given Series of Certificates may or may not be offered by the same Prospectus
Supplement as the senior Classes of such Series.
The Certificates will be freely transferable and exchangeable for
Certificates of the same Series and Class at the office set forth in such
Certificates, provided, however, that certain Classes of Certificates may be
subject to transfer restrictions set forth in such Certificates and described in
the applicable Prospectus Supplement. A reasonable service charge may be imposed
for any registration of exchange or transfer of Certificates, and the Company
may require payment of a sum sufficient to cover any tax or other governmental
charge. If specified in the applicable Prospectus Supplement, one or more
Classes of Certificates for any Series may be transferable only on the books of
The Depository Trust Company or another depository identified in such Prospectus
Supplement.
Unless otherwise indicated in the applicable Prospectus Supplement,
beginning with the month following the month in which the Cut-Off Date occurs
for a Series of Certificates, distributions of principal and interest (or, where
applicable, principal only or interest only) on each Class of Certificates will
be made either by the Trustee, the Master Servicer or the Certificate
Administrator, as applicable, acting on behalf of the Trustee or a paying agent
appointed by the Trustee (the "Paying Agent") on the 25th day (or if such 25th
day is not a business day, the business day immediately following such 25th day)
of each calendar month (the "Distribution Date") to the persons in whose names
the Certificates are registered at the close of business on the last business
day of the month preceding the month in which the Distribution Date occurs (the
"Record Date"). Distributions for each Series will be made by wire transfer in
immediately available funds for the account of, or by check mailed to, each
Certificateholder of record; provided, however, that, unless otherwise specified
in the related Prospectus Supplement, the final distribution in retirement of
the Certificates for each Class of a Series will be made only upon presentation
and surrender of the Certificates at the office or agency of the Company or the
Trustee specified in the notice to Certificateholders of such final
distribution.
ASSIGNMENT OF MORTGAGE LOANS
The Company will cause the Mortgage Loans to be assigned to the Trustee,
together with all principal and interest on the Mortgage Loans other than
principal and interest due on or before the Cut-Off Date. The Company or a
Servicing Entity, as applicable, will expressly reserve its or a Seller's rights
in and to any Retained Yield, which accordingly will not constitute part of the
Trust Fund. In 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.
Each Mortgage will be assigned to the Trustee by an assignment of mortgage
or other similar instrument recorded or filed in the public recording office
for the jurisdiction in which the related Mortgaged Property is located, except
in jurisdictions where, in the written opinion of counsel admitted to practice
in the applicable state and acceptable to the Trustee and the Company, such
recording or filing is not required to protect the Trustee's interest in the
related 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. In the alternative, with respect to
any Mortgage Loan registered on the mortgage electronic registration system
(the "MERS (Registered Trademark) System")
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maintained by MERSCORP, Inc. and/or Mortgage Electronic Registration Systems,
Inc. or any successor thereto ("MERS"), the change in beneficial ownership to
the Trustee of the Mortgage will be registered electronically through the MERS
(Registered Trademark) System in accordance with the rules of membership of
MERS. MERS will serve as mortgagee of record with respect to these Mortgage
Loans solely as a nominee of the Trustee, in an administrative capacity, and
will not have any interest in these Mortgage Loans.
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 (except as to any Mortgage Loan registered on the
MERS (Registered Trademark) System) to the Trustee of the Mortgage in a form for
recording or filing as may be appropriate in the state where the Mortgaged
Property is located, the original recorded Mortgage with evidence of recording
or filing indicated thereon, a copy of the title insurance policy or other
evidence of title and evidence of any Primary Insurance Policy, FHA Insurance
Policy or VA Guaranty for such Mortgage Loan, if applicable; or, in the case of
each Cooperative Loan, the related Cooperative Note, the original security
agreement, the proprietary lease or occupancy agreement, the related stock
certificate and related blank stock powers, and a copy of the original filed
financing statement together with assignments thereof from the applicable Seller
to the Trustee in a form sufficient for filing. In certain instances where
original documents respecting a Mortgage Loan may not be available prior to
execution of the Pooling Agreement, the Company, such Servicing Entity or such
Servicer will deliver such documents to the Trustee within 270 days thereafter
unless, as set forth in the Pooling Agreement, the county recorder has not yet
returned such Mortgage Loan. Notwithstanding the foregoing, a Trust Fund may
include Mortgage Loans where the original Mortgage Note is not delivered to the
Trustee if the Company delivers to the Trustee or the custodian a copy or a
duplicate original of the Mortgage Note, together with an affidavit certifying
that the original thereof has been lost or destroyed. With respect to such
Mortgage Loans, the Trustee (or its nominee) may not be able to enforce the
Mortgage Note against the related borrower. The Company, such Servicing Entity
or such Servicer will agree to repurchase or substitute for such a Mortgage Loan
in certain circumstances (see "Description of Certificates--Representations and
Warranties").
In instances where, due to a delay on the part of the title insurer, a copy
of the title insurance policy for a particular Mortgage Loan cannot be delivered
to the Trustee prior to or concurrently with the execution of the Pooling
Agreement, the Company will provide a copy of such title insurance policy to the
Trustee within 90 days after the Company's receipt of the original recorded
Mortgage, any intervening recorded assignments or other documents necessary to
issue such title insurance policy.
The Trustee will review the mortgage documents within 45 days of receipt
thereof to ascertain that all required documents have been properly executed and
received. The Trustee will hold such documents for each Series in trust for the
benefit of Certificateholders of such Series. With respect to Series of
Certificates as to which the Company and/or a Servicing Entity will act as
Master Servicer, if any document is found by the Trustee not to have been
properly executed or received or to be unrelated to the Mortgage Loans (or the
related Mortgage Loan Servicing Group for such Series if both the Company and a
Servicing Entity are acting as Master Servicers) identified in the Pooling
Agreement, the Trustee will notify the Company or such Servicing Entity, as
applicable. If the Company or such Servicing Entity, as applicable, cannot cure
such defect, the Company or such Servicing Entity, as applicable, will
substitute a new mortgage loan meeting the conditions set forth in the Pooling
Agreement (see "--Substitution of Mortgage Loans" below) or repurchase the
related Mortgage Loan from the Trustee at a price equal to 100% of the
outstanding principal balance of such Mortgage Loan, plus accrued interest
thereon at the applicable Pass-Through Rate through the last day of the month of
such repurchase. With respect to Series of Certificates as to which there will
be no Master Servicer, if a defect of the type described in the preceding
sentence is discovered by the Trustee and cannot be cured by the Seller, the
Seller will substitute a new mortgage loan or repurchase the related Mortgage
Loan from the Trustee upon the terms described in the preceding sentence. The
purchase price of any Mortgage Loan so repurchased will be passed through to
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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.
Buydown Funds provided by the Sellers or other parties for any Buydown
Loans included in a Mortgage Pool may be deposited on the date of settlement of
the sale of the Certificates to the original purchasers thereof (the "Closing
Date") into either (a) a separate account (the "Buydown Fund Account")
maintained (i) with the Trustee or another financial institution approved by the
Company or Servicing Entity, as applicable, as Master Servicer, (ii) within FDIC
insured accounts (or other insured accounts acceptable to the rating agency or
agencies) held and monitored by a Servicer or (iii) in a separate non-trust
account without FDIC or other insurance in an institution having the highest
unsecured long-term debt rating by the rating agency or agencies (or such other
institution acceptable to the rating agency or agencies) or (b) held in a
Custodial Account for P&I or a Custodial Account for Reserves and monitored by a
Servicer. Since Buydown Funds may be funded at either the par values of future
payment subsidies or funded in an amount less than the par values of future
payment subsidies and determined by discounting such par values in accordance
with interest accruing on such values, Buydown Fund Accounts may be
non-interest-bearing or may bear interest. In no event will the amount held in
any Buydown Fund Account exceed the level of deposit insurance covering such
account. Accordingly, more than one such account may be established.
SUBSTITUTION OF MORTGAGE LOANS
With respect to Series of Certificates as to which the Company and/or a
Servicing Entity will act as Master Servicer, the Company or the Servicing
Entity, as applicable, may substitute an eligible mortgage loan for a defective
Mortgage Loan (or, if applicable, a Mortgage Loan in its related Mortgage Loan
Servicing Group) in lieu of repurchasing such defective Mortgage Loan or the
related Mortgaged Property (a) within three months after the Closing Date for
the related Series of Certificates, and (b) within two years after such Closing
Date, if the related Mortgage Loan is a "defective obligation" within the
meaning of Section 860G(a)(4)(A)(ii) of the Code. Any mortgage loan, to be
eligible for substitution, must fit within the general description of the
Mortgage Loans set forth herein and in the related Prospectus Supplement. With
respect to Series of Certificates as to which there will be no Master Servicer,
the Seller or the Servicer, as specified in the related Prospectus Supplement,
may substitute an eligible mortgage loan for a defective Mortgage Loan in lieu
of repurchasing such defective Mortgage Loan or the related Mortgaged Property
in the circumstances and to the extent described in the two preceding sentences.
See "The Mortgage Pools".
REPRESENTATIONS AND WARRANTIES
Unless otherwise stated in the applicable Prospectus Supplement, in the
Pooling Agreement for each Series of Certificates as to which the Company will
act as a Master Servicer, the Company will represent and warrant to the Trustee
with respect to (a) all Mortgage Loans if it is the only Master Servicer and (b)
the Mortgage Loans in its Mortgage Loan Servicing Group if both the Company and
a Servicing Entity are acting as Master Servicers, among other things, that (i)
the information set forth in the schedule of Mortgage Loans is true and correct
in all material respects; (ii) except in the case of Cooperative Loans, a
lender's title policy (or other satisfactory evidence of title) was issued on
the date of the origination of each Mortgage Loan and each such policy or other
evidence of title is valid and remains in full force and effect; (iii) if a
Primary Insurance Policy, FHA Insurance Policy or VA Guaranty is required with
respect to such Mortgage Loan, such policy or guaranty is valid and remains in
full force and effect as of the Closing Date; (iv) 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,
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(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 make
representations and warranties to the Company with respect to such Mortgage
Loans substantially similar to those indicated in the second preceding
paragraph, and the Company will assign such representations and warranties to
the Trustee and the Certificateholders under the Pooling Agreement. The
applicable Prospectus Supplement and Pooling Agreement may set forth additional
representations and warranties of the Seller, the Servicing Entity and/or the
Company.
In the event of the discovery by the Company, the Servicing Entity or the
Servicer of a breach of any representation or warranty which materially and
adversely affects the interest of the Certificateholders in the related Mortgage
Loan, or the receipt of notice of such a breach from the Trustee, the Company,
the Servicing Entity or the Seller, as the case may be, will cure the breach,
substitute a new mortgage loan for such Mortgage Loan or repurchase such
Mortgage Loan, or any Mortgaged Property acquired with respect thereto, on the
terms set forth above under "--Assignment of Mortgage Loans". The proceeds of
any such repurchase will be passed through to Certificateholders as liquidation
proceeds. This substitution or repurchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for any such breach.
Under the Pooling Agreement, the Company or a Servicing Entity, as Master
Servicer, or the Servicer with respect to Series of Certificates for which there
will be no Master Servicer, will have the right, but not the obligation, to
purchase any Mortgage Loan (or, if applicable, Mortgage Loan in the Company's or
Servicing Entity's Mortgage Loan Servicing Group), subject to the limitations
set forth in the Pooling Agreement, from the applicable Mortgage Pool in the
event that such Mortgage Loan
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becomes 90 days or more delinquent; provided, that the aggregate purchase price
of the Mortgage Loans so repurchased (as set forth in the Pooling Agreement)
shall not exceed one-half of one percent (0.50%) of the aggregate Principal
Balance of all Mortgage Loans as of the Cut-Off Date.
SERVICING
With respect to Series of Certificates as to which the Company and/or a
Servicing Entity will act as Master Servicer, pursuant to the Pooling Agreement
the Company or Servicing Entity, as applicable, as Master Servicer, will be
responsible for servicing and administering the Mortgage Loans, or the Mortgage
Loans in its respective Mortgage Loan Servicing Group, as applicable, but will
be permitted to contract with the Seller/Servicer from whom each Mortgage Loan
was purchased, or another eligible servicing institution, to perform such
functions under the supervision of the Master Servicer as more fully described
below.
In the contract pursuant to which each Seller/Servicer will perform its
servicing duties, which contract will generally be the Selling and Servicing
Contract, each Seller/Servicer will agree, subject to the general supervision of
the Company or Servicing Entity, as applicable, as Master Servicer, or its
respective agent, to perform diligently all services and duties customary to the
servicing of mortgage loans. Such Master Servicer or its agent will monitor each
Seller/Servicer's performance and, unless otherwise specified in the applicable
Prospectus Supplement, such Master Servicer will have the right to remove and
substitute a replacement Seller/Servicer at any time if it considers such
removal to be in the best interest of Certificateholders. The duties performed
by the Seller/Servicers include collection and remittance of principal and
interest payments, administration of mortgage escrow accounts, collection of
insurance claims and, if necessary, foreclosure. In the event a Selling and
Servicing Contract is terminated by the Company or Servicing Entity, as
applicable, as Master Servicer, for any reason, such Master Servicer may procure
a substitute Seller/Servicer, which may be an affiliate of such Master Servicer.
During the period necessary to effect the execution and implementation of a
contract with such substitute Seller/Servicer, all duties and responsibilities
of the Seller/Servicer under the terminated Selling and Servicing Contract will
be performed by such Master Servicer. In such event, such Master Servicer will
be entitled to retain the same Servicing Fee as was paid to the Seller/Servicer
under such terminated Selling and Servicing Contract.
With respect to Series of Certificates as to which there will be no Master
Servicer, pursuant to the Pooling Agreement the servicing of the Mortgage Loans
will be performed by the Servicer, and the Company (as Certificate
Administrator) will calculate amounts distributable to the Certificateholders,
prepare tax returns on behalf of the Trust Fund and provide certain other
administrative services specified in the Pooling Agreement. With respect to a
Series as to which the Company and the Servicing Entity will act as Master
Servicers, unless otherwise specified in the applicable Prospectus Supplement,
the Company will also act as the Certificate Administrator. Unless otherwise
specified in the related Prospectus Supplement, with respect to a Series as to
which a Servicing Entity is the only Master Servicer, such Servicing Entity
shall act as the Certificate Administrator. The Servicer will generally perform
the same services and duties as a Seller/Servicer under a Selling and Servicing
Agreement, as well as certain services of a Master Servicer described herein.
The Trustee or its agent will monitor the Servicer's performance and, unless
otherwise specified in the applicable Prospectus Supplement, the Trustee will
have the right to remove and substitute a replacement servicer, which may be the
Company or an affiliate of the Company, to assume the servicing obligations of
the Servicer at any time if it considers such removal to be in the best
interests of Certificateholders. During the period necessary to effect the
execution and implementation of a contract with such substitute servicer,
certain duties and responsibilities of the Servicer under the Pooling Agreement
will be performed by the Trustee. In such event, the Trustee will be entitled to
retain the same Servicing Fee as was to be paid the Servicer under the Pooling
Agreement. The obligation of the Trustee or a replacement servicer to perform
the servicing duties of the Servicer will not, however, require such party to
cure any defect with respect to any Mortgage Loan, or substitute a new mortgage
loan for or repurchase a Mortgage Loan as to which there has been a breach of a
representation or warranty made by the Seller or to cure any breach of a
servicing covenant made by the former Servicer.
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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, 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
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any applicable credit enhancements or title, hazard or other insurance
policy covering any Mortgage Loan, other than proceeds to be applied to the
restoration or repair of the related Mortgaged Property (hereinafter
referred to as "Insurance Proceeds");
(iii) Any Advances of such Seller/Servicer's funds (such Advances to be
deposited prior to the Withdrawal Date, as defined below); and
(iv) All proceeds of any Mortgage Loans or property acquired in respect
thereof repurchased as required for defects in documentation, breach of
representations or warranties, or otherwise.
Each Seller/Servicer has the option of either (i) depositing gross
interest collections in the Custodial Account for P&I, subject to withdrawal of
its related Servicing Fees, or (ii) deducting its Servicing Fees from gross
interest collections prior to deposit in such account.
On the Withdrawal Date or, with the Master Servicer's approval (or the
related Master Servicer if both the Company and a Servicing Entity are acting
as Master Servicers), on a daily basis, each Seller/Servicer may withdraw the
following amounts from its Custodial Account for P&I:
(i) Amounts received on particular Mortgage Loans as late payments of
principal or interest and respecting which the Seller/Servicer has made an
unreimbursed Advance;
(ii) Amounts to reimburse the Seller/Servicer for Advances the Master
Servicer (or the related Master Servicer if both the Company and a
Servicing Entity are acting as Master Servicers) has determined to be
otherwise nonrecoverable; and
(iii) Amounts in respect of Servicing Fees previously deposited.
The Company and/or the Servicing Entity, as applicable, will require that
deposits in each Custodial Account for P&I be held (a) in a trust account in
the corporate trust department of the Trustee or another financial institution
approved by the Company or Servicing Entity, as applicable, as Master Servicer,
such that the rights of the Company or Servicing Entity, as applicable, as
Master Servicer, the Trustee and the Certificateholders will be fully protected
against the claims of any creditors of the Servicer and of any creditors or
depositors of the institution in which such account is maintained, (b) in FDIC
insured accounts (or other accounts with comparable insurance coverage
acceptable to the rating agency or agencies) created maintained and monitored
by a Servicer or (c) in a separate non-trust account without FDIC or other
insurance in an institution having an unsecured long-term debt rating of at
least one of the two highest unsecured long-term debt ratings of the rating
agency or agencies (or such other institution acceptable to the rating agency
or agencies). If a Custodial Account for P&I is insured by the FDIC and at any
time the amount in such account exceeds the limits of insurance on such
account, the Seller/Servicer shall be required to withdraw such excess from
such account and remit it to the Company or Servicing Entity, as applicable,
for deposit in the Investment Account described below.
With respect to Series of Certificates as to which the Company and/or the
Servicing Entity, as applicable, will act as Master Servicer and unless
otherwise specified in the related Prospectus Supplement, not later than the
20th day of each month (or the preceding business day if such 20th day is not a
business day) (the "Withdrawal Date"), the Company or Servicing Entity, as
applicable, will withdraw or direct the withdrawal from any funds in the
Custodial Account for P&I maintained by each related Seller/Servicer an amount
representing:
(i) Scheduled installments of principal and interest on the Mortgage
Loans received or advanced by such Seller/Servicer which were due on the
first day of the current month, net of Servicing Fees due the
Seller/Servicer and less any amounts to be withdrawn later by the Company
or Servicing Entity, as applicable, from any applicable Buydown Fund
Account;
(ii) Proceeds of liquidations of Mortgage Loans received by the
Seller/Servicer in the immediately preceding calendar month, with interest
to the date of liquidation, net of Servicing Fees due such Seller/Servicer
and less any amounts to be withdrawn later by the Company or Servicing
Entity, as applicable, from any applicable Buydown Fund Account;
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(iii) Principal due to Payoffs received during the period from the 15th
of the immediately preceding calendar month through the 14th of such
calendar month; in each case with interest at the applicable Pass-Through
Rate attributable to interest paid by the Mortgagor through the date of the
Payoff (provided, however, that in the case of Payoffs received between the
first day and the 14th day of any month, interest accrued from the first
day of such month to the date of such Payoff will not be paid to the
Certificateholders), less any amounts to be withdrawn later by the 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.
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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.
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
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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 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
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by the Servicer. The Servicer shall deposit any required Advances in the
Custodial Account for P&I on the Withdrawal Date. The withdrawal of funds and
their deposit into the Investment Account on the Withdrawal Date, as described
above, will also be effected by the Servicer. The Investment Account described
above will be established by the Certificate Administrator and the Trustee, and
investments of amounts therein in Eligible Investments will be directed by the
Certificate Administrator for its own account and at its own risk. The
Certificate Administrator will make the required withdrawal from the Investment
Account on the last day of the Investment Period for deposit in the Certificate
Account, as described above. Authorized withdrawals from the Certificate
Account for the purposes described above will be made by the Certificate
Administrator. Other than as set forth in this paragraph, unless the context
otherwise requires, references above to "Master Servicer" or "Seller/Servicer",
and to "Master Servicing Fee" shall refer instead to "Servicer" and "Servicing
Fee", respectively.
DISTRIBUTIONS ON CERTIFICATES
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
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(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 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.
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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 or publish electronically a statement or statements with
respect to the related Trust Funds setting forth the information specifically
described in the related Pooling Agreement, which generally will include the
following with respect to such Series of Certificates:
(i) the beginning principal balance or notional principal balance
representing the ending balance from the prior statement;
(ii) the amount, if any, of such distribution principal;
(iii) the amount, if any, of such distribution allocable to interest on
the Mortgage Loans accrued at the applicable Pass-Through Rate on the
beginning principal balance or notional principal balance, and, with
respect to a Series of Certificates where one or more Classes of such
Series are subordinated in right of payment to one or more other Classes of
such Series, the amount, if any, of any shortfall in the amount of interest
and principal distributed;
(iv) the total amount distributed;
(v) the ending principal balance or notional principal balance after
the application in (ii) above; and
(vi) the then applicable Pass-Through Rate or weighted average
Pass-Through Rate, calculated as of the close of business on the related
Determination Date.
Upon request, a Certificateholder may receive a monthly report which sets
forth (i) the amount of the distribution for such month allocable to Principal
Prepayments, miscellaneous post-liquidation collections and Conversion Fees,
(ii) Mortgage Loan delinquencies, indicating the number and aggregate principal
amount of Mortgage Loans delinquent one, two and three months, as well as the
book value of any Mortgaged Property acquired through foreclosure, deed in lieu
of foreclosure or other exercise of rights respecting the Trustee's security
interest in the Mortgage Loans, (iii) the amount of remaining coverage under
any applicable credit enhancements, stated separately, as of the close of
business on the applicable Determination Date and (iv) the sum of the Master
Servicing Fee and the aggregate Servicing Fees for the month.
In addition, by the date required by applicable tax law of each year, the
Master Servicer with respect to Series of Certificates as to which there will
be only one Master Servicer, or the Certificate Administrator with respect to
Series of Certificates as to which there will be no Master Servicer or as to
which both the Company and a Servicing Entity will act as Master Servicers,
will furnish a report to each Certificateholder of record at any time during
the preceding calendar year as to the aggregate of
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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 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
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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.
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
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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 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.
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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 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.
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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.
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
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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 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
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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
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Pooling Agreement for any Series or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
The Pooling Agreement for each Series may be amended by the Company and/or
a Servicing Entity and the Trustee, with respect to Series of Certificates as
to which the Company and/or a Servicing Entity will act as Master Servicer (and
in the case where both the Company and a Servicing Entity are acting as Master
Servicers, the Certificate Administrator), and by the Company, the Servicer,
the Certificate Administrator and the Trustee with respect to Series of
Certificates as to which there will be no Master Servicer, without the consent
of any of the Certificateholders covered by such Pooling Agreement, (i) to cure
any ambiguity, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein, (iii) to comply with any
requirements imposed by the Internal Revenue Code of 1986, as amended (the
"Code") or any regulations thereunder, including provisions to such extent as
shall be necessary to maintain the qualification of the Trust Fund as a REMIC
or to avoid or minimize the risk of imposition of any tax on the related Trust
Fund, and (iv) to correct the description of any property at any time included
in the Trust Fund, or to assure conveyance to the Trustee of any property
included in the Trust Fund. The Pooling Agreement for each Series may also be
amended by the Company and the Trustee, with respect to Series of Certificates
as to which the Company will act as Master Servicer, and by the Company, the
Servicer, the Certificate Administrator and the Trustee with respect to Series
of Certificates as to which the Company will not act as Master Servicer, with
the consent of the holders of Certificates for that Series evidencing interests
aggregating not less than 66% of the Trust Fund, as determined in the manner
set forth in such Pooling Agreement, for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of such
Pooling Agreement or of modifying in any manner the rights of the holders of
Certificates of that Series; provided, however, that no such amendment may (i)
reduce in any manner the amount of, or delay the timing of, payments received
on Mortgage Loans which are required to be distributed in respect of any
Certificate without the consent of the holder of such Certificate, or (ii)
reduce the aforesaid percentage of Certificates, the holders of which are
required to consent to any such amendment without the consent of the holders of
all Certificates of such Series then outstanding.
The Prospectus Supplement for a particular Series may describe other or
different provisions concerning conditions to the amendment of the related
Pooling Agreement.
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.
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TERMINATION
The obligations created by the Pooling Agreement for each Series will
terminate upon the occurrence of both (i) the later of the maturity or other
liquidation of the last Mortgage Loan subject thereto and the disposition of
all property acquired upon foreclosure of any Mortgage Loan and (ii) the
payment to Certificateholders of each Class, if any, of that Series of all
amounts held on behalf of such Certificateholders and required to be paid to
them pursuant to such Pooling Agreement. The Pooling Agreement for each Series
will permit, but not require, the Company to repurchase from the Trust Fund for
such Series all remaining Mortgage Loans at a price equal to the unpaid
principal amount thereof or the Trust Fund's adjusted basis in the Mortgage
Loans, as described in the related Prospectus Supplement, in either case
together with interest at the applicable Mortgage Interest Rates (which will
generally be passed through to Certificateholders at the applicable
Pass-Through Rates). The exercise of such right will effect early retirement of
the Certificates of such Series, but the Company's right so to repurchase is
subject to the aggregate principal balances of the Mortgage Loans at the time
of repurchase being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal amount of the Mortgage Loans
underlying the Certificates of such Series as of the Cut-Off Date. In no event,
however, will the trust created by any Pooling Agreement continue beyond the
expiration of 21 years from the death of the survivor of the issue of the
person named in such Pooling Agreement. For each Series, the Trustee will give
written notice of termination of the Pooling Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency specified in the
notice of termination.
REDEMPTION AGREEMENT
If so specified in the Prospectus Supplement for a Series, the related
Trust Fund will enter into a redemption agreement pursuant to which the
counterparty to the agreement will have the right to cause a redemption of the
outstanding Certificates of such Series, beginning on the Distribution Date and
subject to payment of the redemption price and other conditions specified in
the Prospectus Supplement. In general, the redemption price will equal the
aggregate outstanding principal balance of all Certificates of such Series
(other than such Certificates with a notional principal balance), plus any
interest described in the Prospectus Supplement. Payment of the redemption
price will be in lieu of any distribution of principal and interest that would
otherwise be made on that Distribution Date. Upon a redemption, the holder of
the redemption right will receive the assets of the Trust Fund and each
Certificateholder will receive the outstanding principal balance of its
Certificate (other than a holder of Certificates with a notional principal
balance), plus any interest specified in the Prospectus Supplement. See "Yield,
Prepayment and Maturity Considerations" for a discussion of the effects of such
a redemption of an investor's yield to maturity. In the case of a Trust Fund
for which a REMIC election or elections have been made, the transaction by
which the Certificates are retired and the related redemption is conducted will
constitute a "qualified liquidation" under Section 860F of the Code.
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.
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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
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the Master Servicer as a condition for coverage of a loss by a Primary
Insurance Policy is not so made by the Master Servicer because the such Advance
has been determined to be nonrecoverable, then such loss will be allocated to
the Certificateholders. See "Description of Certificates--Advances".
For any Certificates offered hereunder as to which the Company and/or a
Servicing Entity will act as Master Servicer, the Company or Servicing Entity,
as applicable, will cause each Servicer to maintain, or with respect to a
Series of Certificates as to which there will be no Master Servicer, the
Servicer will maintain, in full force and effect and to the extent coverage is
available a Primary Insurance Policy with regard to each Mortgage Loan for
which such coverage is required under the standard described above, provided
that such Primary Insurance Policy was in place as of the Cut-Off Date and the
Company or Servicing Entity, as applicable, had knowledge of such Primary
Insurance Policy. With respect to Series of Certificates as to which the
Company and/or a Servicing Entity will act as Master Servicer, in the event
that the Company or Servicing Entity, as applicable learns that a Mortgage Loan
had a loan-to-value ratio at origination and as of the Cut-Off Date in excess
of 80% and was not the subject of a Primary Insurance Policy (and was not
included in any exception to such standard disclosed in the related Prospectus
Supplement), then the Company or Servicing Entity, as applicable is required to
use its reasonable efforts to obtain and maintain a Primary Insurance Policy to
the extent that such a policy is obtainable at a reasonable price. With respect
to Series of Certificates as to which there will be no Master Servicer, in the
event the Servicer learns of the lack of a Primary Insurance Policy described
in the preceding sentence, the Servicer shall notify the Trustee who shall
require the Seller to obtain a Primary Insurance Policy, repurchase the
Mortgage Loan or substitute a mortgage loan for the applicable Mortgage Loan.
The Company or Servicing Entity, as Master Servicer, or the Servicer, as
applicable, will not cancel or refuse to renew any such Primary Insurance
Policy in effect at the time of the initial issuance of a Series of
Certificates that is required to be kept in force under the applicable Pooling
Agreement unless, in the event that such Series of Certificates was rated at
the time of issuance, the replacement Primary Insurance Policy from such
cancelled or non-renewed policy is maintained with an insurer whose
claims-paying ability is acceptable to the rating agency or agencies that rated
such Series of Certificates for mortgage pass-through certificates having a
rating equal to or better than the then-current ratings of such Series of
Certificates.
Evidence of each Primary Insurance Policy will be provided to the Trustee
simultaneously with the transfer to the Trustee of the related Mortgage Loan.
With respect to Series of Certificates as to which the Company and/or a
Servicing Entity will act as Master Servicer, under the Selling and Servicing
Contract each Seller/Servicer, on behalf of itself, the Company, the related
Master Servicer, the Trustee and the Certificateholders, will be required to
present claims to the insurer under any Primary Insurance Policy and take such
reasonable steps as are necessary to permit recovery thereunder with respect to
defaulted Mortgage Loans. Amounts collected by a Seller/Servicer under such
Primary Insurance Policy shall be deposited in the Custodial Account for P&I
maintained by such Seller/Servicer on behalf of the Company, the Master
Servicer, the Trustee and the Certificateholders. The Company or Servicing
Entity, as applicable, will agree to cause each Seller/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.
The Pooling Agreement will permit the cancellation or non-renewal of a
Primary Insurance Policy in the event that the loan-to-value ratio of the
Mortgage Loan based on the original appraisal or a current appraisal is less
than 80% of the then current outstanding principal balance of such Mortgage
Loan.
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.
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FHA MORTGAGE INSURANCE
The National Housing Act of 1934, as amended (the "Housing Act"),
authorizes various FHA mortgage insurance programs. Some of the Mortgage Loans
may be insured under either Section 203(b), Section 234 or Section 235 of the
Housing Act. Under Section 203(b), FHA insures mortgage loans of up to 30
years' duration for the purchase of one- to four-family dwelling units.
Mortgage Loans for the purchase of condominium units are insured by FHA under
Section 234. Loans insured under these programs must bear interest at a rate
not exceeding the maximum rate in effect at the time the loan is made, as
established by the United States Department of Housing and Urban Development
("HUD"), and may not exceed specified percentages of the lesser of the
appraised value of the property and the sales price, less seller paid closing
costs for the property, up to certain specified maximums. In addition, FHA
imposes initial investment minimums and other requirements on mortgage loans
insured under the Section 203(b) and Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee on
behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible, a mortgagor must be part of a
family, must have income within the limits prescribed by HUD at the time of
initial occupancy, must occupy the property and must meet requirements for
recertification at least annually.
The regulations governing these programs provide that insurance benefits
are payable either (i) upon foreclosure (or other acquisition of possession)
and conveyance of the mortgaged premises to HUD or (ii) upon assignment of the
defaulted mortgage loan to HUD. The FHA insurance that may be provided under
these programs upon conveyance of the home to HUD is equal to 100% of the
outstanding principal balance of the mortgage loan, plus accrued interest, as
described below, and certain additional costs and expenses. When entitlement to
insurance benefits results from assignment of the mortgage loan to HUD, the
insurance payment is computed as of the date of the assignment and includes the
unpaid principal amount of the mortgage loan plus mortgage interest accrued and
unpaid to the assignment date.
When entitlement to insurance benefits results from foreclosure (or other
acquisition of possession) and conveyance, the insurance payment is equal to
the unpaid principal amount of the mortgage loan, adjusted to reimburse the
mortgagee for certain tax, insurance and similar payments made by it and to
deduct certain amounts received or retained by the mortgagee after default,
plus reimbursement not to exceed two-thirds of the mortgagee's foreclosure
costs.
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a veteran
(or, in certain instances, his or her spouse) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one-to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of
mortgage loans with terms limited by the estimated economic life of the
property, up to 30 years. The maximum guaranty that may be issued by the VA
under this program is 50% of the original principal amount of the mortgage loan
up to a certain dollar limit established by the VA. The loan-to-value ratios
allowed for VA-guaranteed loans are set forth in the FNMA Seller's Guide. The
liability on the guaranty is reduced or increased pro rata with any 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.
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Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Insurance Policy may be required
by the Company for VA loans in excess of certain amounts. The amount of any
such additional coverage will be set forth in the related Prospectus
Supplement.
HAZARD INSURANCE
Unless otherwise specified in the applicable Prospectus Supplement, each
Seller/Servicer with respect to Series of Certificates as to which the Company
and/or a Servicing Entity will act as Master Servicer, or the Servicer with
respect to Series of Certificates as to which there will be no Master Servicer,
will cause to be maintained for each Mortgage Loan (other than Cooperative
Loans and Mortgage Loans secured by condominium apartments) that it services a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary in the state in
which the Mortgaged Property is located. Such coverage will be in an amount not
less than the maximum insurable value of the Mortgaged Property or the original
principal balance of such Mortgage Loan, whichever is less. As set forth above,
all amounts collected by the Company or Servicing Entity, as applicable, as
Master Servicer, or a Seller/Servicer, or the Servicer, as applicable, under
any hazard policy (except for amounts to be applied to the restoration or
repair of the Mortgaged Property or released to the Mortgagor in accordance
with the Seller/Servicer's or the Servicer's normal servicing procedures) will
be deposited in the Custodial Account for P&I. In the event that the Company or
Servicing Entity, as applicable, as Master Servicer, or the Seller/Servicer, or
the Servicer, as applicable, maintains a blanket policy insuring against hazard
losses on all of the Mortgage Loans, it shall conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance. Such
blanket policy may contain a deductible clause, in which case the Company or
Servicing Entity, as applicable, as Master Servicer, or the Seller/Servicer, or
the Servicer, as applicable, will deposit in the Custodial Account for P&I or
the Certificate Account all sums which would have been deposited therein but
for such clause. The Company or Servicing Entity, as applicable, as Master
Servicer, and each of the Seller/Servicers with respect to Series of
Certificates as to which the Company and/or a Servicing Entity will act as
Master Servicer, or the Servicer with respect to Series of Certificates as to
which there will be no Master Servicer, are required to maintain a fidelity
bond and errors and omissions policy with respect to officers and employees
which provide coverage against losses which may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions in
failing to maintain insurance, subject to certain limitations as to amount of
coverage, deductible amounts, conditions, exclusions and exceptions in such
form and amount as specified in the Servicing Contract or the Pooling
Agreement, as applicable.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by respective state
laws, and most such policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mud flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. The Company or Servicing Entity, as applicable, may require
Mortgaged Properties in certain locations to be covered by policies of
earthquake insurance, to the extent it is reasonably available. When any
improvement to a Mortgaged Property is located in a designated flood area and
in a community which participates in the 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.
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The hazard insurance policies covering the Mortgaged Properties typically
contain a clause which, in effect, requires the insured at all times to carry
insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause provides that the insurer's liability in the
event of partial loss does not exceed the larger of (i) the replacement cost of
the improvements less physical depreciation, and (ii) such proportion of the
loss, without deduction for depreciation, as the amount of insurance carried
bears to the specified percentage of the full replacement cost of such
improvements.
Neither the Seller/Servicer with respect to Series of Certificates as to
which the Company and/or a Servicing Entity will act as Master Servicer, or the
Servicer with respect to Series of Certificates as to which there will be no
Master Servicer, will require that a hazard or flood insurance policy be
maintained for any Cooperative Loan or Mortgage Loan secured by a condominium
apartment. With respect to a Cooperative Loan, generally the Cooperative itself
is responsible for maintenance of hazard insurance for the property owned by
the Cooperative, and the tenant-stockholders of the Cooperative do not maintain
individual hazard insurance policies. To the extent, however, that a
Cooperative and the related borrower on a Cooperative Note do not maintain such
insurance or do not maintain adequate coverage or any insurance proceeds are
not applied to the restoration of the damaged property, damage to such
borrower's cooperative apartment or such Cooperative's building could
significantly reduce the value of the collateral securing such Cooperative
Note. With respect to a Mortgage Loan secured by a condominium apartment, the
condominium owner's association for the related building generally is
responsible for maintenance of hazard insurance for such building, and the
condominium owners do not maintain individual hazard insurance policies. To the
extent that the owner of a Mortgage Loan secured by a condominium apartment and
the related condominium owner's association do not maintain such insurance or
do not maintain adequate coverage or any insurance proceeds are not applied to
the restoration of the damaged property, damage to such borrower's condominium
apartment or the related building could significantly reduce the value of the
Mortgaged Property.
Since the amount of hazard insurance a Master Servicer or the
Seller/Servicers, or the Servicer, as applicable, will cause to be maintained
on the Mortgaged Properties declines as the principal balances owing on the
related Mortgage Loans decrease, and since residential properties have
historically appreciated in value over time, in the event of partial loss,
hazard insurance proceeds may be insufficient to restore fully the damaged
property. See "Description of Credit Enhancements--Special Hazard Insurance"
for a description of the limited protection afforded by the Special Hazard
Insurance Policy, Letter of Credit or Reserve Fund, if any is obtained, against
losses occasioned by certain hazards which are otherwise uninsured against, as
well as against losses caused by the application of the clause described in the
preceding paragraph.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows and floods) or insufficient hazard insurance
proceeds could affect distributions to the Certificateholders.
DESCRIPTION OF CREDIT ENHANCEMENTS
To the extent provided in the applicable Prospectus Supplement, credit
enhancement for each Series of Certificates may be comprised of one or more of
the following components, each of which will have a dollar limit. Credit
enhancement components may include coverage with respect to losses that are (i)
attributable to the Mortgagor's failure to make any payment of principal or
interest as required under the Mortgage Note, but not including Special Hazard
Losses, Extraordinary Losses (as defined below) or other losses resulting from
damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
loss, a "Defaulted Mortgage Loss"); (ii) of a type generally covered by a
Special Hazard Insurance Policy (any such loss, a "Special Hazard Loss"); (iii)
attributable to certain actions which may be taken by a bankruptcy court in
connection with a Mortgage Loan, including a reduction 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
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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 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
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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 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
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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.
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
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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 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
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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
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
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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.
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
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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 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
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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
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the Servicer with respect to Series of Certificates as to which there will be
no Master Servicer, will not be required to expend its own funds to restore the
damaged property unless it determines (i) that such restoration will increase
the proceeds to Certificateholders upon liquidation of the Mortgage Loan after
reimbursement of the Company, Servicing Entity or the Servicer, as applicable,
for its expenses and (ii) that such expenses will be recoverable to it through
Liquidation Proceeds or Insurance Proceeds.
If recovery under any Mortgage Pool Insurance Policy (or Letter of Credit
established in lieu of such policy), Primary Insurance Policy, FHA Insurance
Policy or VA Guaranty is not available because the Master Servicer, with
respect to Series of Certificates as to which the Company and/or a Servicing
Entity will act as Master Servicer, or the Servicer with respect to Series of
Certificates as to which there will be no Master Servicer, has been unable to
make the determinations described in the second preceding paragraph, or
otherwise, the Seller/Servicer or the Servicer, as applicable, is,
nevertheless, obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon the defaulted Mortgage Loan. If
the proceeds of any liquidation of the property securing the defaulted Mortgage
Loan are less than the principal balance of the defaulted Mortgage Loan plus
accrued and unpaid interest thereon at the applicable Pass-Through Rate (after
deduction of the Retained Yield, if any, or a pro rata portion thereof as
required by the applicable Pooling Agreement), Certificateholders in the
aggregate will realize a loss in the amount of such difference plus the
aggregate of expenses incurred by the Company or Servicing Entity, as
applicable, as Master Servicer, and the Seller/Servicer, or the Servicer, as
applicable, in connection with such proceedings and which are reimbursable
under the Pooling Agreement. In addition, and as set forth above, in the event
that the Company or Servicing Entity, as applicable, as Master Servicer, or the
Servicer, as applicable, has expended its own funds to restore damaged property
and such funds have not been reimbursed under any Special Hazard Insurance
Policy or Letter of Credit or Reserve Fund, it will be entitled to receive from
the Certificate Account, out of related Liquidation Proceeds or Insurance
Proceeds, an amount equal to such expenses incurred by it, in which event the
Certificateholders may realize a loss up to the amount so charged. Since
Insurance Proceeds cannot exceed deficiency claims and certain expenses
incurred by the Company or Servicing Entity, as applicable, as Master Servicer,
and the Seller/Servicers, or the Servicer, as applicable, no insurance payments
will result in a recovery to Certificateholders which exceeds the principal
balance of the defaulted Mortgage Loan together with accrued and unpaid
interest thereon at the applicable Pass-Through Rate. In addition, where
property securing a defaulted Mortgage Loan can be resold for an amount
exceeding the principal balance of any related Mortgage Note together with
accrued interest and expenses, it may be expected that, where retention of any
such amount is legally permissible, the insurer will exercise its right under
any related Mortgage Pool Insurance Policy to purchase such property and
realize for itself any excess proceeds. In addition, with respect to certain
Series of Certificates, if so provided in the applicable Prospectus Supplement,
the Company or Servicing Entity, as applicable, as Master Servicer, or the
Servicer, as applicable, may have the option to purchase from the Trust Fund
any defaulted Mortgage Loan after a specified period of delinquency. If a
defaulted Mortgage Loan is not so removed from the Trust Fund, then, upon the
final liquidation thereof, if a loss is realized which is not covered by any
applicable form of credit enhancement or other insurance, the
Certificateholders will bear such loss. However, if a gain results from the
final liquidation of a defaulted Mortgage Loan which is not required by law to
be remitted to the related Mortgagor, the Company or Servicing Entity, as
applicable, as Master Servicer, or the Servicer, as applicable, will be
entitled to retain such gain as additional servicing compensation unless the
applicable Prospectus Supplement provides otherwise. See "Description of Credit
Enhancements".
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The Mortgages (other than the security agreements with respect to the
Cooperative Loans) will be either deeds of trust or mortgages, depending upon
the prevailing practice in the state in which the Mortgaged Property is
located. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to the lien for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are
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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 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
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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
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of the property at public auction upon default by the mortgagor. The laws of
the various states establish certain notice requirements for non-judicial
foreclosure sales. In some states, notice of default must be recorded and sent
to the mortgagor and to any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, notice must be provided in
some states to certain other persons including junior lienholders and any other
individual having an interest in the real property. In some states, the
mortgagor, or any other person having a junior encumbrance on the real estate,
may, during a reinstatement period, cure the default by paying the entire
amount in arrears, plus the costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including limited attorneys' fees, which may be recovered by a
lender. Some states also require a notice of sale to be posted in a public
place and published for a specified period of time in one or more newspapers.
In addition, some state laws require that a copy of the notice of sale be
posted on the property and sent to all parties having an interest in the real
property.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer or by the trustee is a public
sale. However, because of a number of factors, including the difficulty a
potential buyer at the sale would have in determining the exact status of title
and the fact that the physical condition of the property may have deteriorated
during the foreclosure proceedings, it is uncommon for a third party to
purchase the property at the foreclosure sale. Rather, it is common for the
lender to purchase the property from the trustee or referee with a credit bid
in an amount equal to the principal amount of the mortgage or deed of trust,
accrued and unpaid interest and the expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including obtaining casualty
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the
sale of the property. Depending upon market conditions, the ultimate proceeds
of the sale of the property may not equal the lender's investment in the
property.
Courts have imposed general equitable principles upon foreclosure
proceedings. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of his defaults under the loan documents.
Examples of judicial remedies that have been fashioned include judicial
requirements that the lender undertake affirmative and sometimes expensive
actions to determine the causes for the mortgagor's default and the likelihood
that the mortgagor will be able to reinstate the loan. In some cases, courts
have substituted their judgment for the lender's judgment and have required
that lenders reinstate loans or recast payment schedules in order to
accommodate mortgagors who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the security instrument is not monetary, such as 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
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shares to which the proprietary lease or occupancy agreement relates. In
addition, the proprietary lease or occupancy agreement generally permits the
Cooperative to terminate such lease or agreement in the event the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the Cooperative enter into a recognition agreement which, together with any
lender protection provisions contained in the proprietary lease, establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
Recognition agreements also generally provide that in the event the lender
succeeds to the tenant-stockholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative
Loan, the lender must obtain the approval or consent of the board of directors
of the Cooperative as required by the proprietary lease before transferring the
Cooperative shares and assigning the proprietary lease. Such approval or
consent is usually based on the prospective purchaser's income and net worth,
among other factors, and may significantly reduce the number of potential
purchasers, which could limit the ability of the lender to sell and realize
upon the value of the collateral. Generally, the lender is not limited in any
rights it may have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
A foreclosure on the Cooperative shares is accomplished by public sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement 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.
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RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of
the mortgage, there are statutory periods during which the mortgagor and
foreclosed junior lienors may redeem the property from the foreclosure sale.
One effect of the statutory right of redemption is to diminish the ability of
the lender to sell the foreclosed property because the right of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. As a practical matter, the lender
may therefore be forced to retain the property and pay the expenses of
ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which restrict or
eliminate the remedies of a lender under a deed of trust or a mortgage. In some
states, statutes limit the right of the lender to obtain a deficiency judgment
against the mortgagor following sale under a deed of trust or foreclosure. A
deficiency judgment would be a personal judgment against the former mortgagor
equal in most cases to the difference between the net amount realized upon the
public sale of the real property and the amount due to the lender. Other
statutes may require the lender to exhaust the security afforded under a deed
of trust or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the mortgagor. Some state statutes
also prohibit any deficiency judgment where the loan proceeds were used to
purchase an owner-occupied dwelling. Finally, other statutory provisions limit
any deficiency judgment against the former mortgagor following a judicial sale
to the excess of the outstanding debt over the fair market value of the
property at the time of the public sale. The basic purpose of these statutes is
to prevent a lender from obtaining a large deficiency judgment against the
former mortgagor as a result of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner. 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
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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 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
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Garn-St Germain Act to limit the enforceability of the due-on-sale clauses in
certain loans made prior to passage of the Garn-St Germain Act. As of the date
hereof, certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
A consequence of the inability to enforce a due-on-sale clause may be that
a mortgagor's buyer may assume the existing mortgage loan rather than paying it
off, if such existing loan bears an interest rate below the current market
rate, which may have an impact upon the average life of the Mortgage Loans and
the number of Mortgage Loans which may be outstanding until maturity.
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who is a
member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such
Mortgagor's active duty status, unless a court orders otherwise upon
application of the lender. Any shortfall in interest collections resulting from
the application of the Relief Act, to the extent not covered by any applicable
credit enhancements, could result in losses to the Holders of the Certificates.
In addition, the Relief Act imposes limitations which would impair the ability
of the Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first
three months of 1980. The Federal Home Loan Bank Board (now the Office of
Thrift Supervision) has issued regulations governing the implementation of
Title V. The statute authorizes any state to reimpose interest rate limits by
adopting before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized to adopt a provision limiting
discount points or other charges prior to origination on mortgage loans covered
by Title V.
Under the Company's mortgage purchase program, each Lender is required to
represent and warrant to the Company that all Mortgage Loans are originated in
full compliance with applicable state laws, including usury laws. Based upon
such representations and warranties from the Lenders, the Company will make a
similar representation and warranty in the Pooling Agreement for each Series to
the Trustee for the benefit of Certificateholders. See "Description of
Certificates--Representations and Warranties".
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable-rate mortgage
loans, originated by non-federally chartered lenders have historically been
subjected to a variety of restrictions. Such restrictions differed from state
to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender was in
compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St Germain
Act ("Title VIII"). Title VIII provides that, notwithstanding any state law to
the contrary, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of
the Currency with respect to origination of alternative mortgage instruments by
national banks, state-chartered credit unions may originate alternative
mortgage instruments in accordance with regulations promulgated by the National
Credit Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions, and all other non-federally chartered
housing creditors, including state-chartered savings and
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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
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
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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 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,
regulatory 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, regulatory 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.
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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, regulatory 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 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. or Fitch, Inc. (collectively, the "Exemption Rating
Agencies").
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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 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
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(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 Section
4975(c) of the Code, for transactions involving an insurance company general
account. Pursuant to Section 401(c) of ERISA, the DOL issued final regulations
(the "401(c) Regulations") on January 4, 2000 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) and the 401(c) Regulations
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generally provide that, until July 5, 2001, 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 July 5, 2001.
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".
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
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Trust Fund. Prospective Plan Asset investors should consult with their legal
counsel concerning the impact of ERISA and the Code and the potential
consequences in 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
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domestic building and loan association will constitute a "regular or residual
interest in a REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi) in
the same proportion that the Assets would be treated as "loans... secured by an
interest in real property" within the meaning of Code Section 7701(a)(19)(C)(v)
or as other assets described in Code Section 7701(a)(19)(C); and (ii) REMIC
Certificates held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code Section 856(c)(4)(A), and interest on
the REMIC Certificates will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) in the same proportion that, for both purposes,
the Assets would be treated as "interests in real property" as defined in Code
Section 856(c)(5)(C) (or, as provided in the Committee Report, as "real estate
assets" as defined in Code Section 856(c)(5)(B)). Moreover, if 95% or more of
the Assets qualify for any of the foregoing treatments, the REMIC Certificates
will qualify for the corresponding status in their entirety. Investors should
be aware that the investment of amounts in any reserve account in assets not so
qualifying would, and holding property acquired by foreclosure pending sale
might, reduce the amount of the REMIC Certificate that would qualify for the
foregoing treatment. The REMIC Regulations provide that payments on Mortgage
Loans held pending distribution are considered part of the Mortgage Loans for
purposes of Code Section 856(c)(4)(A); it is unclear whether such collected
payments would be so treated for purposes of Code Section 7701(a)(19)(c)(v),
but there appears to be no reason why analogous treatment should not be given
to such collected payments under that provision. The determination as to the
percentage of the REMIC's assets that will constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC during such calendar quarter. The REMIC will report those
determinations to Certificateholders in the manner and at the times required by
applicable Treasury regulations. The applicable Prospectus Supplement or the
related Current Report on Form 8-K for each Series of REMIC Certificates will
describe the Assets as of the Cut-Off Date. REMIC Certificates held by certain
financial institutions will constitute "evidence of indebtedness" within the
meaning of Code Section 582(c)(1); in addition, REMIC Regular Certificates
acquired by a REMIC in accordance with the requirements of Section
860G(a)(3)(C) or Section 860G(a)(4)(B) of the Code will be treated as
"qualified mortgages" for purposes of Code Section 860D(a)(4).
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
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discount rules applicable to REMIC Regular Certificates. Regulations have not
yet been proposed or adopted under Section 1272(a)(6) of the Code. Further,
application of the OID Regulations to the REMIC Regular Certificates remains
unclear in some respects because the OID Regulations generally purport not to
apply to instruments to which Section 1272(a)(6) applies such as REMIC Regular
Certificates, and separately because they either do not address, or are subject
to varying interpretations with regard to, several relevant issues.
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates and for certain other federal income tax
purposes. The Prepayment Assumption is to be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The Committee Report indicates that the regulations will provide
that the Prepayment Assumption, if any, used with respect to a particular
transaction must be the same as that used by the parties in pricing the
transaction. Unless otherwise specified in the applicable Prospectus
Supplement, the Company will use a percentage of the Basic Prepayment
Assumption (or such other Prepayment Assumption as may be specified in the
applicable Prospectus Supplement) in reporting original issue discount that is
consistent with this standard. However, the Company does not make any
representation that the Mortgage Loans will in fact prepay at that percentage
of the Basic Prepayment Assumption or at any other rate. Each investor must
make its own decision as to the appropriate prepayment assumption to be used in
deciding whether or not to purchase any of the REMIC Regular Certificates. The
Prospectus Supplement with respect to a Series of REMIC Certificates will
disclose the percentage of the Basic Prepayment Assumption (or such other
Prepayment Assumption as may be specified therein) to be used in reporting
original issue discount, if any, and for certain other federal income tax
purposes.
The total amount of original issue discount on a REMIC Regular Certificate
is the excess of the "stated redemption price at maturity" of the REMIC Regular
Certificate over its "issue price". Except as discussed in the following two
paragraphs, in general, the issue price of a particular Class of REMIC Regular
Certificates offered hereunder will be the price at which a substantial amount
of REMIC Regular Certificates of that Class are first sold to the public
(excluding bond houses and brokers).
If a REMIC Regular Certificate is sold with accrued interest that relates
to a period prior to the issue date of such REMIC Regular Certificate, the
amount paid for the accrued interest will be treated 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
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a fixed rate, or both. Certain combinations of rates constitute a single
qualified floating rate, including (i) interest stated at a fixed rate for an
initial period of less than one year followed by a qualified floating rate if
the value of the floating rate at the closing date is intended to approximate
the fixed rate, and (ii) two or more qualified floating rates that can be
expected to have approximately the same values throughout the term of the
Certificate. A combination of such rates is conclusively presumed to be a
single floating rate if the values of all rates on the closing date are within
0.25% of each other. A variable rate that is subject to an interest rate cap,
floor, "governor" or similar restriction on rate adjustment may be a qualified
floating rate only if such restriction is fixed throughout the term of the
instrument, or is not reasonably expected as of the closing date to cause the
yield on the debt instrument to differ significantly from the expected yield
absent the restriction. An "objective rate" is a rate (other than a qualified
floating rate) determined using a single formula fixed for the life of the
Certificate, which is based on (i) one or more qualified floating rates
(including a multiple or inverse of a qualified floating rate), (ii) one or
more rates each of which would be a qualified floating rate for a debt
instrument denominated in a foreign currency, (iii) the yield or changes in
price of one or more items of "actively traded" personal property, (iv) a
combination of rates described in (i), (ii) and (iii), or (v) a rate designated
by the IRS. However, a variable rate is not an objective rate if it is
reasonably expected that the average value of the rate during the first half of
the Certificate's term will differ significantly from the average value of such
rate during the final half of its term. A combination of interest stated at a
fixed rate for an initial period of less than one year followed by an objective
rate is treated as a single objective rate if the value of the objective rate
at the closing date is intended to approximate the fixed rate; such a
combination of rates is conclusively presumed to be a single objective rate if
the objective rate on the closing date does not differ from the fixed rate by
more than 0.25%. The qualified stated interest payable with respect to certain
variable rate debt instruments not bearing stated interest at a Single Variable
Rate generally is determined under the OID Regulations by converting such
instruments into fixed rate debt instruments. Instruments qualifying for such
treatment generally include those providing for stated interest at (i) more
than one qualified floating rates, or at (ii) a single fixed rate and (a) one
or more qualified floating rates or (b) a single "qualified inverse floating
rate" (each, a "Multiple Variable Rate"). A qualified inverse floating rate is
an objective rate equal to a fixed rate reduced by a qualified floating rate,
the variations in which can reasonably be expected to inversely reflect
contemporaneous variations in the cost of newly borrowed funds (disregarding
permissible rate caps, floors, governors and similar restrictions such as are
described above). Under these rules, some of the payments of interest on a
Certificate bearing a fixed rate of interest for an initial period followed by
a qualified floating rate of interest in subsequent periods could be treated as
included in the stated redemption price at maturity if the initial fixed rate
were to differ sufficiently from the rate that would have been set using the
formula applicable to 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
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only qualified stated interest except for any "teaser" rate, interest holiday
or similar provision would be treated as subject to the de minimis rule if the
greater of the deferred or foregone interest or the other original issue
discount is less than such de minimis amount.
The OID Regulations generally would treat de minimis original issue
discount as includible in income as each principal payment is made, based on
the product of the total amount of such de minimis original issue discount and
a fraction, whose numerator is the amount of such principal payment and whose
denominator is the stated principal amount of the REMIC Regular Certificate.
The OID Regulations also would permit a Certificateholder to elect to accrue de
minimis original issue discount into income currently based on a constant yield
method. See "Taxation of Owners of REMIC Regular Certificates-- Market Discount
and Premium".
Each holder of a REMIC Regular Certificate must include in gross income
the sum of the "daily portions" of original issue discount on its REMIC Regular
Certificate for each day during its taxable year on which it held such REMIC
Regular Certificate. For this purpose, in the case of an original holder of a
REMIC Regular Certificate, the daily portions of original issue discount will
be determined as follows. A calculation will first be made of the portion of
the original issue discount that accrued during each accrual period, that is,
unless otherwise stated in the applicable Prospectus Supplement, each period
that begins or ends on a date that corresponds to a Distribution Date on the
REMIC Regular Certificate and begins on the first day following the immediately
preceding accrual period (beginning on the Closing Date in the case of the
first such period). For any accrual period such portion will equal the excess,
if any, of (i) the sum of (A) the present value of all of the distributions
remaining to be made on the REMIC Regular Certificate, if any, as of the end of
the accrual period and (B) the distribution made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price at maturity, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value
of the remaining payments referred to in the preceding sentence will be
calculated based on (i) the yield to maturity of the REMIC Regular Certificate,
calculated as of the settlement date, giving effect to the Prepayment
Assumption, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period, and (iii) the Prepayment Assumption. The
adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount with respect to such REMIC Regular
Certificate that accrued in prior accrual periods, and reduced by the amount of
any distributions made on such REMIC Regular Certificate in prior accrual
periods of amounts included in the stated redemption price at maturity. The
original issue discount accruing during any accrual period will be allocated
ratably to each day during the period to determine the daily portion of
original issue discount for each day. With respect to an accrual period between
the settlement date and the first Distribution Date on the REMIC Regular
Certificate (notwithstanding that no distribution is scheduled to be made on
such date) that is shorter than a full accrual period, the OID Regulations
permit the daily portions of original issue discount to be determined according
to any reasonable method.
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.
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Variable Rate Certificates. Purchasers of REMIC Regular Certificates
bearing a variable rate of interest should be aware that there is uncertainty
concerning the application of Section 1272(a)(6) of the Code and the OID
Regulations to such Certificates. In the absence of other authority, the
Company intends to be guided by the provisions of the OID Regulations governing
variable rate debt instruments in adapting the provisions of Section 1272(a)(6)
of the Code to such Certificates for the purpose of preparing reports furnished
to Certificateholders. The effect of the application of such provisions
generally will be to cause Certificateholders holding Certificates bearing
interest at a Single Variable Rate to take into account for each period an
amount corresponding approximately to the sum of (i) the qualified stated
interest, accruing on the outstanding face amount of the REMIC Regular
Certificate as the stated interest rate for that Certificate varies from time
to time and (ii) the amount of original issue discount that would have been
attributable to that period on the basis of a constant yield to maturity for a
bond issued at the same time and issue price as the REMIC Regular Certificate,
having the same face amount and schedule of payments of principal as such
Certificate, subject to the same Prepayment Assumption, and bearing interest at
a fixed rate equal to the value of the applicable qualified floating rate or
qualified inverse floating rate in the case of a Certificate providing for
either such rate, or equal to the fixed rate that reflects the reasonably
expected yield on the Certificate in the case of a Certificate providing for an
objective rate other than an inverse floating rate, in each case as of the
issue date. Certificateholders holding REMIC Regular Certificates bearing
interest at a Multiple Variable Rate generally will take into account interest
and original issue discount under a similar methodology, except that the
amounts of qualified stated interest and original issue discount attributable
to such a Certificate first will be determined for an equivalent fixed rate
debt instrument, the assumed fixed rates for which are (a) for each qualified
floating rate, the value of each such rate as of the closing date (with
appropriate adjustment for any differences in intervals between interest
adjustment dates), (b) for a qualified inverse floating rate, the value of the
rate as of the closing date, (c) for any other objective rate, the fixed rate
that reflects the yield that is reasonably expected for the Certificate, and
(d) for an actual fixed rate, such hypothetical fixed rate as would result
under (a) or (b) if the actual fixed rate were replaced by a hypothetical
qualified floating rate or qualified inverse floating rate such that the fair
market value of the Certificate as of the issue date would be approximately the
same as that of an otherwise identical debt instrument providing for the
hypothetical variable rate rather than the actual fixed rate. If the interest
paid or accrued with respect to a Multiple Variable Rate Certificate during an
accrual period differs from the assumed fixed interest rate, such difference
will be an adjustment (to interest or original issue discount, as applicable)
to the Certificateholder's taxable income for the taxable period or periods to
which such difference relates. Additionally, purchasers of such Certificates
should be aware that the provisions of the OID Regulations applicable to
variable rate debt instruments have been limited and may not apply to some
REMIC Regular Certificates having variable rates. If such a Certificate is not
governed by the provisions of the OID Regulations applicable to variable rate
debt instruments, it may be subject to provisions of proposed Treasury
Regulations applicable to instruments having contingent payments. The
application of those provisions to instruments such as variable rate REMIC
Regular Certificates is subject to differing interpretations. Prospective
purchasers of variable rate REMIC Regular Certificates are advised to consult
their tax advisors concerning the tax treatment of such Certificates.
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.
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A Certificateholder may elect to include market discount in income
currently as it accrues, rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
in income as interest, based on a constant yield method. If such an election
were made for a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to currently include
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election or thereafter. Similarly, a Certificateholder that makes this election
for a Certificate that is acquired at a premium is deemed to have made an
election to amortize bond premium, as described below, with respect to all debt
instruments having amortizable bond premium that such Certificateholder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
Under a statutory de minimis exception, market discount with respect to a
REMIC Regular Certificate will be considered to be zero for purposes of Code
Sections 1276 through 1278 if such market discount is less than 0.25% of the
stated redemption price at maturity of such REMIC Regular Certificate
multiplied by the number of complete years to maturity remaining after the date
of its purchase. In interpreting a similar de minimis rule with respect to
original issue discount on obligations payable in installments, the OID
Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied in determining whether market
discount is de minimis. It appears that de minimis market discount on a REMIC
Regular Certificate would be treated in a manner similar to original issue
discount of a de minimis amount. See "Taxation of Holders of REMIC Regular
Certificates --Original Issue Discount". Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included using the method described above. However, Treasury
regulations implementing the market discount de minimis exception have not been
issued in proposed or temporary form, and the precise treatment of de minimis
market discount on obligations payable in more than one installment therefore
remains uncertain.
The 1986 Act grants authority to the Treasury Department to issue
regulations providing for the method for accruing market discount of more than
a de minimis amount on debt instruments, the principal of which is payable in
more than one installment. Until such time as regulations are issued by the
Treasury Department, certain rules described in the Committee Report will
apply. Under those rules, the holder of a bond purchased with more than de
minimis market discount may elect to accrue such market discount either on the
basis of a constant yield method or on the basis of the appropriate
proportionate method described below. Under the proportionate method for
obligations issued with original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the period.
Under the proportionate method for obligations issued without original issue
discount, the amount of market discount that accrues during a period is equal
to the product of (i) the total remaining market discount, multiplied by (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the 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
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previously reported as ordinary income. Such purchaser also may be required to
defer a portion of its interest deductions for the taxable year attributable to
any indebtedness incurred or continued to purchase or carry such REMIC Regular
Certificate. Any such deferred interest expense is, in general, allowed as a
deduction not later than the year in which the related market discount income
is recognized. If such holder elects to include market discount in income
currently as it accrues on all market discount instruments acquired by such
holder in that taxable year or thereafter, the interest deferral rule described
above will not apply.
A REMIC Regular Certificate purchased at a cost (not including payment for
accrued qualified stated interest) greater than its remaining stated redemption
price at maturity will be considered to be purchased at a premium. The holder
of such a REMIC Regular Certificate may elect to amortize such premium under
the constant yield method. The OID Regulations also permit Certificateholders
to elect to include all interest, discount and premium in income based on a
constant yield method, further treating the Certificateholder as having made
the election to amortize premium generally, as discussed above. The Committee
Report indicates a Congressional intent that the same rules that will apply to
accrual of market discount on installment obligations will also apply in
amortizing bond premium under Code Section 171 on installment obligations such
as the REMIC Regular Certificates.
3. Realized Losses
Under Code Section 166, both corporate holders of REMIC Regular
Certificates and noncorporate holders of REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as a
result of one or more realized losses on the Mortgage Loans. However, it
appears that a noncorporate holder that does not acquire a REMIC Regular
Certificate in connection with a trade or business will not be entitled to
deduct a loss under Code Section 166 until such holder's Certificate becomes
wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term
capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate without
regard to any reduction in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the underlying assets until it can be
established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income
attributable to previously accrued and included income that, as a result of a
realized loss, ultimately will not be realized, the law is unclear with respect
to the timing and character of such loss or reduction in income.
4. Callable Class Certificates
An entity electing to be treated as a REMIC may either itself directly, or
indirectly through the use of a trust owned by such entity, enter into a
redemption agreement pursuant to which the counterparty will have the right to
cause a redemption of the outstanding Certificates (as used herein, each such
right a "Call Right", and each such Certificate, a "Callable Class
Certificate") beginning on the Distribution Date and subject to payment of the
redemption price and other conditions that may be specified in the applicable
Prospectus Supplement. See "Description of the Certificates--
Redemption Agreement." In the event the trust issues the Call Right, counsel to
the Depositor will 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".
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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 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
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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.
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
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accruals of interest (including original issue discount) on the REMIC Regular
Certificates. Second, market discount equal to the excess of any Mortgage
Loan's adjusted issue price (as determined under "Taxation of Owners of REMIC
Regular Certificates--Market Discount and Premium") over its fair market value
at the time of their transfer to the REMIC Mortgage Pool generally will be
included in income as it accrues, based on a constant yield and on the
Prepayment Assumption. For this purpose, the Company intends to treat the fair
market value of the Mortgage Loans as being equal to the aggregate issue prices
of the REMIC Regular Certificates and REMIC Residual Certificates; if one or
more classes of REMIC Regular Certificates or REMIC Residual Certificates are
retained by the Company, it will estimate the value of such retained interests
in order to determine the fair market value of the Mortgage Loans for this
purpose. Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Prohibited Transactions and Other Possible REMIC
Taxes", below) will be taken into account. Fourth, the REMIC Mortgage Pool
generally may not deduct any item that would not be allowed in calculating the
taxable income of a partnership by virtue of Code Section 703(a)(2). Fifth, the
REMIC Regulations provide that the limitation on miscellaneous itemized
deductions imposed on individuals by Code Section 67 will not be applied at the
Mortgage Pool level to the servicing fees paid to the Master Servicer or
sub-servicers, if any. (See, however, "--Pass-Through of Servicing Fees",
below.) If the deductions allowed to the REMIC Mortgage Pool exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
Mortgage Pool for that calendar quarter.
3. Basis Rules and Distributions
Any distribution by a REMIC Mortgage Pool to a Residual Owner will not be
included in the gross income of such Residual Owner to the extent it does not
exceed the adjusted basis of such Residual Owner's interest in a REMIC Residual
Certificate. Such distribution will reduce the adjusted basis of such interest,
but not below zero. To the extent a distribution exceeds the adjusted basis of
the REMIC Residual Certificate, it will be treated as gain from the sale of the
REMIC Residual Certificate. (See "-- Sales of REMIC Certificates", below.) The
adjusted basis of a REMIC Residual Certificate is equal to the amount paid for
such REMIC Residual Certificate, increased by amounts included in the income of
the Residual Owner (See "--Taxation of Owners of REMIC Residual
Certificates--Daily Portions", above) and decreased by distributions and by net
losses taken into account with respect to such interest.
A Residual Owner is not allowed to take into account any net loss for any
calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC Residual Certificate as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Certificate.
The effect of these basis and distribution rules is that a Residual Owner
may not amortize its basis in a REMIC Residual Certificate, but may only
recover its basis through distributions, through the deduction of any net
losses of the REMIC Mortgage Pool or upon the sale of its REMIC Residual
Certificate (See "--Sales of REMIC Certificates", below). The residual holder
does, however, receive reduced taxable income over the life of the REMIC,
because the REMIC's basis in the underlying REMIC Mortgage Pool includes the
fair market value of the REMIC Regular Certificates and REMIC Residual
Certificates.
4. Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate are
subject to certain special tax rules. With respect to a Residual Owner, the
excess inclusion for any calendar quarter is defined as the excess (if any) of
the daily portions of taxable income over the sum of the "daily accruals" for
each day during such quarter that such REMIC Residual Certificate was held by
such Residual Owner. The daily accruals are determined by allocating to each
day during a calendar quarter its ratable portion of the product of the
"adjusted issue price" of the REMIC Residual Certificate at the beginning of
the calendar quarter and 120 percent of the long-term "applicable
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federal rate" (generally, an average of current yields on Treasury securities
of comparable maturity) (the "AFR") in effect at the time of issuance of the
REMIC Residual Certificate. For this purpose, the adjusted issue price of a
REMIC Residual Certificate as of the beginning of any calendar quarter is the
issue price of the REMIC Residual Certificate, increased by the amount of daily
accruals for all prior quarters and decreased by any distributions made with
respect to such REMIC Residual Certificate before the beginning of such
quarter. The issue price of a REMIC Residual Certificate is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial amount of the REMIC Residual Certificates were sold.
An excess inclusion cannot be offset by deductions, losses or loss
carryovers from other activities. For Residual Owners that are subject to tax
on unrelated business taxable income (as defined in Code Section 511), an
excess inclusion of such Residual Owner is treated as unrelated business
taxable income. For Residual Owners that are nonresident alien individuals or
foreign corporations generally subject to United States 30% withholding tax,
even if interest paid to such Residual Owners is generally eligible for
exemptions from such tax, an excess inclusion will be subject to such tax and
no tax treaty rate reduction or exemption may be claimed with respect thereto.
See "--Foreign Investors in REMIC Certificates".
Although it has not done so, the Treasury also has authority to issue
regulations that, if REMIC Residual Certificates are found in the aggregate not
to have "significant value", would treat as excess inclusions with respect to
such REMIC Residual Certificates the entire daily portion of taxable income for
such REMIC Residual Certificates. In order to have significant value, the REMIC
Residual Certificates must have an aggregate issue price, at issuance, at least
equal to two percent of the aggregate issue prices of all of the related REMIC
Regular and Residual Certificates. In addition, the anticipated weighted
average life of the REMIC Residual Certificates must equal or exceed 20 percent
of the anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Each
Prospectus Supplement pursuant to which REMIC Residual Certificates are offered
will state whether such REMIC Residual Certificates will have, or may be
regarded as having, "significant value" under the REMIC Regulations; provided,
however, that any disclosure that a REMIC Residual Certificate will have
"significant value" will be based upon certain assumptions, and the Company
will make no representation that a REMIC Residual Certificate will have
"significant value" for purposes of the above described rules or that a
Residual Owner will receive distributions of amounts calculated pursuant to
those assumptions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder.
5. Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax". If such transfer is disregarded, the
purported transferor will continue to remain liable for any taxes due with
respect to the income on such "noneconomic" REMIC Residual Certificate. The
REMIC Regulations provide that a REMIC Residual Certificate will be considered
a noneconomic residual interest unless, at the time of its transfer and based
on the Prepayment Assumption and any required or permitted clean up calls or
required liquidation provided for in the REMIC's organizational documents, (1)
the present value of the expected future distributions (discounted using the
AFR) on the REMIC Residual Certificate 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
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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
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to the extent that such gain does not exceed the excess, if any, of (i) the
amount that would have been includible in such holder's income had income
accrued at a rate equal to 110% of the AFR as of the date of purchase over (ii)
the amount actually includible in such holder's income. Except as otherwise
provided under "--Taxation of Owners of REMIC Regular Certificates--Market
Discount and Premium" and under Code Section 582(c), any additional gain or any
loss on the sale or exchange of a REMIC Certificate will be capital gain or
loss, provided such REMIC Certificate is held as a capital asset (generally,
property held for investment) within the meaning of Code Section 1221. The
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
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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. For purposes of the affidavit, the Pooling Agreement also
treats an "electing large partnership" as defined in Section 775(a) of the Code
as if it were a "disqualified organization."
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in such entity, then a tax
will be imposed on such entity equal to the product of (i) the amount of excess
inclusions on the REMIC Residual Certificate that are allocable to the interest
in the pass-through entity held by such disqualified organization and (ii) the
highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
the record holder of an interest in such entity furnishes to such entity (i)
such holder's social security number and a statement under penalties of perjury
that such social security number is that of the record holder or (ii) a
statement under 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.
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
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the Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. The Code also imposes a 100 percent tax on the value of any
contribution of assets to the REMIC after the "start-up day" (the day on which
the regular and residual interests are issued), other than pursuant to
specified exceptions, and subjects "net income from foreclosure property" to
tax at the highest corporate rate. It is not anticipated that a REMIC Mortgage
Pool will engage in any such transactions or receive any such income.
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
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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.
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
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considered paid on the obligations held by the REMIC, rather than on the
Certificate itself. Such payments would thus only qualify for the portfolio
interest exception if the underlying obligations held by the REMIC would so
qualify. Such withholding tax generally would be imposed at a rate of 30
percent but would be subject to reduction under any tax treaty applicable to
the Residual Owner. However, there is no exemption from withholding tax nor may
the rate of such tax be reduced, under a tax treaty or otherwise, with respect
to any distribution of income that is an excess inclusion. See "--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions".
Certain restrictions relating to transfers of REMIC Residual Certificates
to and by investors who are not U.S. Persons are also imposed by the REMIC
Regulations. First, transfers of REMIC Residual Certificates to Non-U.S.
Persons that have "tax avoidance potential" are disregarded for all federal
income tax purposes. If such transfer is disregarded, the purported transferor
of such a REMIC Residual Certificate to a Non-U.S. Person would continue to
remain liable for any taxes due with respect to the income on such REMIC
Residual Certificate. A REMIC Residual Certificate has tax avoidance potential
unless, at the time of the transfer, the transferor reasonably expects that the
REMIC will distribute to the transferee amounts that will equal at least 30
percent of each excess inclusion, and that such amounts will be distributed at
or after the time at which the excess inclusion accrues and not later than the
close of the calendar year following the calendar year of accrual. This rule
does not apply to transfers if the income from the REMIC Residual Certificate
is taxed in the hands of the transferee as income effectively connected with
the conduct of a U.S. trade or business. Second, if a Non-U.S. Person transfers
a REMIC Residual Certificate to a U.S. Person, and the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, that
transfer is disregarded for all federal income tax purposes and the purported
Non-U.S. Person transferor continues to be treated as the owner of the REMIC
Residual Certificate. Thus, the REMIC's liability to withhold 30 percent of the
accrued excess inclusions is not terminated even though the REMIC Residual
Certificate is no longer held by a Non-U.S. Person.
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,
2000, 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
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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
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
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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.
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
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Act .......................................... 90
Additional Collateral ........................ 10
Additional Collateral Loans .................. 10
Additional Collateral Requirement ............ 10
Advance Claims Endorsement ................... 50
Advances ..................................... 12
AFR .......................................... 83
Asset Conservation Act ....................... 65
Bankruptcy Instrument ........................ 49
Bankruptcy Loss .............................. 48
Basic Prepayment Assumption .................. 16
Budget Act ................................... 85
Buydown Fund ................................. 10
Buydown Fund Account ......................... 23
Buydown Loan ................................. 10
Call Right ................................... 79
Callable Class Certificate ................... 79
CERCLA ....................................... 65
Certificate Account .......................... 30
Certificate Administrator .................... 9
Certificate Administrator Fee ................ 11
Closing Date ................................. 23
Code ......................................... 41
Commission ................................... 11
Company ...................................... 8
Compensating Interest ........................ 15
Conversion Fee ............................... 13
Cooperative .................................. 8
Cooperative Loans ............................ 8
Cooperative Note ............................. 58
Cooperative Notes ............................ 8
Curtailment .................................. 15
Custodial Account for P&I .................... 26
Defaulted Mortgage Loss ...................... 48
Determination Date ........................... 33
Distribution Date ............................ 21
Distribution Period .......................... 31
DOL .......................................... 66
DOL Regulation ............................... 66
Due Date ..................................... 14
Eligible Investments ......................... 29
EPA .......................................... 65
<CAPTION>
PAGE
------------
<S> <C>
ERISA ........................................ 66
ERISA Plans .................................. 66
Excluded Plan ................................ 68
Exemption Rating Agencies .................... 67
Extraordinary Losses ......................... 49
Fannie Mae Approved Mortgagees ............... 17
FDIC ......................................... 17
FHA .......................................... 9
FHA Insurance Policies ....................... 9
FHA-Approved Mortgagees ...................... 17
Fraud Instrument ............................. 49
Fraud Loss ................................... 49
Freddie Mac Approved Mortgagees .............. 17
Garn-St Germain Act .......................... 63
Housing Act .................................. 46
HUD .......................................... 46
Indemnified Parties .......................... 38
Insurance Proceeds ........................... 27
Investment Account ........................... 28
Investment Period ............................ 28
IRS .......................................... 73
Lenders ...................................... 17
Letter of Credit ............................. 53
Letter of Credit Bank ........................ 53
Liquidation Proceeds ......................... 26
Loss ......................................... 44
Master Servicer .............................. 8
Master Servicing Fee ......................... 11
MERS ......................................... 22
MERS (Registered Trademark) System .......... 21
Mortgage Interest Rate ....................... 9
Mortgage Loan Servicing Group ................ 8
Mortgage Loans ............................... 8
Mortgage Notes ............................... 8
Mortgage Pool Insurance Policy ............... 49
Mortgaged Properties ......................... 8
Mortgages .................................... 8
Net Rate ..................................... 26
New Regulations .............................. 89
Non-U.S. Person .............................. 88
OID Regulations .............................. 72
Parties in Interest .......................... 66
</TABLE>
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<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Paying Agent ............................ 21
Payoff .................................. 14
Plan Assets ............................. 66
Plans ................................... 66
Pooling Agreement ....................... 12
Prepayment Assumption ................... 74
Primary Insurance Policy ................ 44
Principal Prepayments ................... 16
PTCE .................................... 69
PTE ..................................... 67
RCRA .................................... 65
Record Date ............................. 21
REIT .................................... 84
Relief Act .............................. 64
REMIC ................................... 72
REMIC Certificates ...................... 72
REMIC Mortgage Pool ..................... 72
REMIC Provisions ........................ 72
REMIC Regulations ....................... 72
Reserve Account ......................... 51
Reserve Fund ............................ 54
Residual Owner .......................... 81
Retained Yield .......................... 26
<CAPTION>
PAGE
-----
<S> <C>
Seller/Servicer ......................... 31
Seller/Servicers ........................ 8
Sellers ................................. 8
Selling and Servicing Contracts ......... 20
Senior Certificates ..................... 51
Servicer ................................ 9
Servicing Contracts ..................... 11
Servicing Entity ........................ 8
Servicing Fee ........................... 11
Special Hazard Loss ..................... 48
Subordinated Certificates ............... 51
Title V ................................. 64
Title VIII .............................. 64
Trust Fund .............................. 11
Trustee ................................. 12
U.S. Person ............................. 88
UBTI .................................... 70
UCC ..................................... 61
Underwriter's Exemption ................. 67
VA ...................................... 9
VA Guaranties ........................... 9
VA Loans ................................ 9
Withdrawal Date ......................... 27
</TABLE>
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[PNC MORTGAGE SECURITIES CORP. LOGO]
Depositor and Master Servicer
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 2000-9
$258,835,943
(APPROXIMATE)
------------------
PROSPECTUS SUPPLEMENT
------------------
UNDERWRITER
CREDIT SUISSE FIRST BOSTON
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 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 CERTIFICATES AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THE CERTIFICATES WILL DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL MARCH 26, 2001.
